Commercial Debt Management and the Need to Promote Free Services

Derbyshire Districts CAB

Contents

1. Executive Summary

2. Commercial Debt Management

3. Our Clients

4. Marketing

5. Fees

6. Rules, Codes and Legislation

7. Free Alternatives

8. Why Choose a Fee-Charging Company?

Appendix 1: The Online Market for Debt Management

Appendix 2: Client Case Studies

Report compiled as part of the Derbyshire Districts CAB Money Means financial capability project © 2014.

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You should NEVER have to pay for help with your debts.

1. Executive SummaryDerbyshire Districts Citizens Advice Bureau provides free debt advice across Amber Valley, Derbyshire Dales, Erewash and High Peak. We also refer clients for free debt advice and management with a selection of partners, including StepChange and PayPlan. We also routinely come across clients who have previously paid for debt management services and rarely benefited from it.

The commercial debt management sector is booming. Debt solutions, such as Individual Voluntary Arrangements (IVA) and Debt Management Plans (DMP) are heavily advertised and there continues to be a strong demand for these services. But the market has not always been transparent. Customers can get confused about who they’re dealing with when firms market their services under a number of different brands. And advertising is very good at emphasising the possible benefits of a solution, without giving equal weight to cautions and provisos.

Add to that picture a second layer of activity in the form of ‘lead generators’ – companies which do not offer debt solutions directly, but refer to other providers. Despite being the first point of contact for many customers, the information they provide may not be comprehensive or as informed as advice from elsewhere. In many cases, these services are largely automatic – taking the form of websites designed to collect customer information, or automated phone calls. In any case, there are serious doubts about their impartiality.

It’s understandable that the combination of a relatively new and confusing marketplace with a vulnerable and sometimes desperate customer base should provide openings for scammers and opportunists. Inevitably, the Debt Management sector has come under pressure to clean up its act, but despite new regulations and voluntary codes, there are still rogue companies who fail to provide an adequate service or who, whether deliberately or inadvertently, mislead their clients. We think that it is important that clients are warned about dodgy operators and dubious practices - especially when clients who find themselves under pressure from creditors are more likely to be vulnerable to questionable sales techniques.

But we believe that the existence of non-compliant companies is a side issue. DEMSA’s code of practice contains much that, when implemented correctly, ensures that customers are treated fairly. But is also contains the following clause:

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Members must demonstrate that they act solely in their clients’ best interests. In doing so they must help clients to clear their debts as quickly and efficiently as possible.

This raises a question: if a debt management company is following this dictum to the letter, should they not advise their customers to seek free help and advice in every instance? Doesn’t that fact that a significant portion of the client’s available income goes on fees rather than reducing the debt rather work against the stated intention of clearing debts as quickly as possible?

The industry might argue that it can provide a better service than a free service, or a self-help route. This might indeed be the case for the customers that they are able to cherry pick, although evidence of this assertion is by no means easy to come by.

We certainly have many case studies to the contrary. These largely demonstrate failures to abide by FSA guidelines and the industry’s own voluntary codes, but from these stories emerges a picture of the limitations of paid-for debt management. The sector does not appear to be any better at freezing interest or stopping collection activities. It cannot consistently guide its customers to the most appropriate solutions. And there are a significant number of debtors that the industry doesn’t seem able to help at all – usually, those without sufficient income to afford the fees.

Where does the not-for-profit sector stand on this? Citizens Advice’s Adviceguide gives plenty of information about how to find a free debt management plan, and emphasises the advantages of this option. It stops short of advising against using a fee-charging company.

Many fee-charging DMP providers will argue that you'll get a better service by paying a fee. They may also say that because they're being paid by you, rather than by the creditors themselves, they're working in your interests rather than those of your creditors. It's up to you to judge for yourself what you think about these arguments.i

Money Saving Expert is noticeably less equivocal about fee-charging debt management companies.

Avoid any debt help or loan consolidation companies that advertise on the telly or in some newspapers. Their job is to make money out of you, plain and simple.ii

We believe that it is time to take a firm line against an industry that thrives on profiteering from personal debt. We believe that people should NEVER have to pay

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for help with their debts and that there is a need to tackle the imbalance between the free and paid-for sectors.

Firstly what is needed is better promotion of free services. It is difficult to see how charities could match the promotional budgets available to the commercial sector, but there is certainly a need for clients to be made aware of the alternatives.

Secondly we need to address public perceptions of commercial vs. not-for-profit debt management. Yes, a free service can successfully deliver working and sustainable debt management solutions. And no, a commercial provider might not necessarily be able to deliver on all that its advertising implies.

