Download Written evidence submitted by the Parliamentary Debt Management

Written evidence submitted by the Parliamentary Debt
Management Working Group (BoE 04)
Introduction
The Parliamentary Debt Management Working Group (DMWG) met on Monday 25th January.
Formed of a select group of industry stakeholders and MPs from across party lines, it discussed the
requirement for urgent reform in the debt management sector in light of a significant threat to the
ongoing provision of advice and services at the level required to meet consumer need. It concluded
that a sector-wide offering of a standardised debt management plan should be established. This would
be free to the consumer to access, with its costs covered by creditors. The DMWG recommended that
authorising this solution required only a minor legislative amendment, and identified the Bank of
England and Financial Services Bill, which is undergoing House of Commons scrutiny at the time of
writing. As such, this paper has been submitted as evidence for the information of the Public Bill
Committee.
Attendees











Rt Hon Norman Lamb MP
Johnny Mercer MP
Gary Streeter MP
Yvonne Fovargue MP
John Ludlow, the Office of Yvonne Fovargue MP
Bonnie Burke, the Office of Helen Goodman MP
Ben Brodie, the Office of Chris Leslie MP
John Fairhurst, Director, PayPlan
Rachel Duffey, CEO, PayPlan
Julie Grant, Head of Welfare, Unison
David Hawkes, National Money Advice Co-ordinator, Advice UK
Terms of Reference
The DMWG operates to consider how best to establish a low-cost but sustainable debt management
plan that would be free for consumers to access and funded by creditors, as well as placing no further
burden on taxpayers. Related to this, it considers the environment for free and fee paying debt
management services at large. These issues include: gaps in debt advice provision and the need for
greater clarity for consumers; consumer access to a standardised debt management plan; and, setting
the fee structure for a viable funding mechanism.
Debt Management Plans
The Money Advice Service estimates that there are 8.8 million people in the UK who are worried
about their debts to the extent that they regard them as a ‘heavy burden’. Analysis conducted by
PayPlan suggests that up to a third of these people can be helped by a negotiated repayment
mechanism allowing people to clear their debts in a managed way; this is known as a ‘debt
management plan’.
There are approximately 400,000 people in active debt management plans across the UK. Of these,
approximately 200,000 are in ‘free-to-consumer’ agreements. These are arrangements that a consumer
does not pay to access, but are instead funded by creditors on a ‘fair share’principle.
Despite the availability of free to consumer services there remains a mixed economy of provision.
The other 200,000 people active in debt management plans are required to pay for services provided
by fee-charging debt management companies. This sector is becoming increasingly inefficient with
fees representing a disproportionately high share of consumer repayments.
[“Fair share” is a voluntary arrangement whereby supporting creditors credit their customer with the
full value of their repayment but separately contribute an agreed percentage of that repayment, as a
contribution towards the costs of establishing and maintaining their repayment plan.]
Discussion Summary (Abridged)
John Fairhurst, Director at PayPlan, opened
the discussion with introductions. Acting as
the DMWG’s interim chair, he gave a brief
synopsis of the issues on the agenda. He
started by explaining that PayPlan is a major
provider of free debt management plans and
added that other ‘free to consumer’ providers
include StepChange and Christians Against
Poverty. All three providers operate the ‘fairshare’ funding model which sees creditors
making voluntary contributions on a fair share
basis to help the operators cover the costs of
the plans they provide. This allows those
organisations to offer the consumer a free
service.
John explained that the reason for this DMWG
meeting is the pressing issue of an expected
uplift in demand for debt management plans in
the near future. This, he said, raises questions
about the capacity of free-to-consumer
operators to cope and raises the prospect of
individuals needing to rely upon fee charging
firms who significantly extend repayment
terms by virtue of their high charges.
PayPlan’s view as a free-to-consumer provider
is that fair share rates offered to customers are
no longer reflective of the costs associated
with supporting cases. In recent years, the
disposable income of PayPlan’s customer base
has reduced significantly. This has meant that,
the majority of new cases that are being taken
on are not economically viable. Organisations
have seen their income reduced quite
significantly, in PayPlan’s case by a third. This
is not just a problem for PayPlan; it is a
problem for the sector as a whole. The ability
to grow, or for that matter, maintain free to
consumer capacity is therefore compromised.
Norman Lamb MP pointed out that that the
funding level agreed with creditors could be
restricting for free-to-consumer operators.
Rachel Duffey confirmed that, in PayPlan’s
case, they are very much at the mercy of
creditors and not all of them are supportive.
Within the creditor community it is often the
larger banks who find themselves crosssubsidising non-supportive lenders like payday
loans companies and debt purchasers.
Johnny Mercer MP suggested that it is in the
creditors’ interest that debtors choose the
