Debt Management Plans

Gordon Banks Excerpts

Tuesday 5th July 2011 Westminster Hall

[Nic Dakin (Scunthorpe) (Lab)]

It is a pleasure to serve under your chairmanship, Ms Osborne, to have secured this debate, and to see so many hon. Members in the Chamber. Many other hon. Members have contacted me to say that they would have liked to be present, but unfortunately cannot attend. I thank the Under-Secretary of State for Business, Innovation and Skills, the hon. Member for Kingston and Surbiton (Mr Davey), for meeting a delegation from the all-party group on debt and personal finance a few weeks ago. He had a positive discussion with us about debt management plans.

Unfortunately, increasing numbers of people are getting into debt. In the Scunthorpe county constituency, for example, the average debt of clients of the Consumer Credit Counselling Service is £16,870. I fear that the trend might continue in the years ahead. When people summon up the courage to ask for help in dealing with their debts, they need to get the best support to clear their debts, not to make matters worse. However, at present, people who try to take responsibility for their debts can find themselves at the mercy of unhelpful, aggressive and sometimes unscrupulous practices that can make dealing with debt an even more unbearable experience.

[Gordon Banks (Ochil and South Perthshire) (Lab)]

A debt management plan has a real purpose: to return something to the creditors, but also to get the consumer out of debt as soon as possible. Does my hon. Friend have similar concerns to mine, about the many instances in which consumers find themselves with more debt, rather than less?

[Nic Dakin]

My hon. Friend makes his point well. Under a debt management plan, a debt management company collects a single monthly payment from its clients and administers the repayments on their behalf to each of the non-priority creditors, such as for consumer credit debt. Usually, the client pays for the service, although some organisations will do it for free, such as the charity Consumer Credit Counselling Service and the company Payplan, which are funded through the “fair share” approach to debt management, the virtues of which my hon. Friend extols. Such an approach ensures that the creditor, rather than the debtor, pays for debt advice and support by returning a percentage of the payment made by the debtor to the debt management plan operator. The creditor, however, credits the debtor with the amount of the full payment. That is the best possible approach to debt management, because it aligns the debtor and the debt management company, which is in their interests and the interests of the creditor. That model enables charities such as CCCS to help the nine out of 10 people lacking the means to repay their debt.

Other debt management companies also behave responsibly, but some companies’ practice has significant risks for the client. Most DMCs charge an initial up-front fee, which can be quite high, as well as an administration fee each month, leaving the clients with less money to pay off their debts. CCCS estimates that clients of commercial DMCs will take up to two years longer to repay their debts.

--- Later in debate ---

[Nic Dakin]

My hon. Friend has much knowledge and expertise in this area, and she makes a powerful point about the need for the Government to act now to protect vulnerable people. I know that the Minister has concerns, and I look forward to his response.

Citizens Advice believes that there should be a statutory scheme, with better powers for the regulator, coupled with improved funding of free debt advice. The solution, to improve current arrangements and protect vulnerable people from getting further into debt as a result of the behaviour of those to whom they turn for support and advice, might be to have a regulated environment in which providers are independently audited to standards set by an independent body, fees are controlled, and there is clear certainty about the repayment term, for creditors and debtors alike.

[Gordon Banks]

My hon. Friend is generous in giving way. He has hit the nail right on the head. This is a little bit of advertising: I hope later this year to promote a private Member’s Bill on this very issue, providing for a statutory scheme that is binding and includes a rigorous audit process and a fee cap. Does he agree—this has already been touched on today—that when someone approaches a debt management company for advice, they are at their most vulnerable? If they are told, “Give me £50”, or £200 or £600, “and I will sort the matter out, and spread that payment over a period,” that is exploiting their vulnerability.

[Nic Dakin]

My hon. Friend makes a powerful point. We look forward to his private Member’s Bill, which will raise the issue again. We need a regime that will encourage providers to compete on quality, rather than the size of their advertising budget. Debt management plans would then be more likely to lead to debt repayment and genuine resolution of debt problems for the majority of customers who entered into them. That would be achieved at far lower cost than under the current regime, and would significantly increase the speed with which creditors were repaid. That would be good for debtors, good for creditors, and good for UK plc.

[Damian Hinds (East Hampshire) (Con)]

I congratulate the hon. Member for Scunthorpe (Nic Dakin) on securing this important and timely debate. I thank him and the Minister for allowing time for several hon. Members to make short contributions. The issue is not party political, and it is encouraging that hon. Members from six political parties are here. We had an opportunity to debate related issues in the House yesterday, and almost everyone now coalesces around the fact that a proper approach to the issue must have three strands: education, regulation and provision of alternatives. The important issue that we are discussing, which relates to a growing problem, touches on all three strands, but has to do with regulation especially.

