Debt Advice and Debt Management

Ian Murray Excerpts

Thursday 1st December 2011 Commons Chamber

[Ian Murray (Edinburgh South) (Lab)]

This afternoon’s debate has shown the passion of Members across the Chamber about this important subject. I congratulate my hon. Friend the Member for Stockton North (Alex Cunningham) and the hon. Member for Chatham and Aylesford (Tracey Crouch) on securing the debate through the Backbench Business Committee and pay particular tribute to my hon. Friends the Members for Makerfield (Yvonne Fovargue) and for Darlington (Mrs Chapman), who is not in her place, for doing so much to highlight concerns about debt advice and debt management. They are all strong advocates for their constituents, dogged campaigners and great champions of free debt advisory services such as Citizens Advice. We must put on the record our thanks to them for bringing such important information before the House.

Every life blighted by the spectre of debt is one too many. The human and family cost of uncontrollable debt should not be underestimated. The debate is often couched in terms of numbers and regulations, as we have heard this afternoon, but we must not lose sight of the fact that debt can often cost relationships, employment and, tragically, lives.

We come to the House this afternoon at a time of great economic uncertainty, which makes the debate even more important. Inflation stands at 5% and the sustained squeeze on wages has left many struggling to pay everyday bills, heat their homes and buy essentials. With Christmas around the corner, families will be under even more pressure as a result of financial worries.

Many consumers have got into debt by borrowing via credit cards, finance deals, overdrafts and unsecured personal loans. In numerous cases, as we have heard this afternoon, that is not down to reckless spending or people living beyond their means; too often it is due to the harsh reality of rising living costs. A recent survey found that such costs alone may force 71% of UK consumers to use savings, credit cards or overdrafts in order to meet the cost of bills—the trap of using debt to service debt. For others, it is down to a shock in their personal lives, such as unemployment, divorce, bereavement or ill health, and there is evidence that around half the people with debt problems are in that predicament because of some such tragic life event. That shows that the spectre of debt could fall on any of us at any time, as the hon. Member for Grantham and Stamford (Nick Boles) explained earlier.

There are numerous types of debt, from bank loans and overdrafts to credit cards and finance agreements, but one of the largest increases in indebtedness is due to debt to Government Departments and agencies, which has not been mentioned today. That includes those who have accrued arrears in council tax, benefit overpayments, payments to the Child Support Agency or Her Majesty’s Revenue and Customs, and even TV licences. Most concerning of all is the number of people with high-cost credit debt who are seeking advice. Debt due to loans from payday and high street lenders has rocketed in the past 12 months. The Money Advice Trust alone has seen the number of calls it receives increase from 200 a week to 1,000. That is hardly surprising, given that it is impossible to watch daytime television without being swamped by TV adverts offering easy high-cost credit on the high street or internet.

What happens to people when they fall into financial difficulties? Debt advice plays a critical role in helping to manage financial difficulties, but often people feel that accessing advice is stigmatising. Indeed, many fall into difficulty because of a lack of financial education. We should give a strong commitment to include financial education as part of the national curriculum in order to resolve some of today’s problems tomorrow. An e-petition started by Martin Lewis of MoneySavingExpert has received over 100,000 signatures, so I hope that the Backbench Business Committee or the Government will find time for a debate. I commend the hon. Member for North Swindon (Justin Tomlinson) for doing so much on that not only in the House through the all-party group on financial education for young people, but in promoting financial education in schools.

With the OBR revising the level of personal debt in the UK dramatically upward, it is little wonder the number of people walking through the doors of citizens advice bureaux across the UK seeking debt advice remains high. Citizens Advice alone deals with almost 9,000 new debt problems every working day. It is that free and accessible expert debt advice that can play a key role in unlocking control of the debt. I would like to put on the record my thanks to Citizens Advice for the contribution it makes up and down the country in often difficult and challenging circumstances. It deserves the gratitude of the whole House.

Without access to free debt advice from organisations such as Citizens Advice, however, consumers will often seek other less affordable solutions from fee-charging debt management services in order to pay down debt—an issue that every Member who has spoken this afternoon has mentioned. Sadly, there are too many examples of abuse in the sector, and it affects some of the most vulnerable people in society.

