Peter Lovitt
Department for Business, Innovation and Skills
Consumer and Competition Policy
1 Victoria Street
London
SW1H 0ET
Submitted via email: [email protected]
BBA submission to the BIS Managing Borrowing and Dealing with Debt: Call for
Evidence in support of the Consumer Credit and Personal Insolvency Review
1.
The British Bankers’ Association welcomes the opportunity that this Call for Evidence provides
to share our views with the government on how the consumer credit and personal insolvency
regimes might be improved. The BBA is the leading association for UK banking and financial
services, speaking for over 220 banking members from 60 countries on the full range of the UK
and international banking issues.
2.
In responding to each of the Call for Evidence questions we have noted government’s request
for prioritisation of issues and the provision of evidence where possible. Our members’ priority
areas within consumer credit were submitted to BIS in advance of this Call for Evidence and are
attached as Annex A to this submission.
3.
As noted in the Call for Evidence, there has been a plethora of legislative and regulatory action
concerning consumer credit over the last 5 years. This has included domestic legislation, a
European Directive, regulatory guidance from the OFT, self-regulation via the Lending Code and
industry initiatives in response to a previous BIS white paper. In addition, the future regulatory
landscape for consumer credit is uncertain and open to possible change under the current
institutional reform agenda.
4.
We therefore believe that there is a limited need for and practicality of further changes around
consumer credit, until such time as the impact of ongoing changes is known and until the
landscape in which new initiatives might sit is established.
5.
In determining its approach to meeting the Coalition Agreement pledges - to reform financial
services regulation, curb unsustainable lending and strengthen consumer protections – it is
important that the government considers the role that it intends consumer credit to have in
helping the UK economy to grow out of recession and in turn what impact the pursuit of its
pledges might have on this role.
6.
Credit, both personal and commercial is the oil that drives the economic engine. Regulatory
barriers to efficient and cost-effective provision of credit result in less credit being offered and
accessible. Rate caps, discussed in more detail in response to question 9, are an example of a
regulatory initiative that can lead to an unhealthy contraction in the market, as BIS’ forerunner,
the DTI, found in its 2004 Policis research.
7.
Likewise, our members are committed to lending responsibly and, although we recognise that
this may not be the case for the entire market, a careful balance must be struck between an
effective level of conduct of business regulation and an over-burdensome and inefficient regime
that inconveniences the consumer and is not commercially viable for the lender.
8.
In reaching its conclusions, the government should remember that its own research, Overindebtedness in Britain, March 2010 shows that the overwhelming majority of UK households
are not over-indebted.
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9.
For these reasons, we have limited our input on consumer credit to those issues where we
believe that maximum benefit for the industry and consumers can be felt for the least additional
disruption to the credit landscape.
10. With regard to personal insolvency, the BBA believes that there is more need and scope for
fundamental change, so in addition to answering each question posed by the Call for Evidence,
we also provide a detailed analysis of where changes would be appropriate, attached as Annex
B to this submission.
The decision to borrow
Q1. Should the Government extend regulations on advertising for credit products beyond
the cost of credit?
11. The BBA does not believe that an extension of regulations on advertising of credit beyond cost
is necessary. At present any advert for regulated unsecured consumer credit must comply with
the Consumer Credit Act (CCA); the Consumer Protection Regulations; the relevant Advertising
Standards Authority Code and a number of additional Codes of practice. Additionally most
lenders subscribe to one or more of the credit industry’s voluntary codes of practice, such as the
Lending Code, which requires that adverts are fair, clear and not mis-leading.
12. Advertising of credit will also be subject to the terms of the Consumer Credit Directive (CCD)
from 1st February 2011 onwards. As a maximum harmonisation Directive it is questionable
whether the UK government is at liberty to extend regulations concerning credit.
Q2. Should consumer credit advertising rules be aligned with those which the FSA
applies to secured credit?
13. As outlined above, we believe consumer credit advertisements are subject to a comprehensive
and effective range of legislative and regulatory requirements, including provisions which outlaw
misleading claims and omissions.
14. The BBA is not aware of any consumer detriment arising from the way consumer credit is
currently advertised and we do not believe FSA’s financial promotions requirements would
create a regime for credit that would be any more stringent than that which currently exists and
will be subject to further consolidation via implementation of the Consumer Credit Directive
advertising provisions in the New Year.
Q3. What would be the impact of a 7-day cooling off period for store cards on (a)
consumer behaviour and (b) lenders?
15. (A) We believe a cooling off period for store cards could have two detrimental impacts on
consumers. The first is that the purchase made when the card is sold would no longer be
subject to discount; the second is that the consumer who is relying on credit to make the
purchase might use an alternative form of credit, such as a credit card, which might prove more
expensive.
16. The Call for Evidence states that consumers benefit from having time to consider whether a loan
is right for them. Under CCD, consumers will have a 14 day right of withdrawal from store cards.
17. (B) BBA members do not provide store cards, so we will not comment in detail on possible
impacts for lenders, but we would observe that the absence of a convenient avenue for
consumers to purchase and benefit immediately from the store card would most likely result in
falling demand and lenders would therefore be likely to leave the market.
Q4. We would welcome your in views on the following OFT recommendations from the
review of high cost credit:
(a) that the Government works with lenders to provide information on high-cost
credit loans to consumers through price comparison websites.
18. We believe that price comparison websites can be a useful channel for providing consumers
with more transparency and comparability for financial services. We would therefore support the
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OFT’s recommendation, subject to the high cost credit continuing to be defined as per the OFT
review.
(b) that the Government explores whether there is scope under the European
Consumer Credit Directive for a requirement that high-cost credit suppliers must
include 'wealth warning' statements on advertisements for high-cost credit
19. We believe that additional requirements for credit adverts would ‘gold-plate’ the Consumer
Credit Directive and would therefore be in breach of its maximum harmonisation status.
(c) that the Government works with credit reference agencies to explore ways in
which payday lenders and rent-to-buy suppliers could provide suitable information to
credit reference agencies about the payment performance of their customers, in turn
allowing those with good payment records to use mainstream lenders more easily in
the future
20. The BBA supports greater sharing and use of credit data, where it supports our members’
commitments to responsible lending. However, a number of questions arise regarding the use
and appropriateness of sharing information on payday lending.
21. The government and consumer bodies have previously expressed concern that consumer
detriment with regard to payday lending arises more often where the customer ‘rolls over’ a loan
or repeatedly uses the services of a payday lender. It therefore seems incongruous that a
customer might be expected to use such services on a regular basis in order to build a sufficient
credit file to access more mainstream services.
22. The alternative is that very limited use of a payday lender is unlikely to provide enough
behavioural data to a credit file to impact on the credit risk assessment made by a mainstream
lender.
(d) that the OFT collects essential information on the high-cost Credit sector, such as
the volume, value and pricing of credit, levels of repeat business and defaults among
customers as needed. This will help OFT understand the effect of its
recommendations and provide better evidence for future policy making
23. We agree that the OFT should collect further information on the high-cost credit sector to help
better inform any future policy interventions.
(e) that the relevant trade associations for home credit suppliers, payday lenders and
pawnbrokers establish a code or codes of practice covering best practice policy
including on: complaints and advice to customers, policies on rolling over of loans,
limits for amounts to lend to consumers, avoiding misleading consumers through
advertisements and ensuring that consumers are aware of the ultimate owners of
brand names
24. The BBA supports the OFT recommendation for further best practice for high cost credit
providers via voluntary codes of practice.
Q5. Is there a need for greater sharing of data between the consumer credit industry and
other bodies, including utility companies, local authorities and HMRC?
25. The BBA strongly supports greater access to and sharing of relevant data to support
comprehensive and accurate credit decisioning. This position was included in the BBA’s priority
areas previously submitted to BIS and included as Annex B to this submission.
26. We believe that sharing this data would benefit all consumers, plus current holders of the data
and therefore the wider economy, by improving credit assessment and responsible lending
practices and the collection of monies owed. We believe the following data should be made
available to credit reference agencies:
• Non consented portions of credit accounts – data on around 40 million ‘old’ current
accounts is not currently shared so a full picture of those customers’ financial positions is
not possible.
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• Utilities performance data from water, electricity and gas suppliers – some utilities
providers already share data on customers who have absconded without payment and
others will share data on customers who are still in situ but are in default. These charges
are an expense paid by the majority of consumers, information on performance could be
a useful barometer of consumer financial behaviour and, help under represented groups
demonstrate payment performance.
• Income data from government resources – access to data from a reliable third party
source such as the HMRC and DWP databases to show income and benefit information
would enable more effective affordability calculations to be carried out
• Student Loan data – currently default data on old style student debt is shared but actual
debt levels and new style data is not included. With the cost of further education
escalating and more people opting to study during the recession many more people will
be entering the workplace carrying significant debts in respect of their education. In order
to ensure that those people do not seek or take on unrealistic levels of debt either during
their education or when they start work a full picture of the commitments that they have
needs to be available to lenders.
• Council tax arrears data – although upwards of £500 million of council tax is unpaid each
year, the majority do pay their tax in full and on time and access to the information would
provide more data to assist consumers with little or no credit data to provide payment
profiling.
Q6. It has also been suggested that there needs to be greater transparency around credit
scoring and the impact of credit scores on charges. Do you agree?
27. It is unclear from the Call for Evidence whether this question refers to Credit Reference Agency
(CRA) data or to the internal credit scoring mechanisms employed by lenders.
28. Consumers are able to access their CRA data by requesting their credit file from any of the 3
main agencies. Inaccurate information can be corrected and notes added to files where the
consumer feels that any entry should be qualified. Under the forthcoming CCD requirements
customers who have a credit application declined following the use of CRA data will be given
contact details of the CRA, so that where necessary their file can be requested.
29. Consumer information about the purpose of CRA data is widely marketed and promoted by the
CRAs and BBA members’ websites and lending literature also refers to its uses and consumers’
rights.
30. Lenders’ internal credit risk scoring tools are sophisticated and commercially sensitive tools
used to facilitate responsible lending and appropriate risk-based pricing. Whilst we support
transparency about what risk-based pricing means for customers, we do not believe that greater
information should be available to customers on the technicalities of how lenders price for risk.
Sophisticated and scientific methodologies employed by lenders would not easily be understood
by the majority of consumers; whilst greater knowledge of the ways in which lenders price for
risk would enable some to ‘game’ the system or fraudulently apply for credit.
31. There are a number of ways in which information about what risk-based pricing means for
consumers is already available. For instance, many lenders already provide explanations within
their credit literature and on their websites. Below is an example from the Loans and Credit
pages of one of BBA’s members.
What is credit scoring?
Credit scoring is a system used by [Us] and most major banks and finance companies to
assess customer applications for borrowing.
It involves calculating a rating, or score, from the information you give in your application,
including your age, job and existing financial commitments. Checks are also made with
credit reference agencies to see if they hold any additional information about you that may
influence our decision. If you're an existing customer, we may also look at the way you
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have managed your account or previous borrowing with us. If the overall credit score is
high enough, we could give you the credit you've asked for.
Q7. Which of the stakeholder proposals at Annex A do you consider would bring benefits
to industry or consumers and what would these be? Please provide evidence in support
of your view.
Do members agree all the suggestions under the ‘Decision to borrow’ – if not, why not?
32. The BBA agrees with each of the proposals suggested under ‘Decision to borrow’. Each
represents a rationalisation of current credit legislation that would simplify the regime for lenders
and borrowers and meet the government’s aims to de-regulate where appropriate.
33. Further analysis of the benefits of pursuing these proposals is included in Annex B to this
submission.
Do members agree all the suggestions under the ‘What happens when things go wrong’ –
if not, why not?