Finally, we need to demystify debt advice and debt management. Rather than being spoon fed phrases such as ‘little known government legislation’, clients should be fully aware of their options and the consequences and responsibilities that go with them. This knowledge gives them the power to make informed choices and to avoid bad advice. And with confidence, and a dose of encouragement, this knowledge can help them to take back control of their finances.

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2. Commercial Debt Management

Debt has always been the most prevalent issue facing clients of Citizens Advice. The recent financial crisis and subsequent overhaul of the benefits system have left more and more people struggling to make ends meet. Unsurprisingly there has been a corresponding rise in the demand for advice and support about debt, financial education and claims management.

As ever, where there is demand, there are commercial opportunities, and the paid-for debt advice industry has expanded to meet it. Advertising, promotion and cold calling are testament to how fiercely competitive the market is, but does the industry really benefit its customers?

We conducted a review of debt management help and advice online (see Appendix 1: The online marketplace for debt management). Of the first 70 results, 28 were for commercial debt management services. However, Google results pages also carry paid-for advertising listings, tailored to the search term. These were almost exclusively for fee-charging debt management companies.

The debt management sector consists of two tiers: firstly, firms directly offering management services; secondly, companies and online applications set up to generate leads. In some cases, firms may market their services under several different identities.

There seems to be little verified information about the size of the market for debt management, a problem that was acknowledged in a report compiled for the Debt Resolution Forum in 2012iii. However, the number of providers and the extent of their marketing activities are enough to suggest that there are considerable opportunities for commercial firms.

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3. Our clientsCitizens Advice has a great deal of experience in providing debt advice, and we often see clients who have previously used paid-for debt management services. Inevitably, the vast majority of these clients approach us because their debt management company has failed them in some way, which gives us significant insight into how the commercial sector has let our clients down.

Appendix 2 is a collection of case histories drawn from our evidence database, and we can determine that there are four main areas of concern.

i. Excessive Fees. Many clients with debt management plans find that a significant percentage of the money they pay is goes on fees. This is money which would be much more constructively used to reduce debts.

ii. Inadequate Service. In many cases, firms have failed to provide basic levels of service or have been unable to deliver the results implied by their advertising. They have been unable to negotiate freezes of interest, debts continue to rise and creditors’ collection activities continue. In some cases, payments to creditors have been irregular or no payments have been made – in such cases the distinctions between legitimate debt management firms and scam artists become blurred.

iii. Inappropriate advice. There is evidence to suggest that many companies fail to properly consider their customers’ circumstances, fail to properly inform and advise, and, as a consequence, steer them towards an inappropriate solution. For example, when a company which specialises in IVA’s recommends this route for its potential customers, without considering alternatives, then this would seem to be a strong indication that the advice is given for the benefit of the business, rather than its customer.

iv. Aggressive Marketing. The debt management sector is characterised by intensive marketing. Direct methods are often employed, such as mail-outs and cold calling. In one case, one of our clients was contacted after the company identified that they were subject to a CCJ. This approach, combined with often unrealistic claims about what the business can achieve for its customers, is calculated to target people who are often desperate and vulnerable.

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4. MarketingA qualitative analysis of the language used and the claims made on websites and Google advertising revealed common themes. We were particularly interested in the differences with how charities might promote similar services, as this may go some way to explaining why so many people choose fee-charging services over free alternatives.

References to official bodies.

Many sites claim to offer ‘government help’. Typically this is a reference to IVA legislation, but headings like ‘Government Debt Help’ and even, in one case, ‘Government Debt Grants’ can give the impression that the link leads to an official Government source, or that the company is affiliated or specifically endorsed by a government department.

This ambiguity is not a feature of third sector advertising, where the emphasis is on transparency of information and advice.

Free Advice

Companies typically claim to offer ‘Free Advice’. Of course, the advice may be free but other services are not. Again, there is the potential for confusion here.

Citizens Advice clients know that the advice they receive will be appropriate and given in their best interests. Customers of a commercial firm do not have the same assurances that the advice they will receive is impartial and comprehensive, or whether it is designed primarily to steer the client towards a specific product or service.

How you will benefit

This is the primary difference between how the commercial and charity sectors pitch their services. A commercial company will emphasise claims that that they could write off a percentage of your debt, make you debt free within a couple of years, get interest frozen and so on. The operative word in such statements is often ‘could’ – the reality of what may or may not be achievable is often consigned to the small print.

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By contrast, a charity or other free source of information will be obliged to highlight the limitations of a particular approach – for example that freezing interest is at the discretion of your creditors.

