Debt Advice and Debt Management

Tracey Crouch Excerpts

Thursday 1st December 2011 Commons Chamber

[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.

[Lorely Burt (Solihull) (LD)]

I am sure that all Members will have tales to tell about some of the rogue companies that cynically take people on, take their money as an up-front fee and also charge them commission, knowing all along that that person will have to take on either an IVA or bankruptcy.

[Tracey Crouch]

As it happens, I was about to tell the House about an instance of which I have recently learned. An individual entered an agreement to pay back their debt through a debt management plan. The plan spanned a total of 14 years and required repayment totalling far more than the original debt. In fact, this particular individual would have found it far cheaper to declare bankruptcy. The information and advice simply were not made available to the customer, who was instead trapped in a monthly payment schedule repaying vast fees.

In the past, and certainly in that instance, debt management companies have been responsible for exploiting the vulnerable and heavily burdened with debt and it is welcome that the Office of Fair Trading has begun to crack down on rogue operations. As a Conservative, more regulation is not something I typically welcome, but, in tackling rogue DMCs it is clearly necessary. Their fees are not always made abundantly clear and cost consumers up to £250 million a year. Adding such high costs to the burden for those who are already over-indebted does not strike me as particularly helpful.

[Margot James (Stourbridge) (Con)]

Is my hon. Friend aware that the Select Committee on Business, Innovation and Skills is currently undertaking an inquiry into this issue? So far, we have heard from several experts that the regulation of debt management companies of the paid-for variety is not working at all. Like her, I do not relish more regulation, but I fear that in this area we have no alternative.

[Tracey Crouch]

I am aware that the BIS Committee is looking into this and I hope that its recommendations when it has finished the inquiry will help the Government to form an appropriate regulatory structure, because it is clear that the current structure simply is not good enough.

Currently, a clear bias exists in favour of pushing consumers into plans that are likely to yield more in fees, rather than focusing on paying down their debts steadily over time. That is in stark contrast to the advice provided by Citizens Advice and the Consumer Credit Counselling Service, which is free, impartial and in some cases anonymous. So the debt management plans are not always in consumers’ best interests. In many cases, they fail because the level of debt built up is already too great and the monthly payments are also too great.

Sadly, it is only when those DMPs fall apart that customers turn to the free services provided by Citizens Advice and the CCCS to help them to pick up the pieces. As a result, the advisers at those services see and hear some horror stories littered with shoddy advice and spiralling debt, so they are particularly well placed to comment on the sector. My local Citizens Advice recently had people with a record £3 million-worth of unsecured personal debt walk through its doors in a single week. It suffers from dealing with the impact of a dangerous cocktail—several high-cost credit shops on the local high street and the emergence of rogue debt management companies. It has campaigned heavily for the regulation of both those sectors, which I support and would welcome.

Earlier this year, I tabled an early-day motion calling for further regulation of debt management companies and for the Government to introduce a robust statutory regime under powers available in part 5 of the Tribunals, Courts and Enforcement Act 2007. That would limit what such companies could charge consumers and would require them to submit self-funded independent audits to a relevant authority. If such companies are found to have breached protocol, the company’s consumer credit licence can be revoked or sanctions brought to bear. That system relies on having an effective regulator, and I am pleased that the recent crackdown on rogue debt management companies by the Office of Fair Trading, which has resulted in the worst offenders having their licence stripped from them, is beginning to fulfil that role.

What we need is a standardised service under which vulnerable consumers looking for advice know exactly what they are getting and can rest assured that it will be in their best interests. Transparency is key to sanitising the debt management sector. Regulation and strict sanctions are necessary to rein in the sector, but it is equally vital that more be done to signpost those looking for help to the right services in the first place. The Government have taken welcome steps to improve the access and quality of debt advice, for which I commend them. The commitment of an extra £27 million for face-to-face debt advice to be delivered by Citizens Advice and others means that access to impartial advice can be assured. That will go some way towards encouraging those in debt to seek help.

Some 90% of MPs in the previous Parliament were contacted by constituents in financial difficulty. As a new Member of Parliament representing a constituency with pockets of deprivation, I know that I will make up part of a similar statistic at the end of this Parliament, as will many other hon. Members. We are in a position to signpost constituents who are in difficulty to free and impartial services such as those provided by the Money Advice Service, Citizens Advice and the CCCS, and to steer them away from costly alternatives. That is something I will continue to do.

In my opinion, debt and debt management should be taken as seriously as the provision of high-cost credit. As legislators, we have an opportunity to do what is necessary to control an industry that can, if misused, misdirected or mishandled, ruin someone’s life. There are a variety of reasons why people find themselves in debt and they should not be judged as a consequence. Instead, we should judge those who seek to help them out of debt and we should judge ourselves as legislators if we fail to do anything about this soon.