requirement for banks to identify and act quickly on snowballing penalty
charges/unmanageable debt
34. Banks are already compelled to identify and act quickly when it is apparent that a customer is in,
or may be heading towards financial difficulty, which would include the incurrence of repeated
penalty charges.
35. The OFT Irresponsible Lending Guidance sets out the OFT’s expectation that responsible
lenders would not be treating their customer fairly if they failed to act where there is evidence
that the customer is in arrears or default.
36. Additionally, the Lending Code requires that if -
...a subscriber becomes aware via their existing systems that the customer may
be heading towards financial difficulties; the subscriber should contact the
customer to outline their approach to financial difficulties and to encourage
the customer to contact the subscriber if the customer is worried about their
position. Subscribers should also provide signposts to sources of free,
independent money advice.
37. In March 2010, credit card providers worked with the government to make a number of
commitments to customers, including actions that lenders will proactively take to address
customers’ financial difficulties.
http://www.theukcardsassociation.org.uk/files/credit_and_store_card_review__joint_government_industry_statement_15.03.10.pdf
38. These commitments include the provision of more information to customers at risk of heading
into financial difficulty and the prohibition of credit limit increases and interest rate rises where
customers are at risk of difficulties.
39. For current account holders, banks and the OFT are working together to develop a number of
initiatives that will help customers to avoid the ‘snowballing’ of penalty charges. These initiatives
include giving customers the opportunity to opt out of the ability to go into an unarranged
overdraft and incur penalty charges; best practice standards for dealing with current account
customers who become over indebted; and the development of ways in which to provide
customers with more information (e.g. text alerts) where there is a risk of incurring a penalty
charge.
40. The BBA believes that the banking industry has made great strides over the last couple of years
to further improve identification of customers at risk of financial difficulty and swift action to
provide sympathetic and positive support for customers who become over indebted. We believe
that these steps and the initiatives described above should be given time to bed in and that
government, the OFT and consumer groups should then assess their effectiveness before
considering further action.
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
provision of emergency borrowing facilities with limited duration and capped
interest rates
41. It is not clear from the Call for Evidence what this stakeholder proposal entails. For instance,
there is no detail as to who would be the provider of ‘emergency borrowing facilities’ The BBA is
therefore unable to comment further.

