Active Disciplinary Power

Here at Debt Management Today we thought it was about time we spoke to a trade body within the debt industry to discover where regulation is headed and what the future of the sector holds...

Miranda Atty went to meet Melanie Taylor, Director of External Relations at the Debt Managers Standards Association (DEMSA), to find out more...

DEMSA was established in December 2000 and was set up to promote good practice within the industry and to protect the interests of both the public and the lenders.

With 18 current members, DEMSA represents approximately 80 per cent of the paid-for debt management sector by volume.

I asked Melanie about the main objectives of the organisation. “It is about greater consumer protection and greater consumer redress if anything goes wrong,” she told me. “DEMSA wants to ensure that things are balanced, to enable the customer to make an informed decision. However, we also expect members to behave and to do their own monitoring. If any issues are identified we expect them to be modified straight away.”

Whilst it is all very well creating a trade body to attempt to improve standards within the industry, one thing I was keen to discover was how strongly DEMSA members are regulated. With so much bad press about the paid-for debt advice industry, it is vital to make sure an association is not just a collection of members, but really does make best efforts to regulate and manage those within the industry.

Melanie allayed my concerns, stating: “Membership of DEMSA is reliant upon debt management companies being able to demonstrate that they comply with the standards set out in the DEMSA Code of Conduct.

“DEMSA successfully secured approval for its code of practice under the OFT Consumer Codes Approval Scheme – this means consumers can be confident that they will be treated fairly and an effective redress scheme is open to them if this is not the case. Members have to work hard to get in to the trade body, and will be subject to restraints if they are in any way in breach of the code.

“We have the ability to impose fines, suspend firms and, ultimately, expel them if they fail to meet the standards of the code. Furthermore, if a member were to be expelled from DEMSA, we know the OFT would subsequently look very carefully at their fitness to hold a licence.”

She also explained to me that two firms had recently been referred to DEMSA’s Compliance and Discipline panel, chaired by retired High Court Judge, The Hon Sir Harry Ognall, DL. “One firm had complaints made against it regarding misleading statements. We fined the company £15,000, gave it a warning that any further violation of the DEMSA Code of Conduct in these respects will place the company at serious risk either of suspension or of expulsion from DEMSA, and reported the matter to the OFT. The second company is awaiting the committee’s final decision. If someone is misbehaving, they WILL be held accountable,” Melanie said.

So what do companies need to do to show they deserve to be DEMSA members?

“To join the trade body, an independent audit is required. There is a particularly strict code with regards to marketing, to ensure that material is not misleading. Once the audit is done, companies must demonstrate that they have made changes, and then the firm experiences three months of mystery shopping by an independent firm who reports to DEMSA.

“A percentage of the company’s database is then asked to fill out customer surveys (this could be new customers, customers who have been in a debt management plan for, say, 12 months and customers who have been in a DMP for two years). The surveys are returned direct to DEMSA who analyse the results and identify any trends. DEMSA members also have their telephone calls recorded so we can ensure transparency,” she explained.

There is often thought to be a lot of competition between free and paid-for debt advice, however Melanie emphasised the fact that DEMSA and its members do not view free debt advisers as competitors, instead taking the standpoint that the sectors must, and need, to work together in a complementary way.

DEMSA’s view is that “currently the free sector is not funded sufficiently to serve all those people who need debt help”. Furthermore, the association states: “Not everyone with debt has a low income; many have stable and reasonable incomes and have over-extended themselves.”

I asked her about DEMSA’s partnership with the Institute of Money Advisers (IMA), which includes the introduction of a new professional qualification in debt advice for advisers working in DEMSA member firms. The IMA launched a similar professional qualification for advisers in the free advice sector in 2010 and has so far seen almost 300 advisers achieve this qualification.

She said: “We were very keen to ensure we could offer absolutely equal training to the free-to-consumer area and the teaming up of DEMSA and IMA is big news for the debt sector – it is indicative of free and fee debt advice in partnership. The consumer is at the heart of what we are doing.

“The initiative is ideal for those working close to the customers and for senior managers. The course will be more of a refresher than whole new material; it is designed to ensure companies can demonstrate the appropriate skill and knowledge. There are 150 study hours, with a three-hour examination at the end of the course.”

Looking to the future, I asked Melanie for her opinion on where she thinks the industry may be headed. “Hopefully, we will see the size of the market shrink,” she said. “There is bound to be some consolidation, which will bring its own challenges. When a firm buys a portfolio of debt management plans, the existing customers on the plans they have just bought may have very different ideas about their plans and how they work.”

She continued: “I think, in the future, there will be a raised eyebrow if debt management companies are not members of a trade association. New OFT guidance looks set to recommend every firm goes through an annual audit, and needs to be a member of a trade body, whether this is DEMSA or some other organisation.

“I think self-regulation does have the ability to work, if more is done to encourage it. We would like to see a kite mark which would be enough for a member of the public to know that they are dealing with a reputable firm.

“If a member of the public is in debt they are under pressure and may not necessarily have the knowledge about what makes a good firm and what does not. We need to get to the point where those in a crisis situation are educated about how to compare debt management firms and how to ensure they get a good price. This in turn would help fees to come under control. It would be nice to see the consumer given the control to exercise their position and force the prices down.”

Whilst the industry still has a long way to go with regard to cleaning up or shutting down rogue businesses, membership of a trade body like DEMSA does offer guidance for intermediaries or consumers about those businesses which are committed to promoting best practice within the fee paying debt advice sector.

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