My Lords, I declare my interest as the retiring chair of StepChange, a debt charity which is the UK’s leading independent debt advice and solutions service. StepChange offers free-to-client debt management plans, and the charity estimates that it is administering over a quarter of the total number of DMPs that are currently in place.
We know that people who face unmanageable debt often delay, sometimes for as long as a year, before seeking help. By that stage, they are often so desperate for help that they will enter into a plan with the first provider they happen upon, whether it is telephone or web-based, or whether they have just read about it in the newspapers. In a previous debate, attention was drawn to the volume of marketing calls or texts offering fee-charging debt management services. Of course, there is also the scourge of daytime advertising of such products on television and radio.
In its 2010 review of the debt management plan sector, the OFT concluded that commercial debt management companies,
“are not giving the advice or offering the solution that is in the best interests of the consumer but instead that which is most profitable to them”.
That is quite a serious accusation but, compared with what charities such as StepChange offer all its clients, which is the best independent advice with the client at the centre of the discussion, it is fair to point out that in many cases commercial debt management firms simply do not have the expertise to help resolve people’s debt situations in their best interests even if they want to do so. For instance, out of the hundreds of debt management firms that exist, the Insolvency Service lists only four as able to set up a debt relief order—one
of the key tools to help debtors on lower incomes. In contrast, StepChange spends about £2 million a year on DROs for its clients.
The October 2014 report on this sector produced by the newly formed Competition and Markets Authority says:
“We consider that there is … a case for the FCA to conduct a more broadly-based review of the activities of lead generators”,
including,
“the role of fee-charging brokers ... possibly timed to take place during the authorisation process ... that is now getting underway”.
It is estimated that there were about 600,000 DMPs at the start of 2012. Of these, about 350,000 were with commercial fee-chargers. In 2010, the OFT estimated that debt management firms were making some £250 million profit from these plans—from clients who were, by definition, already over-indebted. It must be obvious to all concerned that, if fees are charged by commercial debt management companies to people who are suffering from unmanageable debt problems, the consequence will be that the extra costs taken will divert funds away from the creditor to the fee-charging DMP provider, and that will ensure that the time taken to repay the debt is extended. That cannot be good for consumers. It cannot be good for the creditors, who will wait longer and get less, and it is not good for the economy because it is a drag on GDP and will slow the recovery.
In this Committee we have discussed the role of the FCA and other sectors of the credit market, and have raised similar concerns in other Bills, not least the one that originally set up the FCA. Although I think highly of the FCA and respect the intentions of senior staff I have come across, it is becoming clear that there is a fundamental problem with the way it is established. Although its paperwork states and its staff will assert that the consumer is at the centre of its thinking, in practice the FCA has a different objective, which it takes as a surrogate for consumer welfare but which is not correct. It ensures that, across the financial services sector, markets are functioning well.
This means that we get perverse results. Almost irrespective of the consumer detriment or harm, the FCA appears to be content if a smaller number of well capitalised firms are trading, such that they are making reasonable profits—which I suppose means reasonable in relation to the capital employed. That is why cleaning up the payday loan market will not in fact eliminate payday lenders or other high cost credit operators, and why their tougher, more proactive regulation of the debt management market—while long overdue and very welcome—will not remove the problem of commercial DMP providers. If, for example, the FCA determines that the DMP market is functioning well, the FCA will be happy—even though the existence of fees will make it much harder for clients to repay their debts, and it will take them longer to do so.
A good example of this is the cap the FCA has introduced on charges in the DMP sector. We think fees should be abolished altogether on the ground that all clients’ money should be utilised to repay their debts. However, the cap has been set at a relatively high level: firms can charge a maximum of 50% of a customer’s repayments, although that must decrease once set-up costs have been recovered. Thereafter,
however, monthly management charges—as distinct from set-up fees—can be charged at a flat percentage of customer repayments. Most of our clients pay about £200 to £250 per month into their DMP. If 50% of the early payments, and let us say 10% of the rest, go to a commercial operator, you can see how the impact will work out. This is absurd. It means that a client of a profit-seeking debt management company with £20,000 of debts will typically pay hundreds of pounds in set-up fees and thousands of pounds in monthly management fees over the term of the plan—money they cannot afford, which should be being paid to their creditors. Compared with a free debt management plan, this will extend the time it takes to pay down debts by as much as several months, and sometimes more than a year. There is substantial consumer detriment here in this market, and it is hard to believe that such a high level of charges is consistent with promoting good consumer outcomes. Our amendments would ban upfront fees for credit brokerage, and clean up DMPs.
Finally, I will touch on one other issue. As a result of FCA regulation, commercial debt management companies are starting to exit the market, and under the amendment, this would accelerate. There will be some transitional problems; for example, when a fee-charging debt management company closed its doors earlier this year, StepChange Debt Charity was on hand to pick up the pieces—and that was good. It was able to support over 400 people, but it is important to note that in so doing, the charity found that more than half of those people had been sold a debt management plan which was not suitable for their circumstances. As the FCA authorisation process starts to clear out the worst operators in this market, it will be up to charities such as StepChange, working with the regulator, to pick up the pieces and help rebuild people’s lives. That will be a significant amount of work. I have written to the FCA to suggest that a plan needs to be put together with the creditors, StepChange and others in the charitable sector to ensure that clients whose DMPs fold under them can be offered a free DMP or other appropriate debt solution. I hope that the FCA will take up that offer to engage. I beg to move.