greater public monitoring and review of credit licence holders
42. The BBA is unclear as to what is proposed in terms of ‘greater public monitoring’ but we are
supportive of the need for Trading Standards to have a visible and comprehensive role in
ensuring that licence holders are compliant with relevant credit legislation and the terms of their
licence.
43. As there are over 100,000 credit licence holders, it is important that Trading Standards takes a
risk-based approach to monitoring and enforcement of credit licence requirements, and that this
risk-based approach considers the types credit offered, the types of customer involved; the
potential for consumer detriment, and the environment in which the credit provider operates.

enhanced power to suspend a consumer credit licence
44. The BBA believes that the OFT currently has sufficient powers to revoke a credit licence or
make conditions upon a licence holder. For example, the OFT has made minded-to-revoke
notices to 29 licence holders and revoked more than 60 licences. More information is available
at http://www.oft.gov.uk/OFTwork/credit/enforcement-action/#named1

establish a "warning order" for credit licensing along the lines of estate agents
45. The BBA believes that the OFT’s existing enforcements powers, such as requirements on
licence holders and minded-to-revoke notices are equivalent to the ‘warning order’ under the
Estate Agents Act 1979.

enhanced access to criminal records
46. The BBA is unclear as to what is proposed here and to whom it applies and is therefore unable
to comment further.

accelerated appeals process
47. The BBA is unclear as to what is proposed here and to whom it applies and is therefore unable
to comment further.

provide for restorative justice
48. The BBA is unclear as to what is proposed here and to whom it applies and is therefore unable
to comment further.

limit ability of creditors to add excessive interest and charges to bad debt
49. The OFT Irresponsible Lending Guidance sets out the OFT’s expectation that in complying with
section 25(2b) of the Consumer Credit Act, lenders should consider forbearance for borrowers
who are in financial difficulties. Such consideration is also required under the Lending Code’s
provisions for sympathetic and positive treatment of customers in financial difficulty.
50. Further consideration of this stakeholder proposal would need to include careful analysis of what
constitutes “excessive” interest and charges; what is considered to be “bad debt” and in what
circumstances any suspension of interest and charges might encourage customers to disengage from tackling their debt, or indeed exacerbating their debt.

ban on orders for sale except in exceptional circumstances and for all
unsecured debts below £25,000
51. The BBA would not oppose a prohibition on orders for sale, unless in exceptional
circumstances, for debts below £25,000. Our members do not normally seek such orders for
debts of this size.
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
minimum debt thresholds for charging orders (at least £25,000)
52. The BBA does not agree that there should be a minimum threshold for charging orders. A
charging order simply gives a lender the security that a debt should over time be recovered. It is
rarely the prelude to an order for sale.

regulate private bailiffs effectively
53. We agree that private bailiffs should be effectively regulated and we intend to respond to the
Ministry of Justice’s proposed public consultation on protection against aggressive bailiffs and to
encourage more flexibility in bailiff collections, as mentioned in their Business Plan for 2011 –
2015, which was published in November 2010.

ban repossession of goods secured by sale
54. The BBA would not oppose a prohibition on the use of bills of sale for consumer lending, as our
members do not normally seek repossession of goods secured by sale. As this does not really
affect BBA members, we do not think it would be appropriate for us to comment any further.

rationalise role of Financial Ombudsman Service (FOS)
55. The BBA believes that the ongoing programme of institutional reform being undertaken in the
financial and consumer regulatory architecture provides the appropriate opportunity to reassess
whether the role, scope and operation of the FOS meets its objectives in a fair, accountable and
consistent manner that fits within the regulatory framework in which it operates. We do not
believe that this exercise in relation to credit and debt is the appropriate vehicle in which to
consider these issues.

tighten credit licensing requirements to set a higher standard for debt
management providers
56. The BBA agrees that the process for granting of credit licences should be more stringent and
perhaps onerous. As outlined in our previous submission to BIS of priority areas (Annex B) we
believe that the relatively low threshold for gaining a licence allows less reputable firms to carry
out licencable activities to the detriment of consumers.
57. Such activities are not limited to debt management providers, although it in this area that a large
number of short-lived and disreputable firms have emerged in recent years.
Q8. Do you believe that the current voluntary, market-driven initiatives to address
concerns about unarranged overdraft charges are delivering, or will deliver, sufficient
improvements for consumers? If not, what would the wider implications of limiting bank
charges be? Please provide evidence in support of your views.
58. In March 2010 1 , the OFT reported that:
Real progress is being made towards personal current accounts that work
well for consumers, with significant developments expected in the market over
the next two years



The average level of unpaid item charges levied by the major PCA providers has
fallen from approximately £34 in 2007 to £17 in 2010, and per transaction paid item
charges for using an unarranged overdraft from approximately £30 to £22.
New charging structures have emerged, contrasting sharply with a lack of innovation
for many years prior to 2007.
There is greater transparency in charging structures.
59. In addition to these significant changes in the levels and visibility of charges, BBA members
have been working with the OFT and consumer bodies to develop a process whereby
consumers are offered the ability to opt-out of unarranged overdraft facilities and the
development of best practice standards for dealing with customers in (or at significant risk of
being in) financial difficulty who incur unarranged overdraft charges.
1
http://www.oft.gov.uk/OFTwork/markets-work/completed/personal/#named6
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60. These standards will be incorporated into the Lending Code when the next edition of the Code is
published in March 2011, and will then be subject to the Lending Standards Board (LSB’s)
monitoring and enforcement regime. Whilst the Lending Code is a voluntary form of regulation,
all current account providers who are Code subscribers are required to meet its obligations. All
major providers of current accounts subscribe to the Code.
61. The BBA therefore strongly believes that changes already undertaken and those in the process
of implementation mark a key change in the way that personal current accounts are operated
and priced. We believe that the market should continue to be the driver of such changes rather
than any arbitrary price caps.
Q9. Should interest rates on credit and store cards be subject to a cap? If so, should this
apply to all interest rates or only those which apply to existing borrowing?
62. The BBA is strongly opposed to the use of price caps for consumer credit in any form. As
evidenced by comprehensive independent research carried out in the UK and abroad, rate caps
have a detrimental impact on consumers’ abilities to access credit, particularly low-income
consumers.
63. In 2004, the DTI commissioned Policis to assess the impact of interest rate controls in the USA,
France and Germany. This analysis showed that:

There is less product diversity in markets with ceilings;

Lenders may respond to ceilings by raising access hurdles to high risk borrowers;

Lenders withdraw from the market where ceilings are newly imposed; or

Lenders may adapt pricing structures so that less of the ultimate cost of the credit to
the consumer is captured within the usury cap.
64. An interest rate cap would clearly be detrimental to those customers that this proposal is
intended to protect. We therefore believe that price should always be determined by a
competitive market and that customers should be provided with appropriate information at the
right time and equipped with an appropriate level of financial capability to make informed
decisions about using credit in an affordable manner.
Q10. Are there any alternative measures which would reduce the scope for consumers
to be exposed to higher interest rates on credit and store cards?
65. Following the BIS review of the regulation of credit and store cards, the credit and store card
industry agreed with government, in March 2010, to five commitments designed to give
consumers more control in the way they use credit and store cards.
66. These commitments are outlined below and should reduce the scope for consumers to be
exposed to high interest rates:
i.
Right to repay – a consumer’s repayments will always be put against the highest rate
debt first. For consumers opening new accounts, the minimum payment will always
cover at least interest, fees and charges, plus 1% of the principal to encourage better
repayment practice;
ii.
Right to control - consumers will have the right to choose not to receive credit limit
increases in future and the right to reduce their limit at any time and consumers will
have better automated payment options. Consumers will be able to do both of these
online;
iii.
Right to reject – consumers will be given more time to reject increases in their interest
rate or their credit limit;
iv.
Right to information – consumers at risk of financial difficulties will be given guidance
on the consequences of paying back too little, and all consumers will be given clear
information on increases in their interest rate or their credit limit, including the right to
reject;
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v.
Right to compare – consumers will have a right to be given the tools they need to
easily compare the costs of different credit cards. Card companies will work with
consumer groups and the Government to develop an annual statement (available
electronically), which will give consumers clear information about how much it has
cost them to use their credit card over the last year.
67. In addition, consumers who are at risk of financial difficulties will be protected through a ban on
increases in their credit limit as well as the ban on increases in their interest rate.
68. With the exception of the annual statement – which is still being developed, these new rights will
come into effect from January 2011, as an Addendum to the Lending Code and will therefore be
subject to the LSB’s independent monitoring and enforcement regime.
69. The BBA believes that the effectiveness of these commitments should be measured after an
appropriate period of implementation before any further initiatives are considered.
Q11. How effective have the Competition Commission's remedies been at improving
prices for home credit customers? Is further action needed to ensure that consumers of
home credit get a fair deal?
70. Members of the BBA do not operate within this market and the BBA is therefore unable to
provide further comment.
Q12. What role should the court play in the debt recovery process? Should it be
restricted to genuine points of law and disputes between the parties?
71. Whilst we agree that the role of the courts should predominantly relate to consideration of
genuine points of law and disputes between the parties, for the debt recovery process the issue
is not usually consideration of a dispute as such (e.g. about the amount of debt) but as an
enforcement mechanism of last resort.
72. If the role of the courts is removed as an option within the debt recovery process, it is difficult to
see what alternative mechanism would be available to effectively enforce debts against those
debtors who simply ‘won’t pay’. We therefore suggest that the court remains as the enforcement
mechanism of last resort.
73. We agree that alternative (and sympathetic and positive ways) of dealing with debtors who ‘can’t
pay’ are key and coordinated and effective free, independent debt advice and streamlined debt
remedies are required to ensure that consumers receive the most appropriate advice/ solution
for their circumstances and creditors receive consistent outcomes.
Q13. Are court-based enforcement mechanisms fit for purpose? If not how would you
like to see them improved or added to?
74. Court-based enforcement mechanisms act as a tool of last resort, particularly for debtors who
‘won’t pay’ and we support alternative sympathetic and positive ways of dealing with debtors
who ‘can’t pay’. We believe court-based enforcement mechanisms could be reduced, simplified
and improved to deal with ‘won’t pays’ more effectively and efficiently if enforcement tools are
streamlined.
75. We believe that court-based enforcement mechanisms enabled by obtaining a County Court
Judgment (CCJ) first, such as Attachment of Earnings Order, Charging Orders and Orders for
Sale should be retained as debt recovery tools of last resort and would continue to be applied
for under an individual creditor’s own discretion. Also, the court would retain the right to consider
whether it would be appropriate to grant a debt enforcement tool in a case, based on its merits,
where discretion rests with the judge. However, other types of little used court-based
enforcement mechanisms, such as Time Orders, Administration Orders or Composition Orders
could be scrapped completely.
76. We suggest that Government conducts a review of all the court-based debt remedy/ recovery
tools, with a view to reducing and simplifying the range available, but also to assess how the
remaining enforcement solutions could be amended and improved.
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Q14. What impact would a £25,000 threshold have on your ability to enforce unpaid
debts by means of 1) charging orders and 2) orders for sale? What alternative action
might you take?
1) Charging orders
77. The BBA does not agree that there should be a minimum threshold for charging orders. A
charging order simply gives a lender the security that a debt should over time be recovered. It is
rarely the prelude to an order for sale.
2) Orders for sale
78. Our members do not normally seek orders for sale for debts below £25,000, unless in
exceptional circumstances.
Q15. How can debtors be encouraged to seek early support to help manage their debt
problems?
79. Many debtors ‘bury their head in the sands’ (e.g. by ignoring post/ bills, etc.) or ‘rob Peter to pay
Paul’ (i.e. by using alternative credit facilities to keep up repayments on debts) and avoid
seeking early support to help manage their debt problems, when their debts may be more
manageable. Debtors usually seek help when their debt problems get worse and are sometimes
only engaged through advertisements for debt solutions provided by commercial debt
management companies.
80. One way of improving this situation may be through the provision of coordinated free
independent debt advice services through a single recognised and trusted medium, as a single
point of call for consumers experiencing financial difficulties, which would then channel the
debtor to appropriate advice through an approved source. This may help propel this source of
free independent money/ debt advice services to the top of the results list on internet-based
search engines.
81. Another way of encouraging debtors to seek early support to help manage their debt problems is
through proactive contact by creditors. The Lending Code contains a number of key
commitments which flow from the principal obligation on Code subscribers to act fairly and
reasonably in all their dealings with customers. One of those key commitments is to act
sympathetically and positively when considering a customer’s financial difficulties. This
commitment is supported by a specific requirement (paragraph 141) for subscribers to
