Debt Advice and Debt Management

Yvonne Fovargue Excerpts

Thursday 1st December 2011 Commons Chamber

[Yvonne Fovargue (Makerfield) (Lab)]

It is a pleasure to follow the hon. Member for Chatham and Aylesford (Tracey Crouch), who made a thoughtful contribution; I agree with most of what she said. I congratulate my hon. Friend the Member for Stockton North (Alex Cunningham) on securing the debate, which is timely, as Christmas is coming up, although that is not traditionally a time when the advice agencies see people who are in debt; they see them in January, once the debts have come through.

The number of people finding their debt unmanageable can only increase; that is beyond doubt. My hon. Friend mentioned the Financial Inclusion Centre’s recent report, “Debt and the Generations”, which says that a £50 per month drop in disposable income, due to any one of a number of factors—a small drop in hours, increased pension contributions, increased child care costs, or a rise in rent—would result in 3.2 million people who are just about coping and keeping their head above water no longer being able to pay all their creditors. As has been said, we are not talking about being profligate, and buying designer trainers and large flat-screen TVs; we are talking about paying the heating bills, paying for food, and buying school uniforms. Research from the Joseph Rowntree Foundation shows that only one person in six seeks advice from any source. If we accept that, it means that a further 500,000 people would seek debt advice if incomes dropped by only £50 a month.

We need to target the people who are not seeking advice, as the research proves that people who receive advice manage significantly better than those who do not. The Money Advice Trust has done an interesting report called “Facing the squeeze”, which indicates that many families are managing at the moment only because they have low interest rates, are taking on additional sources of credit—some of which, unfortunately, are payday loans—or are cutting back on essential expenditure to the point of deprivation. All of us will have visited constituents like the one I visited the other week, who said, “I’ll put the heating on while you’re here, but I’ll turn it off when you’ve gone, because I want to save the money.”

It is incontrovertible that debts do not come singly, and that early intervention when there are debts saves money. Government policy is slightly short-sighted in removing the majority of debt issues from the scope of legal aid, and in leaving things until the point of eviction.

[Paul Blomfield (Sheffield Central) (Lab)]

Does my hon. Friend share the concerns of Peter Hemmingfield, a debt team supervisor in my constituency who works, under the community legal advice contract, with the Legal Services Commission to provide specialist debt advice? He is very concerned that the service that he provides will practically disappear as a result of the intended legal aid cuts. He says in a letter to me:

“A substantial amount of our work is involved in helping many clients who have mental and physical health problems, who are aged”—

[Paul Blomfield]

You are absolutely right, Mr Deputy Speaker; I was just coming to the end. Peter Hemmingfield talks about people who are unable to manage their debts alone. Should we not be concerned about the impact on the most vulnerable?

[Yvonne Fovargue]

I agree with my hon. Friend. As for the idea that people can manage by themselves, that is not happening at the moment, and as a result of the cut to legal aid, 100,000 of the poorest people will lose access to advice. We need to look at where they will go, and how they will be helped in future.

Of course, there is a cost to free debt advice, and it is estimated at about £150 million a year. The credit industry contributes 3% of that amount. I would like the Minister to investigate further how a levy on the credit industry could be made to work without affecting the business model of companies such as the Consumer Credit Counselling Service, which relies on a “fair shares” principle to fund its work; I would not like such companies to go because we were looking at a levy on the credit industry. However, it is not sustainable that the industry should pay just 3% of the £150 million.

On the latest figures, Citizens Advice deals with 8,910 new debt problems each working day. The reason why it deals with that many cases, and why people go to it, is brand awareness. Some 97% of people recognise Citizens Advice, although they might not always know what it does; they sometimes say, “It tells people where to go, doesn’t it?”—well, it does not tell people where to go very often. However, people recognise Citizens Advice, and I am concerned about the Money Advice Service spending its hard-earned money on building a brand that people will recognise. I would question the need to build yet another brand. Why not use a trusted brand to deliver money advice services on the high street?

I am pleased that there is more research on why people get into debt, and I do not think that the reasons have changed significantly over the years. As I have said, they include low income, sudden changes in income, changes in family circumstances, illness, divorce and so on. However, the type of credit that people access has changed. One form of credit that has exploded over the past five years is payday loans. There is evidence of people relying on that type of credit when they max out their credit card and have been denied other avenues of mainstream credit. They use their credit cards regularly to pay their bills.

Only this week I attended a fascinating presentation facilitated by the Centre for Responsible Credit on the international experience, particularly in the US, which is an interesting place, because different states have different regulatory regimes, so the way in which they work can be compared. The former secretary of the securities and banking council who presented the report was adamant that the sector needs to be regulated. He said that as an American citizen he is no fan of regulation, but that regulation needs to be enforced, and the regulator has to have the power to suspend companies where necessary.

