Debt Advice and Debt Management

Gordon Banks Excerpts

Thursday 1st December 2011 Commons Chamber

[Alex Cunningham (Stockton North) (Lab)]

I beg to move,

That this House has considered the matter of debt advice and debt management services.

It is a special privilege for me to open this debate this afternoon—a debate called for by Members from across the House. Although we may have many differences, when it comes to debt advice and debt management services, we share a real concern for ordinary people, including some of the most vulnerable in our society who, often through no fault of their own, find themselves in crisis. Many see that crisis deepen because they do not know where to turn when they fall victim to unscrupulous practices that I am sure we would all unite in condemning.

I am extremely grateful to my hon. Friend the Member for North East Derbyshire (Natascha Engel), Chair of the Backbench Business Committee and to the Committee members for providing us with the time to discuss the issues on the Floor of the House today.

The Select Committee on Business, Innovation and Skills is currently undertaking an inquiry into this very matter, so I believe this debate will add value to the work being done, particularly regarding the scandalous actions of a large number of debt management companies.

Debt seems to have permeated every part of our society in the 21st century. Households are in debt; students are in debt; the Government are in debt; even premiership football clubs are in debt. Debt seems simply like a fact of life for many. Something tells me, however, that neither the Chancellor of the Exchequer nor Malcolm Glazer are subject to aggressive cold calling, excessive fees and misleading advertising by debt management companies from which many of the most vulnerable people in debt suffer. A report commissioned by the Consumer Credit Counselling Service found that 6.2 million people are financially vulnerable—in other words, they have no money left in the bank at the end of the month—and many more are on the brink. More startling is the fact that younger Britons are getting into more debt earlier in life. More than a million households in the 18 to 39 age group are already struggling to cope, with a further 893,000 at risk.

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

Is my hon. Friend as concerned as I am about the cuts to the Money Advice Service just now and how detrimental they will be to the money advice that can be given to young people?

[Alex Cunningham]

I certainly am, and I am going to deal with the issue later. I understand that a considerable number of this body’s staff are to be cut, which is bound to have a tremendous knock-on effect for services across the piece, not just those for young people.

Insolvency is also on the increase. Earlier this year, it emerged that 135,000 people were declared insolvent in England and Wales in the previous 12 months—the highest figure since 1960.

It should also be emphasised that it is the legacy of debt that is the real concern. There was a huge rise in consumer debt from the 1980s until 2007, and although consumer spending has reduced in the last few years, the debt remains, accumulating vast amounts of interest as time goes by. Contrary to what some may think, such debt is not predominantly due to reckless overspending. According to figures from the University of Nottingham, 50% of debt problems can be attributed simply to changes in individual circumstances, particularly unemployment or a drop in wages—something that is not too uncommon in the present grim economic climate.

I know that it would be easy to start outlining why even more people will need help in the coming years as a result of the Government’s policies, but I believe that the purpose of the debate is to concentrate on how we can best help the victims. If we are to help people, we need to retain and enhance the right services and ensure that there is appropriate regulation. Tackling debt head-on can have far-reaching benefits. One pound spent on debt advice saves £2.98 in future spending. A report from the Centre for Social Justice, published in October and entitled “Completing the revolution: Transforming mental health and tackling poverty”, estimated that debt advice could save about £30 million for the national health service, £50 million in legal costs and £220 million in productivity gains, as well as providing other benefits such as debt repayments to creditors.

I am proud of the good work that the Labour Government did in helping those in debt. Since 2005 the financial inclusion fund has done tremendous work, focusing on the most vulnerable members of society and providing free advice for anyone who needs it. I was relieved when, despite the current Government’s initial decision not to maintain the fund, it was announced in February this year that £27 million would be made available so that free face-to-face debt advice could continue to be funded during the coming year. Now I am concerned about future provision, and especially about the possibility that local government—which is also under a considerable financial constraint—will be required to do more in this regard and Government cash will dry up.

The Money Advice Service, set up by the Government to co-ordinate debt advice, is evidently a new body still trying to find its feet, but we desperately need a clarification of its role. For example, if it aims to co-ordinate debt advice, does that include fee-charging services? I hope that the Minister will publish the whole business plan for the service, particularly as I understand that—as was suggested earlier by my hon. Friend the Member for Ochil and South Perthshire (Gordon Banks)—staff numbers are to be cut dramatically.

We must also maintain the excellent practice that exists in our constituencies. In my own constituency the Cabin, part of the Stockton district advice and information service, provides targeted advice for young people. It depends on grants to survive, and I was pleased to learn that the lottery was helping to fund it, but that type of funding is extremely limited, and it will run out.

One young person who was dealt with by the Cabin had approached a fee-charging money management company. According to its assessment, he would be able to pay £100 per month, of which £29.50 was a monthly administration fee. He tried his best to keep up the monthly payments, but knew that he could not really afford them in the first place. He visited the Cabin, which arranged a debt relief order for him, basing his monthly contribution on his current circumstances. He was then able to put his life back on track.

