2011 - A year of transition for DM

With 2011 well on its way to being a distant memory as we focus all our attention on what the future holds, Debt Management Today thought it was the perfect opportunity for us to look back over a year of regulatory change, economic uncertainty and an increasing political spotlight on debt. Miranda Atty spoke to some of the industry’s most influential players to find out what they really think about 2011’s changing debt landscape...

Clamping down

Following an Office of Fair Trading (OFT) Compliance Review in the early part of the year, the regulator took action against a total of 62 debt management firms in 2011 which were deemed to be non-compliant. Back at the beginning of the year, Ray Watson, Director of the OFT’s Consumer Credit Group, said: “We are determined to improve standards in this sector, as the failings identified by our review are unacceptable. Companies providing debt management services should be in no doubt that we will act against bad practice and ensure consumers are protected.”

In the summer the OFT published a consultation document on its updated Debt Management Guidance, which is due in the New Year. Anthony Sharp, who helped found non-policy discussion forum the Money Advice Liaison Group (MALG), commented on the OFT’s revised Debt Management Guidance. “The consultation document for the OFT’s new Debt Management Guidance, which was published in the summer and has now closed, gives us a good idea of what will be in the Guidance which comes out in January next year, but no-one can be completely certain what the document will contain,” he explained.

“It is important also to remember that the new Guidance, just like the exiting one, applies to both free and fee.

“A lot has been learned since the OFT’s Debt Management Guidance first appeared in the market in 2001. As long as the OFT remains the regulator, and let us remember its future is very much in the balance, then it has the powers to deal with rogue fee-charging debt management companies or indeed free advice organisations. I’m confident the OFT can properly handle such bad practice.

“It looks as though the guidance will be more robust than the previous one; although of course there will be areas where many would have liked it to be stronger. Although the OFT does have considerable powers, which it is not slow to use when it comes to abuse, it also needs to be able to work with the two trade bodies in the industry (DEMSA and DRF). Together we may succeed but divided we fall.”

Nick Pearson, Director of External Affairs at Paymex Group, said: “We can already see the effect of the revised guidance. The OFT is still trawling through the action it took against 129 firms earlier this year, and I think that after the guidance comes out more firms will lose their licences and more will exit the market – which is a good thing.”

Kevin Still, Director of Atlantic Financial Management, clarified that the regulator has done more than just clamp down on rogue firms. He stated, “The OFT has clearly focused on aspects of marketing and advertising by credit brokers, lead generators and debt solution providers and has published statements which they would find misleading in the advertising of Debt Management Plans (DMPs), IVAs, Protected Trust Deeds (PTDs) and any other debt management solution.

“A number of consultation documents have also been issued and one of the most significant is the OFT (1378) ‘Misleading or Otherwise Undesirable Names’ document which clarifies what the OFT considers to be a misleading trading style on a CCL and what should be listed on the licence, including website domains. The review of Personal Insolvency could also see major reform in terms of indebted consumers petitioning for their own bankruptcy in England and Wales.”

Alasdair Warwood, Secretary General of the Association of Professional Debt Solutions Intermediaries (APDSI), explained: “The OFT has taken strong and very public enforcement action against many small businesses with debt adjustment/counselling categories on their licence. Furthermore, the regulator has issued a consultation document on misleading trading styles, including the requirement that brokers display their website on their CCL.”

From talking to industry experts, it has become clear that the effects of the OFT’s revised debt management guidance are already being felt in 2011. Michael Land, Chairman of the Debt Managers Standards Association (DEMSA), told us, “We have a great interest in the revised guidance – DEMSA and the OFT actually have a quarterly forum where we meet to discuss issues. We have made suggestions for the revised guidance and I think the new guidance will address a lot of the points that have been raised.

“The one thing I would stress is that enforcement is critical – a regulator needs the resources to be able to enforce effectively, and to do so swiftly. The guidance could have a profound effect, provided the regulator is able to enforce. There are strict consequences of breaching DEMSA’s code, but DEMSA can only deal with those firms who are members.”

Mark Fawcett and Matthew Cheetham both raised the question of whether the regulator has enough power to enforce. Mark, Sales and Marketing Director of Release Money Group, said, “With any guidelines or changes I think they should always be seen by the industry as an opportunity to improve. We strive to see greater guidance in the sector, but unfortunately the industry as a whole is often tarred with the same brush as a few rogue companies.

“My fear with the OFT is that it needs to take greater control to clamp down on companies who try to find ways to work around what they know is wrong. We want to see the OFT get a grip on those that aren’t compliant. Recently, it asked the industry to drive the change for introducers – so our compliance team do due diligence when it comes to a new introducer – but really this is something which should be done by the OFT.”

Matthew, CEO of Harrington Brooks, said that, whilst he believes the OFT’s approach to regulation is more effective than the principal based regulation which the FSA uses the main issue is “not the guidance per se but the effective supervision of it”.

Political scrutiny

One thing that has become more evident as 2011 has progressed has been the government and political bodies turning their attention to the debt sector. Alasdair explained, “The BIS Committee started to conduct its inquiry into debt management, focusing on the Government’s response to its consultation on Managing, Borrowing and Dealing with Debt, entitled, Consumer credit and personal insolvency review: summary of responses on consumer credit and formal response on personal insolvency and its proposals for policies in relation to consumer debt, support mechanisms for those in debt and the provision of credit facilities by commercial companies.”

Nick Pearson elaborated. “I think the BIS Select Committee was rather unfortunately timed from their point of view, because the investigation was carried out three or four weeks after the government stated that they are opposed to statutory regulation. If the Committee were to find that regulation would be the best thing for the debt sector, it is unlikely the Government would turn around and backtrack over what they recently said.