proactively contact customers when their systems indicate that they may be heading towards
financial difficulties. Subscribers must outline their approach to financial difficulties to such
customers and encourage them to contact the subscriber if they are worried about their position.
Subscribers must also provide such customers with signposts to sources of free, independent
money/ debt advice.
82. We believe that this form of sympathetic and positive proactive approach provides valuable
encouragement and assistance to borrowers to seek early support to manage and resolve their
debt problems. Although, customers may sometimes take offence if a suggestion is made by a
lender that they should seek help for what appear to be emerging financial difficulties.
83. To better handle this relationship, access to more complete credit reference data through
greater sharing at pre-delinquency stage would allow lenders to get a more complete point-intime picture of a consumer’s financial health. Currently lenders are able to access this data only
once a customer has defaulted, due to concerns that the data could be used by less reputable
lenders as an opportunity for inappropriate marketing. However, lenders are currently
considering, via the Steering Committee on Reciprocity (SCOR) whether greater use of this data
is possible and appropriate.
Q16. Do the current debt relief options strike the right balance between the needs of the
debtor and the rights of creditors?
84. The economic downturn, with its impact on unemployment and incomes, has pushed more
people into financial difficulties and reduced their ability to repay debt. Much policy thinking has
been given to new remedies, which propose mandating creditor concessions such as debt
11
composition (write-off), compulsion and interest and charges forgiveness. This forces pricing
adjustments across the remainder of the performing portfolio, puts upward pressure on interest
rates and moderates risk appetite – all negative factors for financial inclusion and for economic
recovery.
85. Effective debt management enables an efficient functioning credit market, which is crucial for a
prosperous economy. It is essential that the needs of both debtors, for effective debt relief, and
of creditors, for the best possible returns, are addressed. There is an argument that neither
objective is being met.
86. One of the unintended consequences of the increasing commercialisation of the debt market, by
the growing number of debt management and claims management companies, is the ‘moral
hazard’ of creating a culture where repayment of debts is optional. Credit has long been
provided on the assumption that the repayment of debts is a moral obligation, which is prioritised
over many other forms of spending. Where this breaks down and borrowers do not repay, the
consequences are ultimately passed on to other borrowers in the form of more expensive and
less accessible credit.
87. The current debt remedy regime is fragmented, with numerous debt remedies administered by a
number of different Government bodies, including the Insolvency Service, Ministry of Justice
(MoJ) / HM Courts Service (HMCS) and the Office of Fair Trading (OFT). At present, there are a
number of debt remedy procedures, ranging from informal arrangements such as token payment
plans and Debt Management Plans (DMPs); to formal insolvency procedures such as Individual
Voluntary Arrangements (IVAs), Debt Relief Orders (DROs) and bankruptcy; as well as formal
court-based remedies such as Administration Orders and Charging Orders.
88. There is now some acceptance that debt management is not efficient as it could be. For
example, the aim of the Insolvency Act (1986) was to deal with traders, but has since been
extended to deal with consumer debt – a purpose for which it was not originally intended.
Furthermore, as the MoJ / HMCS has been considering extending its powers under the
Tribunals, Courts and Enforcement Act 2007 (TCEA) regime, there is a view that suggests
summoning debtors in front of the courts is neither cost-effective nor deals with their financial
difficulty sympathetically or positively, especially when the cause of those symptoms was not a
result of their own fault or making.
89. Analysis by the money advice sector shows that the overwhelming majority of bad debts are
incurred as a consequence of unemployment and other life-changing events, rather than by
irresponsible lending. It is, therefore, disappointing that much more focus and emphasis in
placed on the provision of credit as a causal factor in financial difficulty, rather than the incomeshocks of unforeseen events.
90. Debtors typically have three broad needs:
1. Cessation of collections and recoveries activities (calls, field agent visits and litigation);
2. A permanent solution to their debt problems; and
3. A path back into the credit market.
91. At the same time, creditors require the maximum return of capital on a net present value basis,
protection from the unscrupulous, and effective solutions to ensure that ‘won’t pays’ honour their
debt responsibilities.
92. Equally, a debtor might only need short term support as a ‘can't pay’ and any solution needs to
take account of changing circumstances. That is, if ability to repay improves, solutions need to
be flexible enough to move with it and the repayment to the creditor needs to improve.
93. Any requirements to re-shape debt should at all times respect pre-existing contractual
arrangements. The creditor should be allowed to exercise any forbearance at their sole
discretion, bearing in mind that commitments have already been given for the sympathetic
treatment of those in financial difficulty.
94. Many creditors would support offering a better range of debt management options that assist
debtor rehabilitation and allow reasonable prospects for returns to creditors.
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95. As a fundamental first step, we call for a comprehensive strategic review of all debt remedies
(including those yet to be introduced). A holistic review of debt remedies should identify any
gaps; highlight inconsistencies and overlaps in existing provisions; and a situation analysis of
the emerging and future debt market. The needs of both debtors and creditors can be
addressed by mapping the coverage of each remedy and addressing any identified gaps or
overlaps. The primary objective of such a review would be to test whether all debtors and
creditors are being well served by the present regime and what changes – if any – could be
made to improve the system. Any new measures should be introduced in a way that helps to
clarify the ways in which formal debt management remedies are provided.
96. Based on this review, we would support a blueprint for a cohesive, streamlined system of
remedies, which are understandable and accessible to consumers, and give sympathetic
support for those who struggle to repay debt. At the same time the regime should deliver the
desired recovery outcomes for debtors and creditors alike.
97. The existing debt remedies offer a variety of solutions with a range of protections for debtors.
Each is different, but none in itself is a silver bullet. The complexity of this situation means
customers are likely to need 3rd party support to help them choose the most appropriate remedy
for them – and this should be adequately regulated in an emerging market.
98. We believe there should be a single regulatory framework to govern debt remedies and
intermediaries who provide these remedies, to ensure consistency, and that balance is
maintained between the needs of both debtors and their creditors. Going forward, we would also
like the authorities to consider harmonising sanctions and enforcement action.
99. Given the complexities of the present myriad of debt remedies and responsible regulators, a
comprehensive strategic review would lead to a simple, coherent, fair and sustainable
framework for consumer debt and avoid further complicating the current regime for both
consumers and creditors.
100.
These issues are explored in more detail in Annex B.
Q17. What problems are encountered with the current range of debt solutions and how
could they be improved to ensure all debtors have an option and that the choices are
clear?
101. There are a number of informal, formal, statutory and court-based remedies which exist,