Quality of Service

How can the debt management company justify its fees when free services are available? Usually by claiming that they can offer a better quality of service than the free sector.

From www.pdhl.co.uk

“We do not receive any money from the taxpayer, nor do we receive charitable donations from financial institutions. We therefore exist solely on the fees we are able to charge our clients who in return are entitled to expect an outstanding level of customer service. Our fees are extremely competitive and are lower than some of our competitors. They also reflect the cost of providing the level of service we commit to giving you on an on-going basis.”

In the example above, PDHL make a virtue of their fees, claiming that they entitle the customer to expect “an outstanding level of service”. Like many other companies, PDHL seem to be playing on the notion of ‘perceived value’. In essence, you get what you pay for – that a free solution cannot possibly deliver the same level of service as a fee-charging service.

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5. FeesPossibly the most important information the potential customer needs to know is what the service is going to cost. We looked specifically at fees for debt management plans. With one or two exceptions, we were able to find details of fees on most sites that directly offered debt management plans (for lead generators, information was generally less forthcoming), although occasionally this did entail some hunting around. Comparison of fees is complicated by a number of factors, but typically the fee structure conforms to a standard pattern:

Set Up Fees:

Usually pitched at the equivalent of the clients first two or three payments, although minimum and maximum amounts are often specified. These payments are spread over the first six months, so that at least fifty percent of the clients’ payments are made to creditors.

Management Fees:

Typically around 18% of the client’s monthly payments goes on fees, although maximum and minimum amounts are usually specified. What is often not clear from information supplied online is whether these payments are taken in addition to the set up fees in the first six months, or whether they commence at month seven.

Renewal Fee

A few of the websites we looked at charge a renewal or review fee at the end of the first year of payments. DEMSA’s Debt Management Protocol indicates that the provider should bear the cost of all reviews.

Referral Fee

In cases where the client has been referred by a third party, they may find that the cost of any referral fee may be passed on to them. In our sample we came across a few general references to this possibility, but no firm information.

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An IllustrationTo help demonstrate how fees might impact upon a client’s repayment schedule, we’ve drawn up this illustration, based the fee structure of a typical debt management provider (in this case based on the current advertised fees of Harrington Brooks).

The Client

The client has non-priority debts to four separate creditors, totalling £20,000. For the sake of simplicity we will say that this debt is divided equally among the creditors. The client’s financial statement shows that the client can afford to pay £60 per month.

The Debt Management Company

The debt management company’s fees are as follows:

An Initial Fee of 50% of the first six months’ payments, but with a minimum payment of £240 required

Thereafter, a monthly Management Fee of £38, to a maximum of 50% of the payment.

Scenario 1: Client uses a Fee Charging Debt Management Company

First 6 months

Client’s pays: £60 per month

Initial Fee: £40 per month (£240 spread over six months)

Disbursement to creditors: £5 per creditor, per month.

From month 7

Client pays: £60 per month

Management Fee: £30 per month.

Disbursement to creditors: £7.50 per creditor, per month

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At £60 per month, the client’s payments over the first six months will be £360. As 50% of this only amounts to £180, the minimum payment of £240 is applied. Note, in this example the client would need to find £40 per month just to cover the fees.

From month 7, the monthly fee is applied, capped at 50% of the payments. In this example there is no minimum payment, but this is not always the case. Many companies have an ongoing management fee of around 18% percent of the monthly payment. The client in this example might do better in such a case, but most companies would still require a minimum fee of around £30 per month.

Scenario 2: Client Uses a Free Debt Management alternative:

Client pays: £60 per month

Fee: N/A

Disbursement to creditors: £15 per creditor, per month

By using a free service, the client’s creditors each receive three times the amount that they would get in the first six months of the fee charging arrangement. Even after the initial six month period, there is no significant rise in the rate of payment.

How can fee-charging debt management companies successfully negotiate repayment plans if creditors are only being offered a fraction of the client’s disposable income? Creditors seem to be getting a poor deal from the arrangement, and this could be why we see so many clients who continue to be pursued for payment. It could also explain why creditors may be less willing to freeze interest.

Clients also appear to be disadvantaged by the arrangement. If creditors are only being paid a third of the available income, then the debts will take three times as long to pay off.

Additionally, because minimum payments are often required to cover fees, clients with little disposable income may simply be unable to access a fee-charging service. In some cases, in order to be accepted by a company, they may agree to make monthly payments that they are unable to reasonably sustain.

