Fee Charging Debt Management Companies (Promotion of Free Debt Management Advice)
Yvonne Fovargue (Makerfield) (Lab)
I beg to move,
That leave be given to bring in a Bill to require fee charging debt management companies to inform potential clients of the availability of free advice on debt management; and for connected purposes.
I have brought forward this Bill to level the playing field between the fee-charging debt management companies, which can spend a considerable amount of money on advertising, and the free agencies, which put all their money into providing a service, and which consequently might not be as well known. In fact, a Google search for “debt advice”, or even for “citizens advice” brings up two debt managements companies at the top of the list, which promise to
“wipe off 75% of your debts”.
Individuals who are looking for a solution to their debts are essentially making a distress purchase. They have realised that their debts are mounting and made that difficult decision to seek help to deal with them. However, searching and deciding on a debt management solution is not like looking for other services. Many people have struggled alone for a considerable time and feel ashamed; they might not have told even their family and friends. It is not like going to a neighbour and asking them to recommend a plumber, and I have never yet heard of anyone asking their mates in the pub whether they have been in debt and who helped them to get out of it.
Instead people turn to the internet or advertisements, or even to a company that has cold-called them. If they are lucky, they go to a citizens advice bureau, but very few have heard of Payplan, National Debtline or the Consumer Credit Counselling Service, which could all help with free solutions tailored to the individual.
What is the problem with fee-charging debt management agencies, beyond the obvious contradiction of charging individuals to get out of their debts? It is estimated that 375,000 people in the UK are on commercially provided debt management plans, costing them £250 million in debt management fees each year. The CCCS estimates that for a debt of £30,000, a client of a debt management company pays £6,000 in fees to that company, and that they extend the life of their debt for 18 months.
Unfortunately, too many of those companies take advantage of people when they are at their most vulnerable. Many people end up in a worse financial situation than when they first sought help. There is significant evidence of companies providing misleading information about their services. They claim to be able to write off debts and charges, and to give free advice, although fees are involved. There is also evidence of some payday lenders acting as an introducer to a debt management company. If that is not a case of, “We’ll get you into debt and then tell you about somebody who you can pay to get out of it,” I do not know what is.
It has been reported that rather than promoting free debt advice, some fee-charging companies have told callers that the CAB is not a specialist money adviser, and not to deal with it on a one-to-one basis. One individual approached a bureau for help after a company refused to cancel a plan that he signed up for within the 14-day cooling-off period. After the CAB intervened the agreement was cancelled, but the company told the client that the bureau would not contact the creditors, so she risked court action by doing what she was doing. High management fees, particularly up-front fees, can also be a particular problem. In one case, an individual was cold-called by a debt management company and paid an up-front fee of £1,000 before receiving any advice at all. I had a constituent who paid £300 to a fee-charging debt management agency, only to find out that they then had no disposable income, after which the agency referred them to my local CAB.
Up-front fees are not the only problem, however. Ongoing fees are also an issue, as companies need to recoup their costs early in the life of the agreement. When I worked for an advice agency, I saw a client who had been paying £80 a month to a debt management company for six months, not one penny of which had gone to her creditors. She said that she did not know where to go, so she looked on the internet and contacted the company. She was considerably upset when she realised that her debt had actually increased, despite those payments, because the interest had not been frozen. Also, debt management companies cannot and do not offer the full range of debt remedies available to an individual, and on occasion have even failed to inform clients of the need to pay their priority creditors first. Another CAB client reported that she was encouraged to make offers via a debt management company to her non-priority creditors, for which they took a fee. As a result she struggled with her mortgage payments, fell into arrears and is now worried about losing her home.
The number of complaints to the Financial Ombudsman Service is rising. There have been 457 new complaints in 2010-11, a staggering 54% of which were upheld in favour of the consumer. The complaints generally fall into two categories. The first is poor administration: money paid to a company is kept in that company’s accounts for a considerable time rather than being paid to the creditors. The second is when, as I have described, a high proportion of the money paid is retained by the company to cover its costs rather than being paid to creditors. This demonstrates that it is not only the individuals who suffer detriment but their creditors, who could be paid much more money more quickly.
It is surely obvious, therefore, that making people aware of free quality agencies, which make sure that all the money paid goes to the creditors, will benefit both parties. An argument often used by the fee-charging sector is that there is insufficient capacity in the free sector. I agree that this needs to be carefully monitored and that a sustainable cross-governmental strategy for the provision of free debt advice is essential. However, a recent partnership between the CCCS and Citizens Advice has demonstrated that the agencies are working together to direct people to the most appropriate form of advice and to ensure that the most expensive form of delivery, the face-to-face advice, is kept for the people who need it most—the most vulnerable—and that people do not have to turn to the fee-charging debt management sector through lack of available free advice.
No one should suffer through ignorance of the services available to help them, and I believe that the Bill will provide for individuals to be informed of the full range of agencies able to support them, instead of allowing them to fall into the hands of some of the fee-charging companies that propel them into further debt and despair.
Question put and agreed to.
Ordered,
That Yvonne Fovargue, Nic Dakin, Phil Wilson, Sheila Gilmore, Alex Cunningham, Teresa Pearce, Justin Tomlinson, Damian Hinds, Tracey Crouch, Tessa Munt, Jonathan Edwards and Dr Julian Huppert present the Bill.
Yvonne Fovargue accordingly presented the Bill
Bill read the First time; to be read a Second time on Friday 20 January 2012, and to be printed (Bill 237).