which makes the selection of an appropriate debt remedy difficult. Given that ‘informal’ debt
remedies, such as breathing space, moratorium, token payments, Debt Management Plans
(DMPs), debt consolidation loans or remortgaging, full and final settlement and full or partial
write-off are all subject to creditor discretion, we suggest that these remain as they are.
102. We do not advocate regulating DMPs if a customer negotiating an alternative repayment
arrangement directly with their creditors cannot be distinguished from a plan negotiated via a 3rd
party DMP provider. Also, is it the advice or the payment distribution and administration function
of a DMP that is the issue?
103. Instead, we suggest a complete overhaul of formal, statutory and court-based remedies and
suggest a simplified model with a streamlined set of formal debt remedies, to cater for the 4 key
generic situations that we feel apply to a debtor’s experience, as outlined in our answer in
response to question 18 below.
i. For a forbearance measure, we propose a derivative of the Enforcement Restriction
Order, recently proposed by the Ministry of Justice. Details of this are further outlined in
our answer in response to questions 20 and 21 below.
ii. We suggest that, for more straightforward personal debts (e.g. non-business debts),
Individual Voluntary Arrangements (IVAs) and Administration Orders could be replaced
with a single debt repayment scheme, which would also potentially replace a DMP and
could be modelled on the Scottish Debt Arrangement Scheme (DAS). This Debt
Repayment Plan (DRP) could be administered by the Insolvency Service, like the way it
is administered by the Accountant in Bankruptcy in Scotland, and offered by an
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‘approved’ adviser and payment distribution also provided by an ‘approved’ provider. A
commercial provider would not necessarily be excluded from offering a DRP, but it would
need to be approved. Under a DRP, creditors would freeze interest and charges under
appropriate circumstances, as is currently the case under a statutory remedy such as
IVA or Administration Order and creditors would not take any further enforcement action
(e.g. charging orders) whilst the debtor is on a DRP, but the DRP would focus on full
repayment wherever possible, although we would not want a DRP to continue for a
unrealistically long period of time, so we suggest a maximum 10 year period should be
considered if appropriate. Therefore, debt composition may also need to be considered
under a DRP for proposals which may potentially extend beyond 10 years. Otherwise,
we suggest few criteria/ parameters as possible to maintain flexibility of the DRP and to
ensure maximum eligibility. In return, the debtor would agree not to divest any assets
that they may have.
iii. For those debtors with little or no income, but who have significant assets, we propose
an Asset Securing Order (ASO), which would be a ‘pro-rata’ Charging Order securing the
debts against the asset in proportion to the value of debts owed to each creditor. This
would provide all creditors with reassurance/ security, without the need to necessarily
force the sale of any assets. This way, all creditors would be treated consistently, without
individual creditors rushing to obtain a Charging Order first to secure their debts against
the asset. An ASO could also potentially be used in conjunction with the proposed
Enforcement Restriction Order or Debt Repayment Plan. In addition, an Asset
Realisation Order may be required to enable the assets to be sold in exceptional cases,
where the debts have not been satisfied, and the value of the assets would be distributed
‘pro-rata’, in proportion of the value of debts outstanding.
iv. Finally, bankruptcy and Debt Relief Orders (DRO) would remain for debt write-off, where
there is no income, no assets and no prospect of repayment, as the ultimate debt relief.
However, we would suggest further consideration regarding whether the DRO limit
should be aligned to the proposed £25000 Orders for Sale threshold.
Q18. Is there sufficient flexibility within the current range of debt solutions to allow for
debtors changing circumstances?
104. There may be many different circumstances that debtors experience, which may be either the
cause or symptom of their financial difficulties, but there will never be sufficient debt remedy
solutions that exist to cater for every single incidence or situation. Rather than introduce a new
debt remedy for every possible incidence or situation, it is important to have a small number of
debt remedies for particular generic situations that are flexible enough to deal with a specific
individual’s circumstances.
105. We believe that there are essentially only 4 generic situations that need to be catered for, as
follows:
i.
Forbearance – extra time to help enable the debtor experiencing temporary financial
difficulties to manage their financial affairs;
ii.
Repayment – a debt repayment mechanism to allow the debtor to repay in line with the
amount they can afford, if they cannot meet their contractual obligations;
iii.
Security – for asset rich, but income poor (i.e. no or little income), where there is the
availability of sufficient assets, which could potentially act as security against the debts
owed;
iv.
Debt relief – where there is no income, no assets and no prospect of repayment, then
appropriate forms of debt relief, such as debt write-off could be considered.
106. Based on the above 4 generic situations that we feel debtors may find themselves in, we
believe these could be catered for through a simplified and streamlined set of debt remedy tools,
particularly in the formal debt remedy space.
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Q19. Do the current options allow and encourage those who are in a position to repay
their debts to do so? If not, why not, and how might any incentives be improved?
107. We do not think that it is necessarily the case that the current suite of debt remedies does not
encourage those in a position to repay their debts to do so. We believe that because of the
present matrix of complex debt remedies that exist, this allows arbitrage between them. If the
number of debt remedies were to be simplified and streamlined, then, we believe that this would
minimise the scope to game the system.
108. We also think further consideration should be given to how incentives for debtors who repay
their debts in full and as early as possible could be improved.
Q20. Do the current options allow a person to deal effectively with a temporary income
‘shock’ and if not, what is needed?
109. There are currently no formal, statutory or court-based debt remedies that adequately
address a temporary income shock. If the debtor has no income or assets, then usually the only
formal route available would be debt write-off - bankruptcy or Debt Relief Order – irrespective of
whether the debtor’s financial circumstances may improve in the future. If the debtor has assets,
but no income, then, in addition to bankruptcy, a Charging Order may be another potential
solution, possibly followed by an Order for Sale to realise the debts.
110. However, informal arrangements, such as 30 day (or an extended 60 day) breathing space,
moratorium (payment holiday) or token payments exist, but these are generally granted at the
creditor’s discretion. Although BBA members subscribe to the Lending Code, which is monitored
and enforced by the Lending Standards Board, there is no similar consistent approach across all
sectors of the credit industry (e.g. non-BBA members) or creditors (i.e. non-lending institutions).
This leads to inconsistent treatment of debtors but also inconsistent outcomes for creditors, as
some creditors will add interest and charges or pursue other enforcement action, such as
obtaining a Charging Order, to maintain their commercial positions.
111. We advocate the retention of informal remedies, such as breathing space, moratorium and
token payments, which will be appropriate in certain circumstances, where there may be one or
a few manageable creditors and/or the debtor wishes to avoid going down the formal route. In
addition, we suggest Government considers introducing a formal or statutory version of an
enforced moratorium, possibly as an amended version of the proposed Enforcement Restriction