I am a Conservative Member of Parliament, and not a great fan of new regulation, but this is one area where it is needed. It is astounding that when some markets are grappling with sometimes unreasonable regulation, regulation of debt management has not hitherto been more effective. I daresay some hon. Members may take a purely libertarian, “caveat emptor” view of the matter, but I have not yet met them. If I have, I have not heard them expressing that view. As has been said, the market that we are considering deals with some of the most vulnerable consumers. “Vulnerable” is a word that is used an awful lot these days for all sorts of things, but it applies in the purest sense in this case. Much as it may challenge our view of economic theory and so on, the fact is that many people are not making rational choices, and the debt solutions that they seek are often about the first advert that they see, rather than what is most appropriate for them.

[Gordon Banks]

The hon. Gentleman’s point is appropriate; people get sucked in by the first or last advert that they see. However, there is another side. As I have said, one objective must be to give money back to creditors, and the more that is paid in management fees, the less goes back to creditors. We certainly want to help consumers, but we must also recognise that creditors are entitled to repayment of debts.

[Damian Hinds]

The hon. Gentleman makes a fine point. The “fair share” model works for various not-for-profit organisations and can be effective. We should foster and encourage that. A lot could be done with regulation in this area. I want to focus on a couple of measures that the hon. Member for Scunthorpe mentioned, which are relatively straightforward and would be effective.

The first is the banning of cold-calling canvassing for new business, and the second is the banning of up-front fees. The two together would make a big difference. On up-front fees, many people suspect that some operators in the market have a cash-flow model that recognises that they may not be around for ever. Those are not the sort of debt management companies that we want. There are responsible operators, and those are the ones that should be encouraged.

I want to make a final, brief point about the visibility of various debt management services. The Consumer Credit Counselling Service, citizens advice bureaux and others offer free advice services, and the internet is an important source of information for people these days. When people get round to looking into ways of solving their problems, they should be able to find those services easily. I hope that search engine providers, particularly Google, which to all intents and purposes is the search engine provider, will be encouraged to act.

--- Later in debate ---

[Yvonne Fovargue (Makerfield) (Lab)]

I congratulate my hon. Friend the Member for Scunthorpe (Nic Dakin) on securing this debate, which we have needed for some time. I confirm that I believe that creditors must be paid, but the practices of some debt management companies do not encourage that. They load the fees up front, and recoup all their charges in the first two years. They provide no encouragement for people to carry on with a sensible plan, because the up-front loading discourages people from continuing after that period, and frankly they do not worry about that, because those two years are where they make their money. They cannot offer the full range of solutions, and are not allowed to do so, because only authorised providers can produce debt relief orders, and in the main those providers are citizens advice bureaux.

There was great concern last year when the financial inclusion fund was due to finish. Fee-paying debt-management companies were circling like sharks, thinking, “We’ll be the only option, and debt advice will not be available.” I urge the Government to consider a financial inclusion fund and free debt advice, because that is all that will stop some debt management companies.

I am worried about the link between such companies and high-cost lenders, some of which now have another arm: a debt management company. They get people into debt, charge them for that, and then put them through to their own debt management company, which will charge to get people out of the debt that it put them into in the first place. That is not acceptable. Regulation was introduced in the United States and Australia, which are not countries noted for over-regulation, and it has worked. That is why there is a proliferation of debt management companies here.

[Gordon Banks]

I suggest that my hon. Friend ask the Minister to look over the border at Scotland, where there is a system that works much better than that in the rest of the UK.

--- Later in debate ---

[The Parliamentary Under-Secretary of State for Business, Innovation and Skills (Mr Edward Davey)]

I congratulate the hon. Member for Scunthorpe (Nic Dakin) on securing this debate. I was pleased that he did, and it is good that so many hon. Members have contributed to it and aired their concerns. The Government are acutely aware of those concerns, and we share many of them. It is a sign of our desire to protect vulnerable individuals that debt management issues were a major part of the questions that we asked as part of the joint Treasury and Department for Business, Innovation and Skills call for evidence. The “Consumer Credit and Personal Insolvency Review” was published last year, and covers all aspects of the consumer credit life cycle, including what happens when things go wrong.

