Debt Advice and Debt Management

Nick Boles Excerpts

Thursday 1st December 2011 Commons Chamber

[Nick Boles (Grantham and Stamford) (Con)]

This has been a fascinating debate and I congratulate the hon. Member for Stockton North (Alex Cunningham) and my hon. Friend the Member for Chatham and Aylesford (Tracey Crouch) on managing to secure it now, in a week when we have learned from the Office for Budget Responsibility, the Institute for Fiscal Studies and others that real disposable incomes for most people in Britain will not rise much in the next few years.

We all know, through our own experiences and those of the people we represent, the extent to which unavoidable costs such as filling one’s car, paying a heating bill or doing the weekly shop are going up. As a result, I fear that many more people will find that the sums just do not add up at the end of every week or month and that they cannot pay every bill on time. It is particularly important therefore that we anticipate now, in the next few months, the rising demand for debt management advice and work out how to protect the people who need to call on that advice.

Many hon. Members are great experts on aspects of this problem. My hon. Friend the Member for East Hampshire (Damian Hinds) is a great expert on credit unions, my hon. Friend the Member for North Swindon (Justin Tomlinson) is a great expert on financial advice and the hon. Member for Makerfield (Yvonne Fovargue) seems to be a great expert on everything to do with financial understanding. My interest in this subject comes from my constituency. I am lucky enough to represent the 750 people who work for Payplan in Grantham, which is an extraordinary business. It is important to understand that it is a business—a very valuable business—that does very well at making money. It does so by providing free debt management advice to troubled debtors and taking a fair share of contributions from creditors.

Payplan has demonstrated, along with the Consumer Credit Counselling Service and a few others, that it is an entirely commercial proposition to offer people advice based on the contributions received from creditors. It absolutely is not necessary to charge consumers for that advice in order to build a valuable business and make decent and respectable profits. Payplan is a partner of the Money Advice Trust and works closely with Citizens Advice and the National Debtline. I have run small businesses and I have many friends and colleagues who work in businesses, and I have not come across a business that makes as much money as Payplan does by doing as much good, so I am immensely proud to represent it and its employees.

The key question I want to address is the one at the heart of the debt management advice industry: what is the right economic model for that industry and should we be willing to intervene as a Government to change or specify that model? I go along with a view put forward by other hon. Members, particularly by those on the Government side, although my Lincolnshire colleague the hon. Member for Scunthorpe (Nic Dakin) also seemed to be of the same view. I am innately—I do not require the hon. Gentleman to go along with this—an economic liberal, like the Minister. I start off being sceptical of state intervention and I require that people demonstrate to me that a market failure is both obvious and substantial. I was therefore very happy, when a number of us met the Minister to discuss these issues a few months ago, to take his suggestion and look at whether there was a non-regulatory way of trying to fix the problem of cowboy companies gouging vulnerable debtors with huge fees up front and failing to fix their fundamental, underlying problem.

I was happy to look at whether there were alternative ways of dealing with the problem, and I set up a meeting with the excellent people who work in what has become known as the nudge unit at No. 10 Downing street. They are some of the most terrifyingly clever people one could hope to come across, and they are advised by one of the two authors of the original book, “Nudge”, who advise the Government on this issue. At the end of an hour in Portcullis house during which I fuelled them copiously with coffee because I knew that I would be able to make no other contribution to their deliberations, they reluctantly concluded—I think they were genuinely reluctant—that there was no obvious way of nudging this category of consumers.

Hon. Members have talked about the consumers in question, and about their state of mind and character. My hon. Friend the Member for East Hampshire described them, and while he was doing so I realised that he could have been describing me. There was the tendency to respond to advertising, and the unwillingness to open letters. Certainly, we Members of Parliament all feel, when we get personal letters, that we have had enough letters in the week. He missed out one vital element that certainly describes me: the total brain-freeze that seizes a person whenever they have to consider their personal finances. Last year, on my election to the House, I forced myself, for the first time, to draw up a budget for the year, and it is not a process that I intend to repeat soon.

We can all understand that for a person on a much lower income than any of us in the Chamber, and for a person whose costs were much more unforgiving than ours, it would be much more difficult to make a purely rational decision. They would be much less likely to ask themselves, “How is it that these people are able to do all this for free? Where will they send that money in the first few months? How quickly will my debts go down, and will they go down as quickly as they would if I went to another provider?”. It is simply unrealistic to expect consumers of that kind, in that situation, to go through the right process of questioning.