The Cabin’s manager, Janine Browne, is worried about young people finding their way to the very kind of organisation that we want them to avoid. She told me:

“We find the majority of debt collection agencies are very aggressive and if young people cannot access appropriate advice and support they will try other avenues which may not be effective or necessarily appropriate to their circumstances. Without support they bow to pressure.”

What is happening with debt management companies? In 2010-11, the Citizens Advice service in England and Wales dealt with 3,155 complaints about debt management services, 5% more than in the previous year. The key complaints were about poor advice, poor service, excessive charging, cold calling, and up-front fees for services that did not materialise. Most debt firms that have been audited have also failed to comply with guidance from the Office of Fair Trading in several respects, the main problem being misleading advertising that represents their services as being free when they are not. Through up-front fees, the companies take their clients’ cash for themselves first and their creditors second, leaving people disheartened by the lack of progress in dealing with their debts. What can we do?

I have a number of questions for the Minister. Free debt advice is currently widely available and easily accessed. How will he protect and promote those services? The current system of self-regulation is failing. How will he enhance it? Will he ban cold-calling canvassing for new business and the upfront fees? Will he introduce tougher licensing and a requirement for firms to make clear their fees on any advertising and on initially meeting clients?

[Gordon Banks]

My hon. Friend is giving the Minister a Christmas list—and the Minister will recall that this time last year we were addressing the Postal Services Bill, which caused much amusement. Does my hon. Friend agree that the Minister should pay particular attention to the powers of the Office of Fair Trading? Where it has evidence of wrongdoing, it must be able to act quickly to suspend the licences of companies, rather than cases being dragged out for up to four years in the courts before the OFT can finally take action.

[Alex Cunningham]

My hon. Friend steals my final point. He will find out in a few moments that I entirely agree with what he says. What I do know, however, is that some Christmas list requests will not be fulfilled this year because of the levels of debt people are facing.

What work does the Minister have planned with search engines such as Google on finding ways to help people in need find the free services that are available to them, rather than the unscrupulous merchants? Will he provide the OFT with the power to investigate ruthless companies and shut them down early, rather than that sometimes taking more than two years, during which time the companies still operate, make a profit and charge vulnerable customers? I look forward to the Minister telling us what is to be done.

--- Later in debate ---

[Tracey Crouch (Chatham and Aylesford) (Con)]

It is a pleasure to follow the hon. Member for Stockton North (Alex Cunningham). I attended the Backbench Business Committee with him in order to try to secure this debate, and I am grateful to the Committee for enabling us to speak on this important issue.

Debt is not a new phenomenon, but over recent years personal debt levels have risen sharply and have become unmanageable for many. Total UK personal debt stands at £1.5 trillion, UK adults owe an average of £30,000, and the Office for Budget Responsibility predicts that total household debt is set to rise from £55,000 to just over £80,000 by the end of this Parliament. My constituency of Chatham and Aylesford has pockets of severe deprivation and high levels of personal debt, and the number of new personal insolvencies there stood at 275 in 2009 alone. Those figures give a mere snapshot of the levels of debt we face in the UK, but they serve to highlight the importance of getting the debt advice right for those in need.

People can find it difficult to admit that their debts have become unmanageable. Many would rather continue as if there were not a problem with the state of their finances, struggling to make their monthly payments and racking up more debt. Typical symptoms include selectively ignoring bills, taking on more credit cards, and turning to store cards to relieve the pressure temporarily. Of course, that just prolongs the delay before the acceptance of a debt problem and worsens the situation in the meantime. Long gone are the days when bank managers took people aside, as they did with me, and cut up their credit cards, but I think many of us would welcome a return to the days when banks paid a bit more attention to personal accounts.

Although many of the individuals seeking debt advice represent a particularly vulnerable section of society on a low income, unmanageable debt is no longer confined to the least well-off. Data from Experian suggest that the biggest increase in personal insolvencies in 2010 was among middle-class families, who typically have a number of monthly outgoings to meet. Equally worrying is the number of young professionals and middle-income earners who have entered insolvency. To return to the point I made earlier about problems in dealing with debt, it is fair to say that it is such groups in society who struggle the most to admit that there is a problem in the first place.

Aside from not wanting to admit to what they see as a failure on their part, those people might be oblivious to the advice and services open to them and instead go on burying their heads in the sand. One fifth of the people struggling with debt are not sure where to turn for advice, let alone aware of the benefits and drawbacks of debt management plans, the meaning of an individual voluntary arrangement or the criteria for debt relief orders. When they decide to do something about their debts, information and impartial advice are key. Finding someone the right solution and getting them on to a feasible plan is vital to remedying the problem, not least as the repayment of debts owed is in the interest of not only the debtor, but the creditors they owe.