I urge the Minister to consider the report and its conclusions, including limiting the number of roll-overs and a cooling-off period so that people cannot immediately take out another loan when the first one ends, then take out another one to pay off the second one. Evidence from Florida shows that capping the total amount that people can take out in any one period—for example, $500 in a year—improves their ability to pay back that loan. We asked whether that sent people into the hands of illegal lenders, but we were told that the average amount that people take out in loans in Florida is $388, which is quite a bit below the $500 limit. People do not max out their loans, which may mean that they do not go anywhere else. In California, however, where maximum loans are much lower at $250, people take out $249, which is evidence that they will look elsewhere quite quickly. It is an interesting report.

We should also consider setting up a real-time database owned by the regulator, but funded by payday loan companies, that stores basic data, including the number of loans and amounts, so that easy referrals for debt advice can be made.

[Damian Hinds (East Hampshire) (Con)]

Does the hon. Lady agree that the United States consumer credit market is rather different from the one in the United Kingdom? She is right to identify the difference between states, but another key difference is that there is no home credit market to speak of. There is a danger that if we over-regulate on payday lending we may shift that borrowing into other business models.

[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.

[George Hollingbery (Meon Valley) (Con)]

I congratulate the hon. Member for Stockton North (Alex Cunningham) on securing this important debate and the hon. Member for Makerfield (Yvonne Fovargue), whom I followed on the occasion of our maiden speeches, on her speech. It is a particular pleasure to follow her today as she was so erudite and well informed as a consequence of her employment history.

Debt management and debt advice are important concerns even in relatively wealthy constituencies, such as mine. The latest report from our consumer advice bureau shows that debt advice is the No. 1 request it receives on a daily, weekly and annual basis. I do not want to trouble the House for long, but I want to raise an issue that many hon. Members have raised in the Chamber before. Questions on this matter have been asked before by the hon. Members for Great Grimsby (Austin Mitchell), for Ashfield (Gloria De Piero) and for Blaydon (Mr Anderson) and the right hon. Member for Delyn (Mr Hanson). The hon. Member for Westminster North (Ms Buck) has even introduced a private Member’s Bill on the matter. No doubt Mr Deputy Speaker will rule me out of order if the subject is not close enough to the motion before us, but I believe that the subject of bailiffs is important and germane to this debate, because many of my constituents and, I suspect, others rack up debts that they then have to refinance due to the bailiff system.

This is a complex argument, and there are two distinct sides to it. The BBC’s “Inside Out South West” made a programme on debt collectors last month, concluding that efficient debt collection—the threat of ultimate sanction—was important, particularly for small businesses, at this difficult stage of the economic cycle. My conversations with those closer to the Minister than I am, in the Ministry of Justice, suggest that that Department shares that concern.

On the other hand, all Members will have heard stories from many constituents about debts racked up because bailiffs’ charges have ended up way in excess of the original fine or charge. BBC’s “Watchdog” has done a great deal on the matter, and if one trawls the internet, one finds many websites that include lots of information and reflect a huge concern about the issue.

One or two of my constituents have been to see me about debt, and one who e-mailed me about a case then came to see me about her non-payment of council tax. She had missed just two £30 payments, and she knew she had, so she contacted the council to attempt to make arrangements—admittedly some months after she had missed those payments. She knew that it was her fault, but, after having her bailiff changed and trying to leave on an answerphone any number of messages to which there was never any reply, her bailiff was changed, somebody new arrived on her doorstep and she was presented with a bill for £642.

To many people that might not seem like a huge amount of money, but for my constituent it was completely insurmountable: she absolutely could not possibly pay that sort of money. We intervened, made arrangements for the local council and things were sorted out, but if we had not been there I hate to think where she would be. The answer is probably in the hands of the sort of debt management organisations that have been so well described today.

Another constituent failed to pay a parking ticket, and, after many months of dispute one way or another, with missed phone calls, missed letters and letters allegedly sent from bailiffs, she ended up with a bill for £500. A further constituent received a bill for £60 which escalated to £596. There is something plainly disproportionate about what happened in those cases. It is important that we have robust debt collection services, because we cannot allow people to rack up fines knowingly without any intention of paying them, but we have to look at the matter of proportionality, and I am worried about it.

My local citizens advice bureau has shown me two more cases that it has handled. It has one client who receives regular letters from a debt collection—bailiffs—company for her son who owes council tax, but he has not lived with her for five years, as she has made clear to the debt collection company any number of times. She has given the company her son’s address and phone number, but the letters keep on coming. She has also complained to the local authority, but it does not have the power to do anything.

