Debt Advice and Debt Management

Baroness Burt of Solihull Excerpts

Thursday 1st December 2011 Commons Chamber

[Tracey Crouch]

The hon. Gentleman makes a fair point. We all see people in our constituencies who have been tied in and there has always been a vested interest in such programmes.

[Lorely Burt (Solihull) (LD)]

I am sure that all Members will have tales to tell about some of the rogue companies that cynically take people on, take their money as an up-front fee and also charge them commission, knowing all along that that person will have to take on either an IVA or bankruptcy.

[Tracey Crouch]

As it happens, I was about to tell the House about an instance of which I have recently learned. An individual entered an agreement to pay back their debt through a debt management plan. The plan spanned a total of 14 years and required repayment totalling far more than the original debt. In fact, this particular individual would have found it far cheaper to declare bankruptcy. The information and advice simply were not made available to the customer, who was instead trapped in a monthly payment schedule repaying vast fees.

In the past, and certainly in that instance, debt management companies have been responsible for exploiting the vulnerable and heavily burdened with debt and it is welcome that the Office of Fair Trading has begun to crack down on rogue operations. As a Conservative, more regulation is not something I typically welcome, but, in tackling rogue DMCs it is clearly necessary. Their fees are not always made abundantly clear and cost consumers up to £250 million a year. Adding such high costs to the burden for those who are already over-indebted does not strike me as particularly helpful.

--- Later in debate ---

[Lorely Burt (Solihull) (LD)]

I congratulate the hon. Member for Stockton North (Alex Cunningham) on securing this debate and on his excellent contribution, in which he referred to the Consumer Credit Counselling Service report. The problem is enormous: 6.2 million households are financially vulnerable, of which 3.2 million are already in financial difficulty.

There is consensus on both sides of the House that debt advice is a distress purchase. People do not shop around. If they hear of somebody who can help them, they will grasp at the opportunity. There is an “any port in a storm” mentality. I was particularly taken by what the hon. Member for Makerfield (Yvonne Fovargue) said on getting to people before they join the 3.2 million who are already struggling, because help can be afforded to them at that stage.

We have talked about who offers debt advice. Citizens advice bureaux do a wonderful job, and work with the CCCS and Payplan, which are the two free advice services. The important distinction between pay advice companies and free advice companies is that the former are funded by creditors through a fair-share system. When the debt is paid off, the company that has managed to secure the payment receives a commission or contribution. That is important. We have heard about CCCS, which is partnered with Citizens Advice, and the Money Advice Trust, a debt line that will co-ordinate the best debt advice, but the problem, to which several hon. Members have alluded, is that there is not enough information out there for those desperate people when they can really benefit from the help.

Let us look at the pay debt management companies. All the money comes from the customer—the person who is in debt. The balance of their interest comes from getting the fees. Under the fair-share system, the interest is only in ensuring that the payments are paid back because companies do not benefit unless the debt is recovered.

The structure of these fees is also of concern. Not all companies charge an up-front payment, but some will charge hundreds of pounds before they have even looked at a case. Regular commission comes from the person who is making the payments back, and that just makes the problems worse. As I mentioned earlier, what is recommended further down the line is very often something that should have been recommended in the first place. These companies all favour solutions that make them money, so they go for the debt management plan and for the individual voluntary arrangements. Very few offer debt relief orders, which are a key insolvency tool for people with few assets and low incomes.

Although many Members in this Chamber would argue that there is no place for these pay debt management companies, it is important that we consider their case and what they have to offer. The Debt Managers Standards Association, which is one of the two trade bodies, told me that its members, the good companies, offer face-to-face meetings and professional help. They will also negotiate with the debtors. It says that those companies provide that service because they are being paid.

On the other side of the coin, Consumer Focus, which was responding to the Office of Fair Trading report into the debt management sector this year, said:

“On the basis of the OFT review, fee-charging debt management is a market which, at the moment, is largely failing consumers.”

We have heard about the rogue debt management companies and about the number of complaints that are made against them. Interestingly, people do not necessarily go to the regulator about such companies. They tend to go to the citizens advice bureau because they see it as their friend on the high street; the place where they can go to get face-to-face advice.

There are examples of companies that hold on to payments and then go into liquidation. Whatever else we do, we must tackle those rogue companies. Several Members today have called for those companies to be suspended. As soon as we discover that they are misbehaving, they must be suspended there and then before they have the time to wreak havoc and do even further damage.

As the OFT licenses debt management companies, it has certain responsibilities. Last year, it launched a crackdown, issuing warnings to 129 companies, 35 of which threw in the towel straight away. They knew that the game was up and they were not going to be able to make the sort of money that they wanted to.

Although the OFT has teeth, it could do more to regulate such companies. It is strapped for money, so it is unable to give the kind of service that it wants to give. In October, DEMSA agreed in principle that the Institute of Chartered Accountants should undertake monitoring of new and existing DEMSA members. DEMSA has an OFT-approved code of practice, so it is doing its best to clear up the industry and to provide a fair service to customers. At the end of the day, if a company rips off a customer, then they cannot pay. It is in everyone’s interests to clean up the industry.

I want to consider the options available. We could close down debt management companies altogether, but that would be illiberal and take away a service that is of help to many people in the country. Furthermore, of course, those people would simply go elsewhere. Where would they go? They could go to organisations such as the Consumer Credit Counselling Service. On the other hand, however, they might go elsewhere, including to a loan shark. If they are to use debt management companies, therefore, it is important that they have the protection that we all wish for.

Alternatively, we could work with the debt management companies. As suggested by the Debt Resolution Forum, we could require other companies to subscribe to the DEMSA code of practice and to auditing by the Institute of Chartered Accountants. My favourite option, however, would be to strengthen the OFT so that it can use its existing powers to levy a fee on debt management companies to pay for them to be audited. To ensure that it was not prohibitive for small debt management companies, the fee could be related to the number of debts under management at any one time. Consequently, the big companies would pay a larger share, and that would strengthen the OFT and enable it to do what it wants to do—ensure that these companies are properly audited.

The only other alternative is formal regulation, which could be done under existing statutory legislation. I was interested in the comments of the hon. Member for Stourbridge (Margot James) about the report from the Business, Innovation and Skills Committee, and it would be helpful to take an intensive look at the matter and establish whether regulation could provide a workable solution. People’s lives are at stake here. We could not be considering a more important issue that is able to make a difference to the quality of life of indebted people.