When the Office of Fair Trading looked at such companies last year, it found more than 90% non-compliance with its own rules, noting that

“the findings from this review shine a spotlight on a market where poor practices appear to be widespread… it is clear that standards across this market are not as high as should be the case.”

There is, therefore, a strong case for Government intervention.

Following the Government’s consumer credit and personal insolvency review, the Minister committed to the development of a protocol setting out what was expected from a debt management plan, so in his response will he outline the progress that has been made on that?

I welcome the Minister’s commitment to keep the legislative angle open, but he needs to go further now and consider a proper legislative response. It is disappointing that the Government have dragged their feet slightly on the issue, but they could commit today to respond properly to the OFT’s report.

Calls for regulation in the sector have been echoed by fair-share debt operators, such as Payplan and CCCS, which provide free, immediate and ethical debt advice and repayment schemes to more than half a million people every year. They work closely with the organisations that are critical to resolving debt issues—the creditors. Much of their work comes from Citizens Advice referrals, and there is high demand for debt management plans, as every week more consumers reach the limit of their indebtedness and seek responsible solutions to their financial difficulties.

Based on information that I have received from Payplan, the number of people in that situation increased from about 300,000 at the start of 2010 to more than 560,000 by the end. Like Citizens Advice, it fears that in the absence of an effective regulatory framework many vulnerable customers unfortunately receive poor and unsuitable advice from the fee-charging debt management companies that they contact for help.

Such consumers are often charged up-front fees for services that should be free, with charges not being clearly explained before they enter into an agreement. My hon. Friend the Member for Stockton North gave some stark examples of that in his opening speech, and Consumer Focus has also expressed its strong concerns, stating:

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

Debt advice does not need to cost, however. The fair- share models of Payplan and CCCS are effective at dealing with indebtedness and at getting debt under control. The Minister should look at enacting section 5 of the Tribunals, Courts and Enforcement Act 2007 to give consumers the statutory protection that they need through consistent industry standards, whereby only reasonable fees are charged and abuses of the system are rooted out.

Consumers who are often vulnerable need such regulatory protection. In fact, should we work towards a situation in which consideration is given to phasing out up-front charges or, even, fees all together? The idea has been highlighted in many speeches this afternoon.

Consumers need protection from the way fee-charging debt management companies advertise. During my preparation for today’s debate, I had the television on in the background, and while it was on no fewer than three adverts for debt management companies popped up during the breaks, with reassuring claims to “wipe out debts” through “easy solutions” and “one easy monthly payment”. We could be forgiven for thinking that they would solve all our financial problems at one stroke. As Members from all parts of the House know, however, that is simply not the case.

The up-front fee and structure of debt payments, whereby the companies take their cut before paying creditors, is not clear at all in the advertising. There is also no clear indication that such services can be accessed free. As my hon. Friend the Member for Darlington has articulated through her ten-minute rule Bill, statutory regulation, over and above the basic licensing and supervisory regime presided over by the OFT, is desirable in television advertising.

Over-indebted vulnerable customers are acting under stressful conditions and without the time or inclination to shop around. There should be adequate protection from rogue providers of debt advice, so that huge numbers of already indebted customers are prevented from falling into even greater financial difficulties. Indeed, the OFT’s report states that

“advertising is the most significant area of non-compliance, in particular misrepresenting debt management services as being free when they are not”.

The Government need to do more in this respect to ensure that consumers are fully informed about the processes and services available.

My hon. Friend the Member for Stockton North was right to be proud of the previous Government’s financial inclusion fund, which focused millions of pounds of resources on providing free debt advice to those who were most vulnerable and most at risk. It is therefore disappointing that the current Government’s record on helping with consumer debt funding is unclear. In January, they announced that funding to the financial inclusion fund would be cut, with the loss of 500 specialist advisers who work primarily through Citizens Advice, and then gave it a short reprieve of just a year. Were it not for the vocal opposition from Citizens Advice and other consumer debt support groups, along with hon. Friends such as, in particular, my hon. Friend the Member for Makerfield, the Government would have pursued that devastating policy on debt advice. The £27 million that has been allocated to the financial inclusion fund has given the Government a little time to consider how they will continue to provide crucial debt advice to the public. We know that, from April next year, the Money Advice Service will be responsible for the co-ordination of debt advice provision across the UK and has submitted funding proposals to the Financial Services Authority, but it would be helpful if the Minister updated the House on when and if the funding will be confirmed.

