Debt Management Plans

Nic Dakin Excerpts

Tuesday 5th July 2011 Westminster Hall

[Nic Dakin (Scunthorpe) (Lab)]

It is a pleasure to serve under your chairmanship, Ms Osborne, to have secured this debate, and to see so many hon. Members in the Chamber. Many other hon. Members have contacted me to say that they would have liked to be present, but unfortunately cannot attend. I thank the Under-Secretary of State for Business, Innovation and Skills, the hon. Member for Kingston and Surbiton (Mr Davey), for meeting a delegation from the all-party group on debt and personal finance a few weeks ago. He had a positive discussion with us about debt management plans.

Unfortunately, increasing numbers of people are getting into debt. In the Scunthorpe county constituency, for example, the average debt of clients of the Consumer Credit Counselling Service is £16,870. I fear that the trend might continue in the years ahead. When people summon up the courage to ask for help in dealing with their debts, they need to get the best support to clear their debts, not to make matters worse. However, at present, people who try to take responsibility for their debts can find themselves at the mercy of unhelpful, aggressive and sometimes unscrupulous practices that can make dealing with debt an even more unbearable experience.

[Gordon Banks (Ochil and South Perthshire) (Lab)]

A debt management plan has a real purpose: to return something to the creditors, but also to get the consumer out of debt as soon as possible. Does my hon. Friend have similar concerns to mine, about the many instances in which consumers find themselves with more debt, rather than less?

[Nic Dakin]

My hon. Friend makes his point well. Under a debt management plan, a debt management company collects a single monthly payment from its clients and administers the repayments on their behalf to each of the non-priority creditors, such as for consumer credit debt. Usually, the client pays for the service, although some organisations will do it for free, such as the charity Consumer Credit Counselling Service and the company Payplan, which are funded through the “fair share” approach to debt management, the virtues of which my hon. Friend extols. Such an approach ensures that the creditor, rather than the debtor, pays for debt advice and support by returning a percentage of the payment made by the debtor to the debt management plan operator. The creditor, however, credits the debtor with the amount of the full payment. That is the best possible approach to debt management, because it aligns the debtor and the debt management company, which is in their interests and the interests of the creditor. That model enables charities such as CCCS to help the nine out of 10 people lacking the means to repay their debt.

Other debt management companies also behave responsibly, but some companies’ practice has significant risks for the client. Most DMCs charge an initial up-front fee, which can be quite high, as well as an administration fee each month, leaving the clients with less money to pay off their debts. CCCS estimates that clients of commercial DMCs will take up to two years longer to repay their debts.

[Jonathan Edwards (Carmarthen East and Dinefwr) (PC)]

I thank the hon. Gentleman for securing this important debate. Before my elevation to this place, I used to work for the citizens advice bureau movement, and I saw how debt problems had risen significantly in our community. The hon. Member for Makerfield (Yvonne Fovargue), who is present, surely shares that viewpoint. Is it not the case that those debt management companies often target the most vulnerable in society, and that their plans are doomed to fail, which is why we need regulation of the sector, and especially of debt sharks?

[Nic Dakin]

Although there is some good practice, which we need to recognise and celebrate, a number of DMC practices identified by the CAB cause me great concern: cold-calling and aggressive marketing; charging up-front fees for services that fail to materialise; or poor advice in some cases, particularly when other debt remedies would be more suitable for a client’s circumstances.

[Justin Tomlinson (North Swindon) (Con)]

It is a pleasure to hear the hon. Gentleman’s contribution on a subject on which he has spoken on many previous occasions. On his point about poor advice, the obvious answer is that we need some form of quality mark, so that when people seek help—more often than not, the most vulnerable people, who are least well equipped to ascertain whether they are getting good or bad advice—they have the assurance that they are taking the right steps.

[Nic Dakin]

That is a good point. We certainly need more in the system than is there. Other examples of bad practice include: failure to pass on payments to a client’s creditors; ignoring priority debts, such as mortgage or rent, fuel, and council tax, which involve the ultimate sanction of loss of home, fuel supply or even liberty; and excessive charges for debt management services. All such practices have occurred.

[Tessa Munt (Wells) (LD)]

I have been consulted by a debt management company in my constituency. The gentleman who runs that company said that, if I wanted to become a bailiff, he could probably make me one by next Monday morning, because the legislation on, and control over, the bailiff system is sadly adrift from what it should be, and an awful lot of bailiffs do not act as they should. Does the hon. Gentleman agree that the legislation needs to be tightened up, so that it gives some sort of scrutiny of the process?

[Nic Dakin]

The hon. Lady makes a good point which, in a sense, underlines that made by the hon. Member for North Swindon (Justin Tomlinson) about the need for tighter regulation, or a tighter quality mark, in this area generally. Recent research by the Association of Business Recovery Professionals has confirmed worries about a lack of impartial advice, insufficient information about fees, and agreement of too many debt management plans that were always going to be unworkable.

[Jim Shannon (Strangford) (DUP)]

The hon. Gentleman has been generous in giving way. Does he feel that, given the benefit changes that are to be made next year, there will be a greater need for debt management? Also, does he feel that the desperation that arises from debt will fuel an already volatile situation? Does he agree that social security officers and housing associations could give expert advice to help?

[Nic Dakin]

The hon. Gentleman makes a good point. Sadly, we are moving into more austere times, in which more people are likely to get into difficulty. Indeed, the Joseph Rowntree Foundation this morning published figures suggesting just that. The Office of Fair Trading reported widespread non-compliance, misleading advertising by businesses involved in the area, and a lack of competence among front-line advisers working for DMCs. Sadly, the OFT found that self-regulation is not working and continues to be an abject failure.

[Yvonne Fovargue (Makerfield) (Lab)]

Is my hon. Friend as concerned as I am that even where there is evidence of unfair practice, the OFT has taken more than two years to close companies down? In those two years, the companies still operate, make a profit and charge vulnerable customers. The OFT needs more power to investigate such companies and shut them down early.

[Nic Dakin]

My hon. Friend has much knowledge and expertise in this area, and she makes a powerful point about the need for the Government to act now to protect vulnerable people. I know that the Minister has concerns, and I look forward to his response.

Citizens Advice believes that there should be a statutory scheme, with better powers for the regulator, coupled with improved funding of free debt advice. The solution, to improve current arrangements and protect vulnerable people from getting further into debt as a result of the behaviour of those to whom they turn for support and advice, might be to have a regulated environment in which providers are independently audited to standards set by an independent body, fees are controlled, and there is clear certainty about the repayment term, for creditors and debtors alike.

[Gordon Banks]

My hon. Friend is generous in giving way. He has hit the nail right on the head. This is a little bit of advertising: I hope later this year to promote a private Member’s Bill on this very issue, providing for a statutory scheme that is binding and includes a rigorous audit process and a fee cap. Does he agree—this has already been touched on today—that when someone approaches a debt management company for advice, they are at their most vulnerable? If they are told, “Give me £50”, or £200 or £600, “and I will sort the matter out, and spread that payment over a period,” that is exploiting their vulnerability.

[Nic Dakin]

My hon. Friend makes a powerful point. We look forward to his private Member’s Bill, which will raise the issue again. We need a regime that will encourage providers to compete on quality, rather than the size of their advertising budget. Debt management plans would then be more likely to lead to debt repayment and genuine resolution of debt problems for the majority of customers who entered into them. That would be achieved at far lower cost than under the current regime, and would significantly increase the speed with which creditors were repaid. That would be good for debtors, good for creditors, and good for UK plc.