The same bailiffs company persuaded another of my constituents to set up a direct debit to pay off arrears that she had run up some time ago, but the firm failed to collect the second payment, even though the direct debit was still set up. The company assured her that the direct debit was not set up, but bank records showed quite the opposite, and it has since charged her penalties for not paying an amount that it was supposed to collect and had a mandate to collect. That situation clearly cannot be allowed to continue.

This is a difficult issue, as I have already said. It is based on law, customs and practice from many years, if not many centuries, ago and there is clearly a need for reform. The previous Government did act on the matter, putting on the statute book the Tribunals, Courts and Enforcement Act 2007, to which my hon. Friend the Member for Chatham and Aylesford (Tracey Crouch) has referred. She mentioned section 5; my point is about section 3.

Section 3, as I am sure many Members will know, has not been enacted, but some progress has been made. There is an online certificated bailiff register, so debtors can check a bailiff’s status; all bailiffs now have to pass a Criminal Records Bureau check; and minimum training and skills are required for certification. But section 3 remains unenacted. It includes measures on when and how a bailiff or a High Court enforcement officer can enter a premises, what goods they can seize and sell, and what fees they can charge.

[Yvonne Fovargue]

I am glad that the hon. Gentleman mentions visits, because I have had two cases of bailiffs visiting a property, one in which they said, “You’ll be taken to prison and the child will be taken into care, and another in which they threatened to seize a pedigree puppy while a child was there. Some of their actions on visits are as bad as their letters.

[George Hollingbery]

A small trawl of the internet produces reports of any number of similar cases in which the circumstances are really quite horrifying. Vulnerable people standing on a doorstep, often surprised by the visit, can be bamboozled into doing all sorts of things. Indeed, in the parking ticket case that I mentioned, the lady was so upset by the situation, as was her neighbour, that the neighbour wrote out a cheque at that very moment to pay the £592 so that her friend’s car would not be taken away. These are unacceptable practices.

On taking office, the coalition said in its agreement:

“We will provide more protection against aggressive bailiffs and unreasonable charging orders, ensure that courts have the power to insist that repossession is always a last resort, and ban orders for sale on unsecured debts of less than £25,000.”

On 22 March this year, the hon. Member for Gedling (Vernon Coaker) asked a question of the Secretary of State for Justice about the timetable for consultation on the implementation of section 3 of the 2007 Act. He received this reply:

“The Government have given a commitment to provide more protection against aggressive bailiffs. We have identified options for public consultation on this commitment including the better regulation of bailiffs, the powers of bailiffs, their costs and how complaints should be dealt with. We are currently preparing the paper and intend to publish in spring 2011.”—[Official Report, 22 March 2011; Vol. 525, c. 971W.]

It is not spring 2011—it is early winter 2011—and that consultation is still not with us.

I must make it clear that I recognise that this is not an easy problem to solve. There needs to be a robust mechanism in place to enable those who are owed to collect outstanding debts from those who simply refuse to pay; all reasonable people would agree on that. Ministers are faced with serious difficulty in creating a scheme that has real teeth, but only as a last resort, without charges becoming hugely disproportionate. It is a fine balancing act, and I do not envy them the task. But if companies and taxing authorities do not have such schemes available, they could well face serious economic difficulties. It is not an easy task, and I can genuinely understand why making progress is difficult. That said, we have had promises and there is an expectation that something will happen. All I ask is that the Ministry of Justice—of course, the Minister who is with us today cannot respond on its behalf—provide some certainty for those in the industry and those who are subjected to bailiffs’ visits to ensure that we understand where we are going on this issue.

--- Later in debate ---

[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.

--- Later in debate ---

[Damian Hinds]

Obviously credit can be affordable without a usury cap. It depends on the price that is set. I am increasingly of the view that there probably is room for some form of cap, but that it should not be a blunt and general cap that would have all sorts of unintended consequences. As I said a moment ago, I do not believe that there would be any appetite in this country for an enormous central database storing credit transactions involving every conceivable type of provider and every single citizen of the United Kingdom so that loan applications could be compared with earlier ones.

Affordability is now a principle in the OFT guidelines. There is an argument that lenders should have a general duty of care to make reasonable efforts to ensure that the loans they provide are affordable to the consumer, and also that the loan does, indeed, get paid down over time.

[Yvonne Fovargue]

At present, however, even the most up-to-date credit reference agency updates only once a fortnight. My constituent who took out six payday loans in a day would not be stopped by that. Most of our payday lenders come over from America, where they are registered with one agency that regulates only payday loans as a short-term means of lending.

[Damian Hinds]

That is a perfectly legitimate and credible line of argument. The hon. Lady mentioned, however, that the payday lending market barely existed in this country five years ago. There are many other high-cost forms of credit, so this market has a remarkable ability to shapeshift, and targeting just one sector will result in the growth of other sectors. Not all the states in America have the payday loans regulations the hon. Lady mentioned, but those that do have experienced growth in other areas of lending, such as rent-to-own loans. Somebody always picks up the slack in the market, therefore. I am not arguing against all regulation, but I am arguing that what appear to be easy and general solutions are usually ineffective.