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6. Rules, Codes and LegislationThe rules and regulations governing the debt management sector have undergone continuing scrutiny and revision over the last few years as the sector has grown. What follows is a brief summary of rules, codes of practice and legislation that pertain to the industry, and the bodies which enforce them.

Financial Conduct Authority (FCA)Companies offering debt management solutions are required to hold a consumer credit licence issued by the FCA (or by the Office of Fair Trading, from which the FCA recently assumed responsibility for the industry).

The FCA has recently carried out research into the Debt Management sector, the results of which are summarised here:

Key Findings

Consumers often have multiple debts that they can no longer manage, and approach debt management providers only when in urgent need of help.

Consumers are likely to be particularly vulnerable to income shocks and many may also have low financial capability. This puts many in a weak position to ensure they receive a high quality and value for money service.

Consumers often have very limited knowledge of the market and therefore put a lot of trust in debt management providers and do not shop around, relying on recommendations, adverts and basic internet searches.

Some debt management providers may provide poor quality advice due to frontline advisers lacking training and product knowledge and having incentives not aligned to consumers’ interests. Furthermore, there is evidence of high and/or non-transparent fees in the fee-charging debt management sector.

Consumers may suffer detriment including: poor value for money, being put into unsuitable debt solutions and providers not managing client money appropriately.

Our research also found consumer experiences that indicated problematic behaviour by some firms:

poor quality or incorrect advice, for example, a lack of distinction between advice and sales;

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evidence that consumers experienced targeted advertising via the use of lead generators in the sales process; the role of a lead generator was not always clear to the consumer;

lack of clarity about the charges involved in a debt management plan, including set-up charges and the front-loading of fees. Consumers were also often unclear as to whether interest/charges would be frozen; and

confusion about the actions of debt management firms relating to creditors, with some consumers receiving complaints from creditors that they were not being paid.

(from http://www.fca.org.uk/firms/firm-types/consumer-credit/consumer-credit-research/debt-management. )

As a result the FCA published a policy statement laying out the rules that subsequently came into effect in April 2014. Of particular relevance to the Debt Management market was the requirement that payments should be made to creditors from month one, rather than initial payments being taken wholly in fees. There is also a requirement for firms to signpost clients to free and independent sources of advice.

The FCA will continue to assess debt management providers and act swiftly when rules have been breached.

Debt Managers Standards AssociationThe Debt Managers Standards Association (DEMSA) came into being in 2000 to promote good standards within the industry. Its members are required to conform to a code of conduct.

Code of Conduct

The DEMSA Code of Conduct was developed with the approval of the Office of Fair Trading prior to the FCA assumption of responsibility for the sector in April 2014, and includes a provision that members comply with FCA rules.

Specific provisions include:

Staff should be trained to sufficiently high standards Lead generators and referrers should be appropriately licensed and compliant Marketing by companies and their agents must be clear, accurate and truthful.

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Companies and their agents must not represent themselves as offering a free to consumer or government sponsored service.

Customers should be given clear information about fees and withdrawal from the plan.

Customers should be advised that there is no guarantee that collection activities will cease or that interest will be frozen.

Customers’ funds should be held in separate ring-fenced accounts. Customers must be advised of the outcome of negotiations with creditors in a

timely manner. Customers must also be informed of any other developments in the relationship with creditors.

At the outset customers should be provided with a statement of how their money is being disbursed, Where a plan has been agreed, the balance owed, period needed to clear the debts and fees charged must be included in the statement. Customers must be kept informed of any material changes.

Companies must demonstrate that they act solely in their clients’ best interests.

A realistic financial assessment must be made and information verified before advice is given.

DEMSA members must not lend money to customers for the purposes of debt consolidation.

Debt Management Plan Protocol

In addition to the Code of Conduct, DEMSA produce a Debt Management Plan Protocol. This outlines how compliant plans should be marketed, administered and monitored, as well as detailing what information should be given to the client. A DEMSA member cannot offer a mix of both protocol-compliant and non-compliant debt management plans.

DEMSA Complaints Handling and Independent Redress Procedures

DEMSA will also investigate complaints made against its members by customers, complaints arising from an audit or customer satisfaction survey, from another DEMSA member or any other interested party.

Debt Resolution ForumLike DEMSA, the Debt Resolution Forum is a professional body promoting standards within the industry and publishes its own code of conduct, analogous to that of DEMSA. Also, like DEMSA, they provide a complaints and conciliation service.

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7. Free AlternativesCitizens Advice.Citizens Advice is a generalist service, dealing with a broad client group with a wide range of problems. Debt issues represent a significant portion of the demand on the charity. Services vary from bureau to bureau and many have specialist debt advisers and financial capability advisers.