“The evidence of consumer detriment via DMCs has been pretty scant, so I think the Select Committee will therefore probably find that commercial debt companies have a valuable role to pay.”

The House of Commons, which took part in debates during this past week, also focused the spotlight on not only the debt management sector, but the payday loan industry as well. Anthony said, “The House of Commons debates during this last week highlighted the truth that so few MPs ever really understand the subject they are debating about. To place the blame for our financial woes on Pay Day Loan companies and Debt Management companies is plainly naive to say the least. It is of course MPs that make the law, but this lack of knowledge and understanding is very worrying.”

Nick was in agreement. “Many MPs who spoke about the sector failed to acknowledge the huge gulf between responsible firms, especially those who are DEMSA members, and rogue DMCs. For some MPs who spoke, the fact is they are ideologically opposed to people who can afford to pay for debt advice doing so. Let’s be clear, the general public does not support public spending being spent on debt advice over local services after banks and lenders have been reckless and consumers have been feckless.”

Vance Parsons, Director of EuroDebt, summed the debates up: “Another factor impacting Debt Management and Advice services has of course been the significant budget cuts in many free-to-consumer advice organisations. This was highlighted in the recent Commons debate on debt advice and debt management.

“Those in need of assistance now have fewer options available to them as waiting lists for free face-to-face advice to grow ever longer. Many of the most vulnerable and those struggling with serious debt benefit significantly from face-to-face advice. As times get tougher for even those ‘middle income’ families who were previously financially comfortable, the quality one-on-one face-to-face advice offered by the fee-charging sector becomes ever more valuable as an alternative to the long waiting lists and limited resources of the free advice sector.”

Mark added, “My problem with the Commons debate is that what they are trying to achieve will only work if the Government considers that the commercial sector is not the enemy. It is important for fee and free areas to stand side by side, but to do that they must be equal and must be viewed equally.

“Not to criticise the free sector, but at the moment and in the near future it will be going through a lot of changes – it is suffering from a lack of funding and the volume of contact from clients. A greater relationship must be drawn between the two sectors because they are trying to achieve the same thing: to offer the client best advice.”

Vance commented on the parliamentary focus on pay day loans. “There has been much focus on pay day loans as a cause rather than a side effect of consumer debt, but to put things into context, the number of issues we deal with concerning the charges imposed by high street banks for unauthorised overdrafts far outweigh any issues we see concerning pay day loans.”

Debt management protocol

Another issue which has been hotly debated this year has been a proposed debt management protocol similar to the IVA protocol already in existence. Mark told us: “This recently came up at the Debt Resolution Forum (DRF) conference where we discussed a need for changes. Debt management has been with us for the past 15 years and in that time, barring the early 2000’s when the OFT’s first set of debt management guidance was introduced, it has remained relatively unchanged. The IVA and the DMP are essentially similar products, but a DMP does not give the same level of protection.

“We have seen the IVA drop with regard to minimum expectation of monthly repayments – is this in anticipation of a debt management protocol? Our company offers every debt solution available and I think adding a protocol debt management plan would give clients even greater protection.”

Matthew disagreed. He suggested that, whilst the IVA protocol has been successful for debtors and creditors, a debt management protocol would be rather different. “I’m not in favour of a regulated DMP as the strength of the product is the flexibility it gives both debtors and creditors, and regulation would almost inevitably reduce that flexibility.

“Whilst a register of consumers on a DMP might be of some benefit or interest, it’s difficult to see how that might operate with the non-contractual legal nature of a DMP. I do favour debt managers working closer with creditors in the future to electronically exchange information, lowering costs and improving management information.”

DAS

Talks have also been ongoing about introducing into the rest of the UK a Debt Arrangement Scheme (DAS) – a government-run debt management tool which allows a debtor to repay their debts through a debt payment programme. Currently only available in Scotland, we asked Anthony what he thought of expanding the scheme to the rest of the UK. “The Insolvency Service is very interested in DAS,” he said. “In Scotland, the scheme did not succeed when it was first launched a number of years ago, but after the rules were seriously tweaked, it was re-launched in July this year. Since that time the number of DASs granted has hit all records.

“Personally I support this facility and it means that most debtors will end up paying everything they owe. There is very little room in the scheme for what is known as debt forgiveness.

“To me there is one anomaly in the current Scottish version however – DMCs can currently operate DAS which means they can charge a fee. I am not necessarily against them charging but I think any charging should be done at a fixed rate, to stop potential abuse.”

Looking back

Kevin reminded us that “2011 has seen an increasing demand for holistic debt management services. Many families are facing a massive change in their circumstances and resulting disposable income.

“Redundancy, reduced hours with many taking part-time work because full-time jobs have become scarce, and changes in benefits make it vital to find ways to optimise income. High inflation and rising household expenses have meant that many UK families may be facing a deficit in their budget.

“Unauthorised bank overdraft fees have been very topical, along with the growth of pay day lending. In many instances we review banking services and conduct insurance reviews to ensure the most appropriate and cost-efficient financial services are used to release more funds for debt repayments.”

Over the past year, it is clear that regulation and reform have played their parts strongly. The seeds appear to have been sown in 2011 for real steps to push the industry forward during 2012 as we await the OFT’s updated debt management guidance, the outcome of the BIS Committee and of course the economic changes in outlook as expenditure cuts start to bite. The unpredictable nature of the changing debt landscape in 2011, however, inevitably makes me wonder... what will 2012 bring?