Managing borrowing and dealing with debt: consumer credit and personal insolvency HM Treasury/BIS call for evidence The HM Treasury/BIS consultation document invited evidence and recommendations on a range of questions covering both the provision of consumer credit and the provision of debt advice and debt solutions to consumers, faced with difficulties in managing their debts. The IPC submitted its response shortly before the 10 December 2010 deadline. In accordance with our remit we only answered the questions in dealing with debt advice and personal insolvency issues. Our response to the consultation can be accessed on our web-site.
We welcome the BIS/Treasury decision to launch this timely consultation. We agree with the emphasis in the consultation document on the need for respondents to provide evidence. The IPC has campaigned for several years on the need for policy on personal debt issues to be evidence-based and on the need for better published information and statistics about both IVAs and DMPs, the most widely advertised and used debt solutions. We repeat this recommendation in our response to the consultation document. We also welcome the recognition in the consultation document that a “joined-up” approach is required in making policy on personal indebtedness, covering both the statutory debt solutions provided by IPs and informal debt solutions offered by debt advisers
licensed by the OFT.
Improving Debt Advice and Preventing Mis-selling of Debt Solutions
Our response concentrated on what the government could do to promote better advice being given to personal debtors and to combat the risk of mis-selling by commercial debt advice firms of debt solutions such as DMPs and IVAs, in order to maximise the firm’s profits. We drew on evidence of such mis-selling and other abuses from the OFT’s September 2010 survey of compliance with the OFT’s guidance by debt counselling and debt adjustment firms, they had licensed, from surveys undertaken for the IVA Standing Committee, and from anecdotal evidence from the IPC’s own contacts with individual IPs, the RPBs and with the non-profit making advice sector.
We recommended that the government considers three sets of measures to improve the quality of advice given to debtors and to reduce the risk of mis-selling:-
Better information for debtors. All debt advice firms and IPs to be required to provide their customers with up to date information about the average duration and completion/failure rates for DMPs and IVAs for the last three years and a statement of their own fees and charges before the customer commits to any arrangement.
In this context government should seek further to encourage the use of the IS’s excellent Debtors’ Guide by both the commercial and voluntary debt advice sectors; Debt advice firms and IPs to be required or encouraged to use the same income and expenditure categories and expenditure allowances to determine debtors’ surplus income and, if possible, to use the same criteria to assess debtors’ eligibility for different debt solutions. Where the same debtor is eligible for more than one debt solution, e.g DMP, IVA or bankruptcy, the debt adviser must provide the debtor with a balanced statement of the pros and cons of each option; and Stricter and more frequent monitoring of the advice given to debtors and of the subsequent management of their cases by the RPBs in the case of IPs and by the OFT in the case of other debt advice firms. Joint visits by the OFT and the RPBs to firms offering both IVAs and informal debt solutions could be considered.
Changes to existing Debt Solutions
We suggested three possible legislative changes to help ensure that there is a suite of statutory debt solutions available for debtors at all levels of indebtedness and all levels of income and to improve the consistency of the solutions available- The £15,000 ceiling on debts which can be written off through a Debt Relief Order (DRO) should be raised to maximum of £30,000 to allow access for more debtors who cannot afford bankruptcy;
The duration of any debt solution involving continuing payments by the debtor (statutory or informal) should not exceed 10 years. Also some debtors in bankruptcy may be able to make repayments for more than 3 years; and If the evidence justifies a case for a new statutory scheme providing relief from interest and other charges for debtors who can repay their debts in full, the Scottish Debt Arrangement Scheme should be considered to see if it may provide a model for the rest of the UK.
Other Issues raised in the Consultation
The role of the courts We noted that creditors must continue to be able to go to the courts as a “default option” for protecting their interests. This apart, we were in favour of minimizing the role of the courts as a forum for dealing with personal debt problems in the interest of reducing costs and delays.
A moratorium
The consultation document invited comments on the idea of requiring creditors to give debtors a moratorium of 28 days in which to seek independent advice before taking any action to recover their debts. We question this idea, given that debtors are already given a 28 days moratorium before any court hearing takes place and the risk that with another 28 days some debtors might use an additional grace period to dispose of assets. However,
creditors might be required to advise debtors to seek independent advice when they first notify debtors of their statutory demands.
A “gatekeeper”
The consultation document suggested that a single “gatekeeper” might direct or guide all personal debtors to the appropriate debt solution. Such a gatekeeper would need to have the necessary experience and knowledge of personal debt problems and freedom from commercial pressure to provide independent advice. We did not consider this idea to be feasible, since the non-commercial “free advice” sector does not have the capacity that would be required to cope with the level of demand implied and is indeed already struggling to cope with their existing case load. The commercial debt advice sector also lacks the capacity to provide a single gateway and on the basis of the OFT’s survey may be too influenced by what is in their financial interests to provide the wholly independent advice required. This is why we suggest that the most practical approach to improve the quality and consistency of advice and information given by all debt advice firms, commercial or otherwise, is through the regulatory measures set out above