Citizens Advice Bureaux will look at the client’s whole situation and provide independent and impartial advice on a complete range of options. In addition bureaux will help clients’ take control of their finances, prepare financial statements and resolve issues with creditors. Bureaux can also help clients’ negotiate repayment plans. They will not manage the clients’ payments for them, but can refer to other organisations who offer this service.

Website: www.citizensadvice.org.uk

(Contact details for your local bureau can be found via the above website)

StepchangeStepchange is a specialist charity which provides debt advice to clients by phone. They will help clients to understand and reach decisions about the full range of options available to them.

Stepchange arrange non-profit IVAs and DROs. They can also provide a fee-free debt management plan.

Website: http://www.stepchange.org/

Phone number: 0800 138 1111

PayplanClients can access Payplan’s free and impartial advice via telephone. They are a commercial company but crucially offer free IVAs and debt management plans. Funding for these services comes from the credit industry and other commercial partners.

Website: https://www.payplan.com

Phone: 0800 716 239

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National DebtlineNational Debtline is part of the Money Advice Trust and offers a free, impartial telephone advice service. Clients can also access CASHflow, a tool to help clients negotiate repayments to creditors. Clients of other organisations, such as Citizens Advice, also have the opportunity to access this resource.

Website: www.nationaldebtline.org

Phone: 0808 808 4000

Do it yourself?Finally, clients always have the option of setting up and managing their own debt solution. There are many sources of help for clients wanting to instigate their own debt management plan, including advice and online tools. The obvious downside is that clients will need to negotiate with creditors themselves. And creditors may be unwilling to cooperate fully with the client without the involvement of a third party. However, from a financial capability point of view, this is the most empowering approach.

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8. Why Choose a Fee-Charging Company?In 2011, Martyn Saville wrote an article for Which? that posed this question: Why do people pay for debt advice?iv Some things have changed since then – for example, debt management providers are obliged to inform clients that free alternatives are available. However, the question is still as relevant today since we are still seeing so many people who take this option.

The article attracted comments from a number of different sources, including people from CCCS (Stepchange), the Money Advice Trust and from within the Debt Advice sector. Many of their views echo our own experiences.

Not Aware of Free Alternatives

Some clients do not realise that a free debt management plan is an option. Most commercial providers now make their customers aware of this, and usually include contact details for the Money Advice Service as an independent source of advice, but this information may not be given priority.

There is, in any case, a great deal of information for customers to deal with when they first make contact with a debt management company – fees, timescales, terms and conditions and so on. They also have to piece together their own financial information, whilst at the same time dealing with pressure from creditors. Investigating alternatives and comparing services is something that can easily fall by the wayside in such circumstances.

Instant Reaction to Advertising and Direct Marketing

Over the past few years, more people have suddenly found themselves in debt because of redundancy or cessation of benefits. Many of these people may not have had any previous experience of debt. With no clear idea what to do or who to turn to, they are more susceptible to the kind of advertising techniques employed by fee-charging companies.

Extensive television advertising, cold calling and, as we have seen, heavy promotion of their services via the internet, means that for someone who suddenly finds that they are in debt, the first source of help that they are likely to come across will be a commercial provider. Clients are more likely to opt for the ‘first port in a storm’.

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Believe they may get a better service

The fee-charging debt management sector maintains that it can provide a better service. They may claim that they have a better relationship with creditors and find it easier to get plans accepted and get interest frozen. This claim has to be viewed in the light of the ‘open door’ policy of most free providers that dictates they will not turn clients away.

Whether the commercial sector can indeed demonstrate the levels of success that they claim remains to be seen, but given that they can cherry pick their customers, we should certainly not expect to see so many failures.

Instant Response

There is also the question of capacity – a caller to a commercial company will usually be able to get to speak to an adviser straight away. For overloaded third sector providers, the client may have to wait days or even weeks for an appointment.

Further delays may be occasioned by having to deal with more than one agency – for example, a client approaching the CAB for advice may ultimately be referred to Stepchange to set up a DMP. Such delays should not impact on the effectiveness of the plan – indeed, it may result in a more suitable result for the client than rushing headlong into the first option. But for a client under pressure from creditors, a delay is likely to influence their choice of provider.

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Appendix 1:The Online Marketplace for Debt Management As you would expect, debt management companies make use of all the available channels to advertise their services, which includes a heavy reliance on direct methods such as cold calling and text messages

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Internet Searches

Someone searching for help and advice about debt on the internet cannot fail to come across fee-charging debt advice companies. We conducted a study to see what kind of results would be returned by the search engine Google.