Unfortunately, customers can find themselves signed up to inappropriate repayment plans. Statistics from R3, the insolvency trade body, have revealed that 35% of individuals on a debt management plan were not made aware of alternative ways of consolidating their debts and 12% said that they felt pressurised into the arrangement by the company responsible for administering it. Up to 30% of those now declared bankrupt were previously signed up to a debt management plan. That demonstrates the clear lack of information provided and in some cases the coercion from some sectors of the debt management sector, which serves to prolong the misery for the individual and add to their debt burden.

[Gordon Banks]

I just want briefly to outline an issue in my constituency. One of my constituents was making payments through a payment plan and then found the same debt management company acting for the office of the Accountant in Bankruptcy when they went into bankruptcy. My constituent had no understanding of the basis on which that company was dealing with them at all.

[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.

--- Later in debate ---

[Yvonne Fovargue]

I agree, but the disadvantages of the payday loan industry are greater than those in the home credit market, which is easier to regulate, because we can target it. The home credit market has been here for a long time—we all know the Provvy—and when I worked at a CAB, we could see when lenders were going around an estate, and we could talk to those consumers about that. If people get loans on the internet, or from high-street shops or over the phone, that is much more difficult to control.

We should consider a real-time database, because there is a lot of interesting data that could be gleaned from it. The regulator could very quickly look at companies acting illegally as a result of the information on the database. I recommend, too, the Smith Institute publication that was launched today, which is entitled, “A Nation Living On The Never-Never”. It includes a chapter by Damon Gibbons on learning from other countries. I agree: we are not the US or France, but there are things that we can learn, particularly because regulation is different in different states, so quite a lot of comparisons can be made.

That leads me into the need for debt advice, which should be free, independent and quality marked; should be funded in a sustainable way; and should meet the needs of all consumers, including the most vulnerable. Anyone who is in debt can be vulnerable. One of the most difficult cases that I saw involved an accountant, who had reached the stage where they could not open an envelope or answer the telephone. They needed the initial face-to-face advice so that someone could talk them through the situation and explain that they were not alone. They could then be referred to a telephone service and deal with things themselves, but the initial face-to-face advice had to be there.

[Gordon Banks]

My hon. Friend makes a forceful point. When a person is desperate and sitting at their computer searching for a solution, at that point they will embrace with open arms any organisation that responds to say that it can solve their problems, and they will jump into something that they might well regret. That is why the face-to-face advice is so important.

[Yvonne Fovargue]

I absolutely agree. My hon. Friend the Member for Stockton North had a point when he said that we need to look at Google. When someone googles “citizens advice debt advice”, they get the debt management companies, not Citizens Advice, because those companies can afford to pay for the ranking.

Finding debt advice is not like finding a plumber. It is not possible to go into the pub and say, “I’m in debt. Do you know a good company that can help me?” That just does not happen, because people are ashamed to admit that they are in debt. They go on the internet in the middle of the night or look through telephone books because they want the most anonymous way of finding help. That is why they can fall prey to dodgy debt management companies that do not offer the full range of debt solutions. I would probably need another hour to explain the complexity of the debt solutions and the need for a coherent system. I urge the Government to bring forward plans to implement a statutory debt management plan.

Debt management companies sometimes charge up-front fees, as has been said, and sometimes take the money before referring customers to not-for-profit providers. For the average debt of £30,000, the fees are £6,000 on average, which means the client takes a further 18 months to pay it off and the creditor has to wait a further 18 months. It is not good for either party.

Often people are unaware of the free alternatives, which is why I introduced a ten-minute rule Bill to try to level the playing field for not-for-profit providers, which put all their resources into providing advice and none of it into advertising. Since I introduced the Bill, I have received many more examples from across the country of companies ripping off clients—persuading them to take out secured loans or paying the creditors only small amounts, and then going into liquidation, taking the rest of the money. People were giving them continuous authority to take the money from their bank account, which can go on long after the debt should have been paid. However, there is currently no power to suspend such companies, even though the Office of Fair Trading knows that there is considerable consumer detriment. It can take up to two years to revoke a credit licence, because there is no limit on the number of appeals, and the short-term loans industry and fee-charging debt management companies rely on that. For some of them, their business model is to make a profit in two years and then go.

The landscape has completely changed for consumers. Both in the UK and internationally, self-regulation has been proven not to work. I realise that there is a one-in, one-out policy for regulation, but in this instance I urge the Minister to look holistically at the sector. There are so many new challenges and problems that it needs to be treated as a whole new area, rather than as an area that has been around for a long time. It is so different from even five years ago. I believe that we need to provide the necessary adequate regulations and enforcement, however many it takes, to ensure that our vulnerable consumers are not ripped off by the sharks who are profiting from desperation and despair.