Is there a way of making sure that those consumers are at least fully aware of, and given all the required information about, the alternatives on offer? People have talked about Google, and requiring companies that charge consumers to mention the free advice systems. The difficulty is that there is almost no nudge that will overwhelm the advertising that could be funded by the huge fees that companies get. Even Google—a company that I admire greatly, and that is generally very keen to be socially responsible—will find it hard, on its own, to overwhelm the marketing brilliance of commercial operations that have a certain ruthlessness in their approach. As a result, I—and, more importantly, the nudge unit at No. 10—reluctantly concluded that there was no nudge available that would do the job.

As an economic liberal, I then forced myself to go to the next stage, and ask: is this market failure substantial, and is it obvious? I think that the answer is yes on both counts. It is substantial because the disparity between the information available to the consumer and the information available to the person selling to them is great. There are all sorts of areas where all of us, across the House, accept that that is the case, and that regulation is therefore necessary.

We believe, by and large, that it is important for consumers to know up front that cars have certain safety mechanisms in them, because most of us are not sufficiently well versed in checking for ourselves whether a car’s brakes fulfil the standards. We have myriad building regulations because we do not believe that consumers building, buying or moving into houses have any possibility of second-guessing whether the plumbing system will work, or blow up beneath them. We do the same with boilers, and with health care: we expect and require anybody providing laser eye surgery, or any other kind of operation, to be subject to specific regulations, because consumers cannot possibly second-guess whether those products are being provided safely. I would argue that the same applies to the consumers, and the product, that we are talking about.

We reached that conclusion a number of years ago in relation to other financial services. We decided that it was essential to regulate the fees that could be charged by independent financial advisers offering people mortgage, pension or endowment policies and products, for very similar reasons—we did not think that consumers would have the ability or information to assess whether fees were fair. Financial products are innately complicated, and we long ago concluded that consumers needed to be protected from the sharp practices of some providers.

What should the Government do? In the debate, two approaches have been proposed. The reluctance to regulate in a crude way is so deeply instilled in Government Members that they have proposed audits and restrictions on the percentage of fees that can be charged up front, on cold calls and on the worst practices of debt management companies that charge consumer fees. Listening to the debate—and I have genuinely changed my view slightly during it—I have come to the conclusion that going down that route would require enormous expenditure on regulation and enforcement. If we had to enforce measures on cold calls and on auditing everyone, as well as measures on the exact proportion of the fee taken from the repayment in a number of months, that would require such huge expenditure in the Office of Fair Trading that I fear it would be unrealistic.

I have concluded—no doubt the Minister will change my views yet again—that there is a simpler approach. We should take that spectacularly successful commercial model—fair-shares funding by creditors—and make it compulsory for any debt management company to make its money in that way.

[Alex Cunningham]

I have a simple question for the hon. Gentleman. Does he really believe that cold calling should still be allowed?

[Nick Boles]

I do not. I think that cold calling is a terrible idea, but I have good news for the hon. Gentleman: cold calling will die out automatically if all debt management companies follow the fair-shares model. There is not sufficient revenue available from the creditors to fund any of those dodgy marketing practices. That is why CCCS and Payplan do not indulge in those practices. To some extent, we are not here to save one commercial company and not another one, but they do not do so because their fair-share payments from the creditors do not make that possible. It is only because the fee-charging companies charge such huge up-front fees to consumers that they can afford to spend all that money to get them in in the first place.

The good news is that those bad practices would die out. On the other hand, we would have to do something else: we could not just require debt management companies to operate on that model. We would have to require creditors to make it available to all debt management companies, because none of us is in the business of somehow skewing the market towards one or two providers. We would have to require the creditors to offer that to any company that passed the basic regulatory requirements.

I understand that that would be a big step for any Government. The good news is that the legislation is already in place. The Tribunals, Courts and Enforcement Act 2007 is already on the statute book. Part 5, which envisaged setting up regulations for debt management advice, has never been activated, because a commencement order has not been laid. My final suggestion to the Minister is that the Government should bite the bullet and lay that commencement order. They should introduce a simple regulation to enable strong, competitive and profitable commercial providers of debt management advice to flourish by offering advice funded by fair shares from creditors, thereby ensuring that the interests of some of the most vulnerable in our society at some of the most worrying times in their life are protected.