The Ministry of Justice proposes changes to the debt management industry for the benefit of consumers.  

The Debt Resolution Forum (DRF) promotes professional standards for resolving debtors' financial problems, focussing on the quality of advice provided to consumer debtors by all DRF members. 

Mike Thomas was recently in Manchester at the Forum’s annual conference along with representatives from the Office of Fair Trading (OFT), the Ministry of Justice (MoJ), Conservative Party and 180 delegates from the debt management industry, banks and credit card companies. Disappointingly there were no representatives from the main charitable organisations. 

The conference focussed on the government’s consultation paper, launched in September and due to conclude this month, which seeks to address the issue of the future operation of the debt management industry. 

The options under consideration are:

1. Leave the situation as it is and allow Debt Management Companies (DMC’s) to continue unregulated
2. Introduce a new code of practice for companies operating in this area
3. Bring debt management under a formal system of regulation. 

The OFT Deputy Director, Consumer Credit Group Nigel Cates told the conference that the industry needs to do more to improve compliance and although he welcomed the steps by  the DRF to improve training he issued a very clear warning, ‘get your compliance levels up to standard so that you are confident the business is operating correctly’. He closed remarking that he found the DRF training ‘hugely positive’. 

Phil Kelly from the MoJ raised his concerns about the level of advice given to consumers along with the openness, consistency, cost, hidden fees and the prospect of the debtor ever being able to sustain to the debt management plan. He also highlighted his worry for consumers that debt management plans offer no debt relief, stopping of interest and that just one single creditor can put the whole arrangement in jeopardy. 

Amongst the plans for the industry, the MoJ intends to issue a single sheet guide as to what consumers should expect to see with a debt management plan. This guide may eventually become a mandatory requirement, to be issued by all debt management companies to consumers that undertake such a plan. 

Mr Kelly pointed out that should full regulation become the desired choice then this can be relatively easily implemented by Part 5 of the Tribunals Courts & Enforcement Act 2007. However section 124 does not allow profit element so this clause will have to be removed to allow the fee charging section of the industry to continue to operate. 

Importantly, Mr Kelly said that there is a real need for fee charging firms as he recognised that the charities alone cannot cope or deal with the capacity. Mr Kelly then stated that if debt management plans became regulated they would need to consider the following key points. 

Would such plans;

• Stop all interest and charges?
• Exclude business and secured debt?
• Stop all creditor enforcement without permission of the court?
• Introduce one supreme authority to oversee the plans?
• Allow charges and advertising to be controlled?

Consideration would also need to given to building into any regulated plan;

 
• A total debt limit, meaning that if the unsecured liabilities reach a certain amount then this would be an exclusion from taking up such a plan.
• A time limit for the plan to run, for example no longer than 10 years.
• A minimum repayment; the debtor must be able to meet a certain level of payment to make it worthwhile for both the DMC and lenders.
• Should there be debt relief, i.e. debts written off if assets are excluded from the plan?

Creditors of the debtor would also receive a ‘unique statement’ detailing the debtor’s options, for example the return creditors would expect to get in a bankruptcy, Individual Voluntary Arrangement (IVA) as against the proposed Debt Management Plan. This will be a very useful guide in determining why the plan would be the best way forward, for all concerned. 

Fees

Always a contentious issue as some people feel you should not pay for debt advice.

The MoJ will, as part of the consultation, look at who will actually pay the fees for ‘regulated debt management plans’, the debtor/consumer or the creditors. Creditors currently pay the fees when dealing with charitable organisations. There may also be a cap on the limit of fees to be allowed. 

If regulation comes in next year what will happen to those plans set up before this date?

The regulations and issues such as fees will only apply to new ‘regulated plans’ and not historic plans. This raises an interesting point; do you then advise all those consumers that are in ‘unregulated plans’ to stop them and re-apply on the ‘regulated ones’ especially if interest is guaranteed to be stopped and reduced to a time limit and fees paid by the lenders. I know what I would do if I was a consumer in such a plan! 

Andrew Graveson – Director, Debt Resolution Forum, told me “It was encouraging and exciting to see so many different facets of the debt solution’s industry, regulators and creditor representatives together sharing a commitment to improve the quality of services available to over-indebted consumers throughout the UK.”

”Debt resolution services will remain in high demand in the future, and all steps taken to continue to improve the delivery of appropriate advice and effective solutions should be welcomed by the industry and consumers alike.”

I asked Melanie Giles a Director and Licensed Insolvency Practitioner for her views, “The concept of a recognised body of professional experts, working with stakeholders and government bodies in open forum, was very much in evidence at the second annual conference of the Debt Resolution Forum held in Manchester today.”

”I am encouraged by the work that has already been carried out to improve the delivery of both formal and informal debt solutions, and whilst coming from an already highly regulated profession, I see membership of the Debt Resolution Forum as an essential aid to my business moving forward. I have special regard for the opportunity for my staff to receive training towards a recognised professional qualification.”

Debtwizard Comment

Creditors should see the government’s consultation as a positive move, especially if a formal system of regulation is implemented. This will not only help consumers but will also be of immense benefit to the lenders They will no longer have to resource tracing and collection activities as the plan will be presented with a viable and realistic way forward for all parties. All the lender will have to do is receive the payments on what effectively is a bad debt that they would have sold on at a loss. 

Any government is likely to support the fee paying industry because it generates income and helps contribute to the taxation system. On the other hand the government injects millions of pounds of funding each year into charitable organisations and receives no income as a result of their activity. It is inevitable that this funding will be reduced over the coming years due to the current state of the country’s finances. Greg Hands, the Conservative Treasury spokesman, told me that ‘they cannot rule out cuts to this sector.’

Whilst the DRF is proving to be a thoroughly professional and growing trade body making great strides in improving the level of training within the industry and its status and image, I do not feel that self regulation is the answer and would welcome a move to a regulated industry.

Presentation notes from key speakers can be found at Debt Resolution Forum