Hon. Members will appreciate that it is difficult to obtain a precise picture of the debt management industry, even to the extent of obtaining accurate figures for the number of plans in place. Some of the concerns that we have heard recognise that lack of information. I cannot give details today, but I am keen to improve the quality of information about the industry. I will say more about that when we publish our response to the call for evidence, which will be soon.

Despite the constraints, improvements have recently been made to protect the most vulnerable debtors. By extending the eligibility criteria for debt relief orders, we have enabled more of the most vulnerable people to find a way out of unsustainable debt. Some safeguards are already in place, although I understand that several of my colleagues would like us to go further, and I will go on to talk about that. Providers of debt management plans are required to hold a consumer credit licence, and holders of those licences are monitored by the Office of Fair Trading. The OFT has strong enforcement powers. Following its compliance review last year, it issued warnings against 129 companies, of which 43 have since left the market and investigatory work is ongoing in many other cases. The OFT is determined to see that work through as soon as possible.

The OFT has recognised the need to improve its guidance, and it recently published proposed revised guidance for debt management plans. That guidance sets out the standards that the OFT will expect of debt management businesses, and makes it clear that, among other things, such businesses must be fully transparent about the service on offer and the fees charged; explain to consumers the risks and benefits of each proposed solution; not use misleading names or advertising, including misleading web-based adverts; and ensure that the advice provided is in the best interests of customers. Any business that fails to adhere to that guidance can expect strong action to be taken against it, including, where appropriate, the removal of its licence. The industry has recognised the need to improve its practices, and it is welcome that a number of debt management organisations have joined the Debt Managers Standards Association, which, as the OFT has recognised, is trying to improve standards.

What more needs to be done? The Government believe strongly that those struggling with debt must be assured that they will receive the best advice and be directed to the solution most suitable for their needs.

[Gordon Banks]

Will the Minister give way?

[Mr Davey]

I am concerned about the time; perhaps I can make a little more progress and then give way to the hon. Gentleman.

Free and impartial advice is available for people in difficulty. We need to make sure that such advice is well publicised and that vulnerable people know where to find it and can avoid unscrupulous businesses that may seek to take advantage of them. We know about Citizens Advice, and I was pleased that the hon. Member for Scunthorpe mentioned the Consumer Credit Counselling Service, which is a fantastic organisation. He also, quite rightly, mentioned Payplan. We must ensure that people are aware that they can get quality advice for free. That is essential.

Hon. Members have expressed concern that the aim of some fee-charging debt management companies is to make money for themselves, rather than to ensure that an individual finds the appropriate solution for their circumstances. We have also heard, both today and on previous occasions, that some individuals who enter a debt management plan find that they emerge from that plan in a worse position. Clearly, that cannot be right.

I am concerned that those who are in a vulnerable position might seize on an advert that offers what appears to be an easy way out of their difficulties. If they are told that the organisation that they approach will deal with all their debt problems, they may not ask about the likely costs and that will create difficulties. The answer to that complex problem does not necessarily lie in more regulation. We need to empower debtors to find the right information, access the right sources of impartial advice, and find the solution that best meets their needs. We confirmed some time ago that we will fund the face-to-face debt advice project for a further year, while work is done to move the provision of such advice to a more sustainable footing. As my hon. Friend the Financial Secretary to the Treasury said yesterday in the House,

“it is the intention that the Money Advice Service—which is funded by the financial services industry—will take on that work.”—[Official Report, 4 July 2011; Vol. 530, c. 1254.]

It is important that free debt advice is available through Citizens Advice, the Consumer Credit Counselling Service and other quality, free debt advice services.

I want to look at what more can be done to ensure public awareness of reputable debt advice sources, whether online, over the telephone or face to face. Everyone involved in the debate—creditors, debt advice agencies and providers—should be involved in finding the best way forward. When we publish our response to the call for evidence, we will make proposals designed to foster that collaborative approach and help people with unsustainable debts to get the help and advice they need to take control of their lives once more.

[Gordon Banks]

The Minister talks about ensuring that creditors get the best advice. Many of the major lenders fund debt management processes through Payplan, for example. Is there any mileage in making the main funders of an organisation such as Payplan, which could be the major creditor of someone entering a debt management plan, have a role in guiding someone from a fee-paying to a non-fee-paying organisation?

[Mr Davey]

The hon. Gentleman makes an interesting point. It is surprising that many public bodies—whether local authorities, utilities or lenders—do not make those who cannot pay their bills or are in debt as aware as possible of quality, free advice services. We need to talk to those organisations because raising awareness is critical.