fairshare approach, and questioned whether
they see the case for increasing the percentage
that they provide to free-to-consumer
operators. John Fairhurst confirmed that they
do, and are generally supportive of the case for
increasing funding levels. He added that in
PayPlan’s experience, supportive creditors
look to the outliers that do not approach the
arrangement fairly to bridge this gap and are
reluctant to increase their cross subsidy of
these
competitors..
Fee-charging
debt
management companies also have the same
issue; those that try to charge sensible fees
often find themselves outbid – for example on
advertising costs – by those who do not.
Ultimately informal ways of improving
funding arrangements fail because outliers are
not prepared to participate.
Rachel Duffey said that, in relation to debt
purchasers there is also a willingness to
support the fairs hare model but no one
company wants to be that one that leaps
forward and starts paying, losing the
competitive edge that they have on price.
John Fairhurst said that the necessary change
could be brought about by a minor amendment
to existing legislation, which would introduce
a simple fee-setting structure. Effectively, a
small legislative tweak could set a sensible
rate at a level less than that charged by feechargers. This would be approximately the
same as that paid by supporting creditors to
free-to-consumer operators at present, but this
would spread equitably across the creditor
community.
John Fairhurst said that his conversations
with fee chargers had been encouraging and he
has found that some of the larger providers
would generally be supportive of a binding
arrangement that would allow them to offer a
free to consumer product to their clients,
providing that it applied to all. On the other
hand, they are not prepared to adopt it whilst
competitors are able to gain advantage by
charging significantly higher amounts directly
to consumers.
Gary Streeter MP pointed out that, at the
very least, any standard fee paid by creditors
could be less than is currently charged.
Yvonne Fovargue MP suggested that even
without an upsurge in demand, there will be a
number of fee chargers who are likely to go
out of business because their model will not
work under forthcoming FCA rules, in the
same way that a lot of the payday lenders went
out of business after authorisation. She said
that a pressing concern surrounds consumers
who are currently in a fee-paying debt
management plan but could be left without a
solution.
John Fairhurst acknowledged that, if
consumers find that the firm they have a debt
management plan with has left the marketplace
then there is a very strong risk of
disengagement. PayPlan, he said, is in
dialogue with the FCA at the moment, as it is
among the operators able to help rescue
impacted clients.
Rachel Duffey said that a workable
framework is essentially already in place for
debt management plans, and that this is
ultimately about setting an appropriate fee
structure. She said that the FCA has many
more teeth and many more resources than the
Office of Fair Trading used to have. It is
therefore well-placed to deal with other areas
of poor practice within the sector, though it
does not currently have remit to authorise and
oversee an established fee-structure for debt
management plans.
David Hawkes pointed out the FCA’s
Thematic Review into ‘the quality of debt
management advice’ – carried out in the
summer of 2015 – was severely critical of the
fee-charging sector. He said that this
highlighted the problem of fees incentivising
and driving behaviours that are not in the best
interests of the debtor.
Yvonne Fovargue MP said that, on a
cautionary note, such a scheme would not be a
‘silver bullet’ as not everyone is eligible for a
debt management plan.
John Fairhurst agreed and said that this is an
issue that requires a relatively small change
that could have a very big impact on many
consumers. However, it does not take away the
need for those people with low or negative
disposable incomes, for which other
interventions may be necessary.
Summary of Recommendations

A standardised debt management plan could activate a sector-wide offering of a free service to
consumers.

With a supportive FCA framework already in place, a full-blown statutory scheme may not be
necessary.

A minor legislative amendment could effectively bring about a better level of consumer
protection and creditor behaviour.

The amendment would set a free structure. This should establish a fixed monthly sum per case of
£10, with a further 7% of funds collected, borne and shared by creditors.

The Bank of England and Financial Services Bill which is currently undergoing Parliamentary
scrutiny represents an appropriate mechanism to activate the scheme.

The proposed amendment is below in draft form:
Insert the following new Clause –
Debt management plans
(1)
Debt management companies authorised by the Financial Conduct Authority can
charge a fee for any compliant debt management where a consumer is contributing in
excess of £50 per month into their arrangement.
(2) In this section –
“fee” means the sum charged by debt management companies to creditors active in
the plan on a pro-rata basis on the relative balance outstanding. Debt management
companies will not be permitted to make any additional charges in respect of the debt
management plan to either consumers or their creditor. The rate of the fee will be
established and varied periodically by Her Majesty’s Treasury, with an initial fee set
at £10 per month plus 7% of the repayment.
February 2016