Order.
Q21. Is some form of moratorium on creditor action required to a) allow a short time
period for a debtor to seek and act on advice from a qualified adviser and b) allow a
more extended period for a debtor suffering from a temporary difficulty to recover and
start making repayments once more. If so, how might such an arrangement work, and
what safeguards are required to ensure that creditor rights are protected?
112. We believe that this should be a short-term remedy (e.g. for up to 6 months, but reviewed at
an interim 3 month stage), to provide consistent and effective debt relief for the debtor for a
temporary period of time, to enable them to manage their temporary financial difficulties in the
comfort that creditors will not continue to add interest and charges, pursue the debt through
collections or take further enforcement action (e.g. by obtaining a Charging Order and Order for
Sale). In return, debtors entering this formal temporary debt relief remedy will need to ensure
that they will keep creditors updated on any changes to their financial circumstances and will not
divest any assets that they may hold.
113. After this temporary period of debt relief, if the debtor’s financial situation improves and they
have income, the debtor would move to an income-based remedy. However, if the debtor’s
situation fails to improve (i.e. there is little or no income), but the debtor has significant assets,
we propose a ‘pro-rata Charging Order’ being applied to all creditors as security against the
assets, which would provide all creditors with reassurance without the need to necessarily force
the sale of any assets. This way, all creditors would be treated consistently, without individual
creditors rushing to obtain a Charging Order first to secure their debts against the asset.
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Q22. How does a person find out where to go for debt advice and assistance? What are
the advantages and disadvantages of each method?
114.
Please see our answer in response to question 15 above.
Q23. How does a person know that he/she has been given the ‘right’ advice?
115. It is presently unclear whether the ’right’ advice has been provided, given the plethora of debt
remedies that exist. When debtors with similar financial circumstances seek advice from sources
of free independent advice, they can be given different advice and solutions depending on which
organisation they have approached, or also depending on which agency, branch or bureau of
the same organisation the debtor may have used and even which advisor gave the advice. This
situation is exacerbated within the commercial debt management sector, given the large number
of Debt Management Companies and 3rd party intermediaries which exist. Whilst this may
partially be down to the systems and procedures that organisations have in place when giving
advice to debtors, it is further complicated by the myriad of debt remedies that exist and the
difficulty in choosing between similar debt remedies.
116. Simplifying the number of debt remedies available would help reduce the opportunities
available to game the system. Also, introduction of a ‘reasons why’ letter from the adviser,
explaining why a particular debt remedy has been chosen and others discounted, would
reassure both creditors and debtors that appropriate advice has been given.
Q24. What evidence do you have to suggest that debtors end up in the ‘wrong’ solution
and what is the scale and impact – for the debtor, the creditors, and the economy?
117. It is difficult to assess whether debtors end up in the ‘wrong’ solution, but for the reasons
explained in our answers in response to question 23 above and questions 25 and 26 below, we
believe that it is difficult to assess which solution may be the ‘right’ one for a particular debtor’s
financial circumstances. We believe that putting a customer in an inappropriate arrangement
has cost implications for debtors, creditors and the economy. For example, putting a customer
on a DMP before ‘flipping’ them onto an IVA means that the debtor may pay set-up costs twice
and creditors do not receive immediate repayment towards the debt. Also, for IVAs, creditors do
not necessarily receive distributions on a regular monthly basis and, ultimately, if bankruptcy is
pursued when another debt remedy may have been appropriate means that creditors will
receive very little if anything in return. By simplifying the debt remedy landscape, we believe it
will lead to improved and consistent outcomes for debtors, creditors and the economy alike.
Q25. Is it clear in all circumstances what the ‘right’ solution should be?
118. It is currently unclear whether the ‘right’ solution has been chosen, given the plethora of
alternatives that exist. For example, how does an adviser, creditor or customer decide whether
an Individual Voluntary Arrangement (IVA) is better than a County Court Administration Order or
a Debt Management Plan (DMP)? We believe that, if the number of debt remedies were to be
simplified and streamlined, then this would reassure all parties that the best solution for the
debtor’s circumstances has been chosen.
119. Also, introduction of a ‘reasons why’ letter from the adviser, explaining why a particular debt
remedy has been chosen and others discounted, would reassure both creditors and debtors that
appropriate advice has been given.
Q26. How often do debtors move from one remedy to another and could the costs be
reduced in any way?
120. We believe that because of the present matrix of complex debt remedies that exist, this
allows arbitrage between them. If the number of debt remedies were to be simplified and
streamlined, then, we believe that this would minimise the scope to game the system.
Q27. Should there be more consistency on how a debtor’s income, assets and
expenditure are calculated and treated in different procedures?
121. We agree that there should be more consistency on how a debtor’s income, assets and
expenditure are calculated and treated in different procedures, through greater use of a single
16
recognised Income and Expenditure (I&E) budget, such as the Common Financial Statement
(CFS) or Consumer Credit Counseling Service (CCCS) guidelines.
122. However, it should be noted that there are shortcomings; for example, CFS does not
consider assets in any particular detail, apart from a tick-box which confirms that assets have
been discussed. We appreciate the need to keep the Income and Expenditure (I&E) budget
short and simple, but creditors also require reassurance that all aspects of the debtor’s financial
circumstances have been fully considered and the debtor has received ‘best advice’ and the
debt remedy chosen is the best option for the creditor.
123. Therefore, we would welcome greater co-operation between Money Advice Trust (MAT) who
own the CFS and CCCS with a view to developing a single industry I&E form.
124. That said, creditors also need to consider suitable alternative I&E budgets received from
customers irrespective of the channel they chose use (i.e. self-help or 3rd party intermediary), so
we do not propose compulsion in use of the single industry I&E form.
Q28. Should any changes be made to investigation and enforcement action in relation
to debtors entering insolvency procedures?
125. We do not believe that there should be any reduction to the current level of investigation and
enforcement action in relation to debtors entering bankruptcy, given that it is a solution of last
resort. Any more lenient measures for bankruptcy would lead to it being seen as an easy way
out of debts.
126. Instead, we suggest the Insolvency Service should give consideration to replacement of
Individual Voluntary Arrangements (IVAs) for straightforward personal debts (e.g. non-business
debts), with a simple income-based repayment mechanism, which also provides consideration
to any assets that the debtor may hold. We believe that IVAs should be reserved for complicated
financial circumstances, such as business debts and for individuals with complex financial
affairs. One way this could be achieved is by raising the threshold for the value of debts to be
eligible for an IVA.
Q29. What outcomes should such investigations be looking to achieve – for example,
should they just relate to restrictions on future conduct or should they also impact on a