The search term we used was “debt management”.

Of the first 70 entries, the results break down as follows:

28 were for fee-charging debt management companies. This includes both lead generators and companies providing services directly.

24 were sites providing information. These were mostly charities, government sources and consumer websites.

The remainder were not relevant to our search – debt collection agencies, corporate websites, professional bodies and so on.

In addition to results returned by its search algorithm, Google also features three paid advertisements at the top of its results, plus additional advertisements in a column on the right of the page. These are almost exclusively for fee-charging debt advice companies, the upshot being that anyone searching for help with debt advice will encounter

r results that are significantly skewed towards the commercial sector.

Who’s Who?

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From a combination of search results and Google adverts, we identified a list of 56 commercial Debt Management companies. These fall into two categories, representing two tiers of activity.

Lead Generators.

These are sites which broker services or generate leads for other companies. Generally, the information they provide is minimal. Some give details of the companies they work with and their fee structure, but many do not. Their primary function is to collect client details to be passed on to a Debt Management Provider. It appears that in some cases this process of data collection and referral may be partially or wholly automated, and clients may be misled into thinking they are being assessed and referred to an appropriate service by a qualified advisor.

Providers.

Providers commonly offer a number of different options, usually IVAs and debt management plans, although some also provide debt consolidation, debt relief orders or negotiation of full and final settlements. In some cases a provider will specialise in one particular solution and refer clients elsewhere for other solutions.

Multiple Identities

It should also be noted that companies often operate under multiple identities. For instance our sample include three differently branded websites operated by Fresh Finance Ltd, which all refer their clients to Moneysolve Ltd.

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Appendix 2Client Case Studies

The following examples demonstrate the impact of commercial Debt Management

and Advice Services, drawn from clients seen by Derbyshire Districts CAB over the

last year.

These cases principally demonstrate three areas of concern, although inevitably

there is some degree of overlap.

Excessive Fees Inadequate Service Inappropriate Advice

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Excessive FeesPaying a fee of any kind in order to help reduce your debt is rarely advisable when

free alternatives are available to you. In many cases these fees seem excessive,

and take a considerable chunk out of the client’s payments – money which would be

better employed in reducing the debt.

Excessive fees for debt reduction plan

The client decided to contact Resolve Money Matters for help in managing her debts

after they dropped a leaflet through her door. This is typical of the way debt

management services are marketed – direct mail, nuisance text messages or an

aggressive program of cold calling.

At the time the client received this leaflet she was feeling very unwell, and so she

was glad to find someone to who would deal with her debts on her behalf -

particularly when she was told that all her present debts would be paid off in two

years.

Although the client relies on benefits for her income, she agreed to pay £80 per

month, believing that the promise of becoming debt free was worth this expense.

What the client didn’t realise at the time was that she had signed an agreement that

allowed the company to take up to 90% of her payment in fees. And this was not for

a Debt Management Plan, but something that Resolve Money Matters described as

a Debt Reduction Plan, which was not time-limited and meant that the company

could keep taking its excessive fees indefinitely.

The client has since discovered that her creditors are only receiving token payments

of £1 per month. She is devastated to think that she has paid in the region of £1100

and barely reduced her debts. At the time she entered into the agreement the client

was dealing with the breakdown of her marriage and her own ill health, so was

extremely vulnerable. It’s easy to appreciate how these distractions must have

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prevented her from looking into the arrangement more thoroughly, but she

nevertheless feels embarrassed about agreeing to the plan without examining the

fine print.

More charges, more fees

The client rang up Direct Financial Help regarding a Debt Management Plan, but she

was not made aware of a 17.625% monthly management charge (with a minimum

payment of £35.00) and a further one-off £70.00 administration charge. She signed

up for the plan without knowing that a significant chunk of her payments would go

straight to Direct Financial Help, rather than being used to reduce her debt.

Understandably, the client was not happy and wanted to cancel the plan in favour of

finding a more sustainable alternative. With so much money being paid in fees she

feared that her debt would never be paid off. When she approached us for help, she

was losing sleep and was struggling to cope with the stress of her debt hanging over

her.

Charging for advice on bankruptcy

The client had approximately £25,000 worth of debt and was considering bankruptcy.

He approached insolvency specialists Baker and Evans for advice, who charged him

£80 per month for their trouble. After paying over £400 the client was unable to

afford further payments, and Baker and Evans informed him that they would proceed

no further. Even if he had been able to pay their fees in full Baker and Evans would

not be able to proceed with the bankruptcy, as this sum only covered the costs of

‘advice’.