Education and advice are essential. Some people would say that the best advice on debt that we could give to individuals—or to Governments—is, “Don’t.” To be a little more nuanced, we could say that capital spending—people investing in themselves through investing in their education, their home or a car that will help them get to work—is a legitimate reason to incur debt, whereas current spend is usually to be avoided unless people can be confident they will be able to pay the money back. In other words, people must ensure that in the ups and downs of life there are not only downs, but an up will come, too. We might call that a golden role. Opposition Members will recognise that term, and they will also appreciate how important it is to stick to the golden rule and not change it part way through.

My hon. Friend the Member for North Swindon (Justin Tomlinson) has done amazing work not only in running the all-party group on financial education for young people but in raising the profile of this issue. I agree that young people must be equipped with the necessary skills for when they enter adulthood and the marketplace, and I believe the best way to do that is through maths, because if people understand percentages and so forth, they can assess all sorts of financial products. If schools and society are doing their job well, people will understand their self-responsibility too, which is also very important.

There will always be a need for a backstop solution for when things go wrong and I believe that debt counselling and advice should be mainly industry-funded. It must also be available through all channels—online, telephone and face to face. However, we must accept that face-to-face advice is massively more costly than the other channels. The hon. Member for Stockton North cited Citizens Advice cost-benefit analysis figures in respect of debt advice, but they are slightly exaggerated as they represent not the return to the Exchequer, but a much broader view of cost-benefit analysis taking account of the benefit to the economy. We must accept that face-to-face advice is costly, but, as my hon. Friend the Member for North Swindon rightly pointed out, it is essential to have that provision as it is important for some of the most vulnerable members of society. I am delighted that the Money Advice Service is focusing on how it can improve productivity—the case load throughput per person—in order to make face-to-face advice more affordable.

There is a role for debt management companies. There are hundreds of them and we must not over-generalise. On the other hand, a considerable number of them have got into trouble with the OFT, which suggests there might be a systemic problem in the sector. It is worth bearing in mind the circumstances of the customer that a fee-paying DMC will take on. They are, as has been said, typically not letter-openers. They often have unrealistic optimism about how the circumstances of their lives are about to change and turn around and, conversely, they have an enormous myopia about fixing today’s problem and today’s bills rather than looking at how to lay down long-term foundations. They are, almost by definition, quite easily swayed by good advertising—usually by either the first ad they see or the last. That all means that they are quite susceptible to the offer of an apparently easy solution whereby somebody else will take on the administrative burden and deal with the range of creditors on their behalf and they will focus on the smallness of the monthly payments rather than on how the alleged solution will bring them into long-term financial health.

That means, in turn, that the successful companies in the sphere tend to be those with the biggest marketing spend, the biggest promises, the longest repayment term on the loan and therefore the highest conversion rates. Although they will have a substantial drop-out rate, it does not matter so much if they have charged up-front fees that mean that they have ensured that their cash flow is safe. I hear from my excellent citizens advice service in East Hampshire that debt management companies all too often fail to consider the consumer’s overall position, the priority debts that they must pay first and their ability to pay back the loan schedule.

[Yvonne Fovargue]

The hon. Gentleman might be interested in a text that a colleague has just received—the Minister might be interested, too. It is cold calling from a debt management company and says that there is new legislation that means that debts can be written off. Is the Minister aware of introducing that new legislation? That is how people get drawn into the debt management companies.

[Damian Hinds]

Indeed. Remarkably, the hon. Lady might even discover that such texts seem to come from the Government on occasion. For the avoidance of doubt, let me state that they do not. Those are the sorts of tricks and ploys that are played, with a lot of subtle suggestions without saying anything. We probably know people who are not generally credulous who, from time to time, receive such a thing and take it as genuine.

I apologise for being almost boring in the extent to which I am going to agree with all previous speakers—[Hon. Members: “No!”] You are too kind. There is a remarkable degree of consensus among Members from all parties. Cold calling and canvassing for such businesses have no place in a responsible marketplace. The front-loading of fees sets apart the true interests of the customer and the provider. Although banning it might be excessive, we need to get rid of the front-loading and ensure that the operator has an incentive to see the individual through to financial security.

Finally, on search marketing and the extent to which people are actively searching for debt advice rather than being bombarded with marketing messages, I do not think we need to wait for a law or new regulation. There is only one substantial operator in that market. It is called Google and I am sure it has a corporate social responsibility department. I hope that it will read the transcript of the debate and take it on itself to ensure that although it will suffer some diminution in pay-per-click marketing fees, it can put free, respected and valued debt advice services at the very top of the list of the results when people search.