It is vital that the funding of free debt advice is maintained, particularly given the pressure on local government budgets, which could be significantly compounded by the changes to legal aid. Ministry of Justice figures show that the legal aid budget for debt advice is due to fall by a massive 75% from 2013. Last year, Citizens Advice dealt with 64,000 debt cases funded by legal aid. A 75% cut in future funding would reduce that number to just around 15,500. Potentially, tens of thousands of people will be left without the support and advice that they need in their time of need.

It would be remiss of the House to debate debt advice and management services and not to refer to the growing problem of short-term loans and the short-term loan market, which has been mentioned by hon. Members on both sides of the House. Over 1.2 million people use the payday lending market, not out of choice but out of necessity. Families are using doorstep and payday lenders who charge exorbitant rates of interest on these loans, piling on an unmanageable debt burden. It is not appropriate for the Government not to act. Should they not step in and regulate these markets in the interests of the most vulnerable and disadvantaged? My hon. Friend the Member for Walthamstow (Stella Creasy) has been a thorn in the Government’s side in pursuing the high-cost consumer credit market. In doing that, a regulator could work with industry to ensure realistic reductions in exorbitant interest rates and charges. [Interruption.] I am delighted that my hon. Friend has obviously made a direct impression on the Minister.

There are lots of examples of solutions out there. That would not, as many fear, involve imposing an arbitrary interest rate cap that may exclude the very people who need access to short-term credit. Although tackling interest rates is crucial, it is but one strand of the many ways in which that sector can be regulated. There could be upper limits on the amount borrowed or on the number of times an individual can borrow to help to prevent multiple loans. There could be grace periods or time restrictions on paying off a loan and taking out another in order to prevent “rolling”. A balance of regulation has to be struck to protect vulnerable consumers in this competitive marketplace.

Let us not forget to mention illegal loan sharks. I am pleased that the Minister has managed to continue to find funding for the specialist enforcement teams for the illegal money-lending project introduced by the previous Government. Those teams do tremendous work and have raised awareness and understanding of illegal lending.

I pay tribute to many of the speeches that have been made, particularly by my hon. Friend the Member for Stockton North, who spoke passionately about the effect of debt on the most vulnerable in our society. The hon. Member for Chatham and Aylesford—I believe that she is also a very useful footballer—pleaded for the banks to be more responsible and noted that 30% of those who go to debt management companies go bankrupt; that is something that we do not want to happen. The hon. Member for Meon Valley (George Hollingbery), who is not in his place, raised the subject of bailiffs, which is incredibly important to bear in mind in the context of this debate. My hon. Friend the Member for Scunthorpe (Nic Dakin), who is still sporting his Movember moustache—I am not, as it was shaved off by Andrew Neil this morning on the BBC—expressed strong concerns in relation to the provision of free debt advice, of which he has been a strong champion in this Chamber.

The hon. Member for Solihull (Lorely Burt) said that more information needs to be available to people when they need help. I think that everyone in the Chamber agrees with that. The hon. Member for North Swindon also deserves credit for all that he has done on financial education. The hon. Member for East Hampshire (Damian Hinds) raised the importance of credit unions and other lending organisations. I am delighted that he mentioned credit unions, because they have been left out of this debate a bit.

The hon. Member for Grantham and Stamford explained the nudge theory in Downing street. I thought that Nudge was the Downing street cat. Nudge is obviously alive and well in the industry. He also said that Payplan is in his constituency and does a good job in regulating the market in which it operates and in dealing with the debts of many of his constituents and the constituents of other hon. Members.

This has been an important debate. I commend my hon. Friend the Member for Stockton North for bringing the subject to the House. Given the economic outlook, the Government’s political dogma of not admitting that their plan A is not working, and the spectre of higher unemployment, lower growth and shattered consumer confidence, it is unlikely that this issue will improve any time soon. Millions of families may struggle with severe debt. Access to free and independent debt and money advice services is vital for those in financial difficulty. Those services need to be funded in a sustainable way and they must meet the needs of all consumers, including, most importantly, the most vulnerable.