The Client paid over £400 that he could ill afford for advice that he could have got for

free. At the termination of his relationship with Baker and Evans, his application for

bankruptcy has not made any significant progress.

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Taking advantage of debtors

The client approached Money Village to set up a debt management plan to pay off

her creditors. Of the £27 she paid per month, only £7 went to her creditors – the

remainder was swallowed up my Money Village’s fees. Not surprisingly, her debt did

not reduce. Neither, sadly, was it all that surprising that Money Village did not advise

her of alternate options for managing her debts – other than a brief discussion about

bankruptcy, and of course the additional fees that they would charge her for help

with this process.

No doubt Money Village, like most other debt management services, were

completely happy with this ongoing arrangement. It’s their customers who get the

rough end of the deal – paying fees for a service they could get for free, with money

that could be better used to reduce their debt.

Keeping debt management companies in business

The client had three debts, totalling around £8000, and for six years had been paying

these off via a debt management plan provided by Money Tailor. He paid £33 per

month, and from this each of his three creditors got a token payment of £1. The

remaining £30 went towards Money Tailor’s fees.

By the time he approached the CAB for help, the client had paid £2160 to Money

Tailor, but only paid off £216 of his debt. The client had recently lost his job and

could not maintain payments any longer. Six years of payments that could have

been used to reduce his debt have instead gone towards swelling the coffers of a

debt management company.

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Making money from misfortune

The client went to company called The Money Group in February 2013 asking for

help to consolidate all her debts. They referred her to another company, Harrington

Brooks, who set up a debt management plan for her. She agreed to pay £18.48 per

week to clear her debts.

The client was subsequently prompted to visit Citizens Advice after she received a

statement from Harrington Brooks informing her that she had paid £401 off the debt.

Good news at first glance, but on closer inspection she saw that £360 had been

taken from this amount and given to The Money Group as a referral fee. However,

this was just the tip of the iceberg, as Harrington Brooks had also added £2,000 to

her outstanding debt to cover their own fees.

The client was certain that she was not informed of these fees at any time. She

thought she had contacted a company that would act in her interests to help her get

out of debt. In fact, she was just being taken advantage of by not one, but two

organisations who were only interested in making money from her misfortune.

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Inadequate ServiceTake a look at the advertising material for many debt management companies, and

some common themes will soon emerge. They will tell you they can help you get

debt free within two years, negotiate with your creditors to freeze interest or use ‘little

known government legislation’ to get your debts written off completely. In practice,

our clients tell us that the service they actually provide falls somewhat short of what

they promise.

Paying for debt management, but the debt keeps on growing

The client and his wife were thirteen months into a debt repayment plan arranged

through Harrington Brooks. The original total for the debt was approximately £14000.

The couple had been paying £150 per month without exception and the

administration fees for the period were £455, meaning that £1495 should have been

paid to their creditors over this thirteen month period.

They were considerably surprised, therefore, to receive a statement that shows their

total debt had risen to £21,669.34.

The couple were led to believe that all their creditors had agreed to freeze interest

and other charges on the debts, but it became apparent that this was not so.

Harrington Brooks did not inform them that interest was still being applied, and until

the statement arrived they were unaware that their debts were increasing. Despite

making every effort to pay their creditors, the couple now despair of ever doing so.

The clients felt as though they had been let down by the Harrington Brooks. They

had been paying the company on the understanding that their debt would be

managed, but instead it continued to spiral out of control. Is it reasonable to expect

that a fee-charging debt management company should frequently review and

rearrange agreements with creditors, rather than simply sit back and keep taking the

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client’s money? At the very least, should they not keep their clients informed when

they fail to freeze interest?

The couple came to believe that the money they spent on fees had been wasted and

that the only route out of their situation was to opt for an IVA or Bankruptcy. It’s

significant that at the time they first approached Harrington Brooks, the couple were

unaware that it was possible to have a similar arrangement with a non-profit

organisation for free.

Debt management company specialises in shoddy service

For three years the client had been using the services of Kensington Finance, a debt

management company. She had been paying £25 per month, £15 of which went on

Kensington's management fees.

In return for her £15 per month, Kensington did a poor job of managing the client's

case. They did not complete a credit check for the client and she was subsequently

chased by two creditors who were not included on the debt management plan.

Kensington did not provided the client with up to date balances, but they did request

that she pay more towards her debts, without first considering her income and

expenditure.

