Debt Advice and Debt Management

Nicholas Dakin Excerpts

Thursday 1st December 2011 Commons Chamber

[Nic Dakin (Scunthorpe) (Lab)]

It is a pleasure to follow the hon. Member for Meon Valley (George Hollingbery), who made a very intelligent speech about controls on the use of bailiffs that is helpful in the context of the overall picture that we are looking at.

I congratulate my hon. Friend the Member for Stockton North (Alex Cunningham) on securing this debate, and I thank the Backbench Business Committee for allowing us the time for it. The debate is timely in two ways. First, as the Chancellor said this week, we face an economic storm. Families and individuals are facing rising energy prices, higher food prices, and rocketing fuel bills. Their incomes are being squeezed, and there is a real risk that more people will move into debt. Secondly, we are now in December, with the extra pressure of Christmas hitting household budgets. We do not want a debt hangover in the new year, with its awful consequences.

When someone summons up the courage to ask for help with dealing with their debts, they need to get the best possible support from people who will help them to clear those debts, not make matters worse. The hon. Member for Chatham and Aylesford (Tracey Crouch) clearly illustrated the dilemmas and problems, and the kinds of practices that unfortunately happen. 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 make dealing with debt an even more unbearable experience. In 2010, the high-cost credit industry lent £5 billion in the UK. Payday loans alone increased from £1.2 billion in 2009 to £1.9 billion in 2010. The UK now has one of the highest levels of personal debt in the world. In April 2011, the figure stood at a staggering £1,460 billion.

At this time, the future of debt advice is uncertain, with changes to eligibility for legal aid and the transfer of responsibility for debt advice to the Money Advice Service. It is important that the Government and the Money Advice Service confirm the future of the financial inclusion fund debt advice services as soon as possible, not just for next year but for future years. The funding from that is part of the overall funding of Citizens Advice services. There will be real risks if the critical mass of funding to provide advice is destabilised by further cuts in income at local or national level.

The FIF debt advice services are in their sixth year. They were deliberately located in areas such as Scunthorpe to meet the needs of communities that have difficulty accessing debt advice. Every year, those advice services have directly helped more than 100,000 people nationally to resolve their problems. Regular audits and evaluations have found high levels of customer satisfaction, with services exceeding clients’ expectations and effectively reaching their intended target group.

The provision of independent debt advice in my constituency is particularly worrying. The situation is in danger of being exacerbated by the changes to legal aid eligibility and reach. There are real worries about the availability and accessibility of future support. I fear that that is typical of the situation in many parts of the country.

If the FIF debt advice services cease, there will probably be no alternative sources of help. By definition, those services are used by people with very low incomes and limited means. Their inability to repay substantial amounts towards any consumer credit debt means that private sector debt management services do not see them as a profitable client group to serve. Research shows that there is little overlap and duplication between the national telephone advice services and the local FIF services. Clients often use local services on referral from other local agencies such as jobcentres, landlords and local authorities. Many of the people they serve have problems or communication needs that require support to be given face to face for it to be effective.

The quality of advice from many fee-charging debt management companies is questionable. Their fee structures mean that they get much of their income up-front. They are therefore not encouraged to work with their clients to help them manage their affairs and become debt free. A huge amount of those companies’ budgets is spent on advertising to draw in income from the indebted. That contrasts with companies such as the Consumer Credit Counselling Service and Payplan that use a “fair share” model to gain income. The incentive under that model is to work with creditors and the individual to make them better able to manage their money.

According to Citizens Advice, the majority of people in difficulty find themselves there due to changes in their life circumstances, such as death, divorce and redundancy. My hon. Friend the Member for Stockton North, in opening this debate, drew attention to research from the University of Nottingham that underlines that finding.

With all its experience, Citizens Advice highlights three principles for taking debt advice and management services forward. First, access to free and independent debt and money advice services is vital for those in financial difficulty. Such services need to be funded in a sustainable way and should meet the needs of all consumers, including the most vulnerable. Secondly, people in financial difficulties need better options to deal with their debts so that they are not drawn into using poor-quality debt management firms or taking on high-cost credit as a coping strategy. Thirdly, the consumer credit regulator needs stronger powers and more resources to prevent consumer detriment and to act more quickly and decisively to deal with problems. I will return to the point about regulation later.

There are other things that need to be looked at carefully. We have heard about misleading advertising. Many businesses claim that their services are free when they simply are not. Fees should be clear, understandable and highly visible from the start. At the same time, free services must be made equally obvious and clear. My hon. Friend the Member for Makerfield (Yvonne Fovargue) has introduced a ten-minute rule Bill to make advertisers signpost free advice. That is worth careful consideration.