Some clients may be of the opinion that the quality of advice and support they get

from a commercial company may be better than a free alternative. This example

would appear to give the lie to that. The greater portion of the client’s monthly

payment went on fees, and in return she received an extremely shoddy service. She

now understands that there of other options, and that more of her money can go

towards reducing her debt.

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One Debt Solution offer no debt solutions

The client signed up with One Debt Solution in 2011 for a debt management plan for

her non-priority debts. Despite this, some time later the client was contacted by her

creditors, who told her that no payments had been received. The client tried to

contact One Debt Solution many times – each time she was promised a call back,

but this was never honoured.

The client learnt that most of the £2000 she paid went on One Debt Solution’s fees

and not to her creditors as she had believed. Many of the debts that she thought

were being dealt with actually increased due to interest and charges.

One Debt Solution did not fulfil their contract in setting up and maintaining a debt

management plan, and when we last spoke to the client she had still not received a

response. Our understanding is that this company has since gone into liquidation,

but sadly the story remains a familiar one.

The company that charges you to let you do all the work

The client entered into an agreement with Harrington Brooks to provide him with a

debt management plan. He made payments for fifteen weeks before he started to

receive calls from his creditors telling him that they had not received any money.

The client investigated but experienced great difficulty in finding out who had been

paid, who hadn’t and where his money had gone.

When the client came to us he was in the process of once again contacting his

creditors for information and to reassure them that payments would resume – the

kind of thing, in fact, that he thought he was paying Harrington Brooks to do. It goes

without saying that while all this has been going on, Harrington Brooks had

continued to charge him for all the work they’re either not doing correctly or not doing

at all.

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Inappropriate AdviceAnyone who comes to Citizens Advice for help can be confident that not only is the

advice they receive free, but that it is both independent and impartial, and also given

by competent advisers. This isn’t always the case when clients a paid-for service,

who regularly steer their customers towards inappropriate solutions. This may be

down to a lack of competence, or an incomplete lack of knowledge of the available

alternatives. Equally, it may be that the preferred option is in the better interests of

the company. A firm that specialises in arranging IVAs is going to offer you an IVA,

whether this is the best option or not.

Suitability of IVA?

The client owed around £7000 – these were mostly consumer debts, but the total

included some council tax arrears. The client was advised by Clear Debt Ltd that an

IVA (Individual Voluntary Agreement) would be a suitable way of resolving her debt.

This advice turned out to be the incorrect, as it was not appropriate to the client’s

circumstances. The IVA did not go ahead.

Although many companies like Clear Debt claim to offer independent debt advice,

CAB advisers often find that clients are steered towards a particular option,

regardless of whether it is suitable or in their best interests. In this case, the client

was not given sufficient information to enable her to make the most appropriate

choice. By the time she came to the CAB to seek genuinely independent advice,

she was unable to maintain the payments on her council tax arrears, bailiffs had

attended her home and her possessions were at risk.

Exploring all the options

The client had significant debts and no assets. He had agreed to an IVA with an

insolvency company (Vincent Bond). We found, after discussing options with the

client, that he had not been made aware of DROs (Debt Relief Orders).

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The client was committed to making debt payments for the next five years, but this

may not have been the most suitable plan of action. However, the insolvency

company did not explain alternative options with the client, nor explore their

suitability. Without this information the client was unable to make an informed

choice.

Inappropriate IVA for terminally ill client

Six years ago, the client, 77 years old, was advised that his diagnosis of bladder

cancer was terminal and that he would have only a few years left to live. The client

lived alone in a Dales Housing flat, had low pension income and was in receipt of

housing benefit and council tax support. His non-priority debts totalled around

£30,000.

Two years prior to contacting Citizens Advice, the client had an IVA supervised by

Wilson Field. Under the agreement the client paid £200 per month to his creditors

but to meet this expense was forced to go without food and had to sell much of his

furniture and belongings.

The client is struggling to survive. He is hungry and terrified of missing a payment to

Wilson Field.

Like a distressing number of people who come to us for help, this client had been

guided towards a completely inappropriate solution to his debt – in this case one that

had a direct impact on his wellbeing.

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i www.adviceguide.org.uk/wales/debt_w/debt_help_with_debt_e/debt_management_plans/getting_a_dmp/do_you_need_to_pay_for_a_dmp.htm ii www.moneysavingexpert.com/loans/debt-help-plan iii Debt Resolution in the UK http://www.debtresolutionforum.org.uk/resources/drf-research-18th-june-2012.pdf

iv http://conversation.which.co.uk/money/dont-pay-for-debt-advice