Another issue is up-front fees. Debt management companies often front-load their charges, with customers paying several hundred pounds before they receive any advice. We need to consider whether up-front fees should be banned. We should also consider whether cold calling should be restricted.

The Office of Fair Trading lacks the resources proactively to monitor compliance by debt management companies. It has issued formal warnings to 129 firms out of the 172 that it has surveyed recently for compliance. We need to strengthen the regulatory framework. Across the House, there is recognition that this is an area in which the regulatory framework needs to be used. I draw attention to the comments of the hon. Member for Chatham and Aylesford, which made that point clear.

We can consider better control on firms entering the market, better scrutiny of business models and making the regime less reliant on enforcement action against firms that behave badly and more focused on preventing bad practice in the first place, so that bad firms do not get into the market. Consumer credit regulation needs to be strengthened, so that it has a deterrent power. At present, many firms are simply not sufficiently worried about action by the Office of Fair Trading to avoid unfair practices.

The regulator should be able to compel firms to compensate consumers for unfair practices, and there should be swifter enforcement against unfit firms. As my hon. Friend the Member for Makerfield said, firms that the OFT considers unfit to hold a credit licence can continue to trade and cause consumers harm for many years as a Jarndyce v. Jarndyce-type labyrinthine process is gone through in the courts. That is not to anybody’s benefit.

Interestingly, a large number of lenders in the UK are now US companies that have come here to take advantage of the lower level of regulation. Earlier this week I met an organisation called Veritec, which said that the market was very attractive to US companies at the moment because of the lack of regulation. Five of the seven largest UK companies in the sector started in the US. It is therefore right and proper that we look at practice in the US and how it has come to regulate this fast-expanding area of business since the problems in 2000 and 2001, particularly in the state of Florida. Those problems led it to introduce a regulatory framework that appears to have some attractions.

My hon. Friend has already drawn attention to the features of the Florida model: a maximum loan of $500—we could consider the maximum being a percentage of gross monthly income instead, but $500 is Florida’s model—limits on multiple loans, the stopping of any roll-over payments, a 24-hour cooling-off period between loans and finally, a very important ingredient, the real-time information system run by a private company and paid for by the credit companies, but accountable to and owned by the regulator. The database is funded by a transaction fee.

[Damian Hinds]

I am pleased to see that although it is the first of the new month, the hon. Gentleman has not taken the opportunity to make his face clean-shaven.

Will the hon. Gentleman acknowledge that the Florida measures apply specifically to payday loans, which do not account for the majority of the credit market or the majority of the debt problems in this country?

[Nic Dakin]

The moustache is having an encore for today and will be removed tomorrow.

The hon. Gentleman is right that the Florida measures apply to payday loans, but I believe that it is worth considering how that model can assist overall. Interestingly, by 2009, 6.8 million loans had been authorised in Florida, and not a single loan was extended beyond the contract period. More than 90% paid back their loan within 30 days and more than 70% repaid on the contract end day. Consumer complaints of mis-selling dropped significantly, as did overall indebtedness, and not one borrower was indebted by more than $500 at any given time. The Florida model may well not be the answer, but I ask the Minister to what extent the Government are drawing on practice elsewhere in the world, including in Florida and in France, which has also been mentioned, to help inform how we can move forward. I believe there is cross-party consensus about the need to regulate, and as the hon. Gentleman indicated, it is horses for courses—the Florida model covers payday lending, but there are other issues to consider.

[Yvonne Fovargue]

The other advantage of the independent database owned by the regulator is that if anyone researches a credit reference agency database, it does not show who has been on the payday lending database. When people move from payday lending to more established forms of credit, as we hope they will, their credit reference is not affected by the fact that they have had a payday loan, or maybe 10 payday loans.

[Nic Dakin]

My hon. Friend makes a significant point. The devil is in the detail—I can see that the Minister is nodding. We should learn from practice elsewhere that can better assist us. It is clear that practices in some US states have created unforeseen difficulties, so there is something to learn from what works well and what does not.

I should like the Minister to address certain questions when he speaks. Will he confirm that the Government recognise the need for sustainable face-to-face debt advice provision for people who get into significant debt difficulty? Will he confirm that the Government will ensure that funding is available for that in future?

Will the Minister take steps to eliminate misleading advertising of debt advice and to abolish the practice of debt management companies charging huge up-front fees, which results in perverse commercial incentives? Will he recognise that a consensus has been expressed by Members on both sides of the House that debt advice and debt management needs to be regulated? Such regulation should not be compromised by the one-in, one-out rule, however reasonable that aspiration is. Regulation is necessary if we are to have better activity. If we do not regulate soon, we will have consequences that we would rather not have.

Finally, will the Minister confirm that he will learn from practice elsewhere in the world? I am sure he will because he is very much into learning from others.