debtor’s discharge from his/her liabilities?
127. We believe that investigations should relate to both restrictions on debtor’s discharge from
his/her liabilities, as well as on future conduct. If there has been any misconduct, then the debtor
should not be discharged from his/her liabilities without any conditions on their future conduct.
128.
Access to a basic bank account could be a step towards fuller access to financial services for
undischarged bankrupts and other individuals in financial difficulties. We would encourage the
Insolvency Service to consider options for mitigating the potential risk of claim against basic
bank account providers for ‘after acquired property’ by the Trustee in Bankruptcy, to enable
wider provision of these accounts, particularly for undischarged bankrupts.
Q30. Are the practical effects of entering the different debt remedies satisfactory e.g.
future access to financial services? Should this be influenced by the outcome of any
investigation/enforcement?
129. We would welcome greater data sharing amongst lenders via Credit Reference Agencies
(CRAs) to enable creditors to get a better/ more complete picture of a debtor’s financial
circumstances, which would help support any future lending decision. A satisfied debt provides
a positive element to any entry and can make a difference to the way a lender looks on it,
although of course a decision to lend will be based on several different considerations.
Q31. Is there a role for a “gatekeeper” to provide a common entry point to all formal
insolvency procedures? If so, what would be the benefits and costs, who would perform
such a function and how would the system operate?
130. There are a number of Government agencies/ bodies/ departments that oversee formal
insolvency procedures and court-based debt recovery processes, as well as informal debt
17
remedies, including the Insolvency Service, Her Majesty’s Courts Service and/or Ministry of
Justice and the Office of Fair Trading. We suggest that all of these functions should be
consolidated under a single organisation and this would lead to cost savings from operating
different systems, processes and procedures, which could be streamlined and made more
efficient. We suggest that the Insolvency Service would be considered the ‘natural’ organisation
to perform all of these functions, especially given its remit to balance the needs between both
creditors – for maximum returns – and debtors – for effective debt relief.
131. We suggest that the Insolvency Service should consider and process applications for all
formal debt remedies, as well as conduct investigations into debtors’ financial affairs where
necessary and collate any necessary Management Information (MI) to inform any policy
thinking. We suggest that the Insolvency Service should review which formal debt remedies
could be provided through a central administrative function, rather than through the court-based
system, as has recently been considered with debtor petition bankruptcy, which would
potentially lead to further cost savings. We also suggest that all registrations of formal debt
remedies could be carried out by Registry Trust Limited, on behalf of the Insolvency Service, to
ensure accurate and efficient recording with the Credit Reference Agencies.
132. In addition, there may also be value in a ‘gatekeeper’ role as a common entry point for all free
independent money/ debt advice services, as a ‘one-stop-shop’, which would ensure
consistency in the debt advice process and the outcomes for both debtors and creditors alike.
So, we would welcome greater coordination amongst the free independent money/ debt advice
agencies to help deliver more consistent outcomes to both debtors and creditors.
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Annex A: BBA Priority Issues for the BIS Consumer Credit and Debt review
This document was originally submitted to BIS (at its request) on the 6th September 2010.
Introduction
1. Following our submission, on the 23rd July, of priority areas for consideration in the
government’s review of consumer credit and personal insolvency, outlined below is further
detail of why BBA members believe these areas should be considered.
2. In launching the review, we urge the government to clarify its view on the fundamental
purpose of consumer credit and the role it should play in the future for the UK economy. This
will help participants to the review determine their approaches and help the government to
determine the scope and format appropriate for consumer credit regulation as we enter the
economic upturn.
3. To illustrate, consider the inevitable tension that exists if there is desire for an increase in
consumers’ access to and use of consumer credit, whilst also placing unclear but potentially
far-reaching prohibitions designed to address irresponsible lending. A careful balance has to
be reached so that the obligations that creditors’ rightly have to treat customers fairly and
responsibly do not make them so risk averse that credit is least available to those who may
benefit most from access to it. Clarification of the government’s aims could help regulators
and stakeholders to allay these and other tensions.
4. The regulatory framework needs to be stable, clear, appropriate and proportionate if
consumer credit is to play an effective part in economic recovery and growth for the benefit of
consumers and business.
5. Excessive regulation (both hard and soft), carries with it the risk that mainstream providers of
credit will withdraw from the market or from certain sectors, contributing to the fall in UK
unsecured credit supply. Excessive regulation undermines competition and risks reducing
access and choice for consumers in the supply of consumer credit.
6. We welcome a focus on evidenced based changes. We firmly believe that robust, statistically
representative evidence should underpin all policy and impact assessment processes. Here
the EU dimension is particularly significant. Much credit policy is now created at EU level and
it is not always clear that this policy is based on such a robust approach. The UK needs to
engage with the EU to ensure the same robust evidence based approach is taken, to avoid
regulatory duplication and overlap and to promote the interests of the UK lending industry.
7. During its review, the government needs to acknowledge and consider the significant number
of changes that have recently taken place, or are currently taking place within both the
consumer credit and personal insolvency environments. Some developments, such as
implementation of the Consumer Credit (EU Directive) Regulations have yet to in-bed and it
will therefore be too soon to usefully assess their impact or effectiveness.
Rationalisation of Consumer Credit legislation
8. Developments in consumer credit since 1974 have resulted in a plethora of consumer credit
legislation. Adoption of the maximum harmonisation Consumer Credit Directive provides the
UK with an opportunity to streamline its legislation and repeal those parts which are no longer
relevant to the modern and sophisticated consumer credit market.
9. Rationalising credit legislation would require careful consideration; to avoid unintended
consequences and ensure that the Act, as a whole, continues to meet its objectives, but it
could simplify the regime for lenders and borrowers and meet the government’s aims to deregulate where appropriate.
10. Outlined briefly below are a number of areas where rationalisation could be considered
Repeal of s18 of CCA - ‘multiple agreements’
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11. Section 18 is complex and gold plates the Consumer Credit Directive. As it was intended, in
part, to deal with the bundling together of loans under the £25k qualifying criteria of the Act, it
is no longer relevant.
12. The requirements of section 18 compel lenders to develop separate documentation for
agreements that fall into a different category of agreement even when there is one loan
account which is administered identically. The drafting of section 18 is unclear, and the use
of undefined terms such as "part" and "category" are unhelpful. The result is lenders face
unnecessary risks in the drafting of their documentation. Technical errors in drafting can have
disproportionate consequences, with loans being enforceable with a court order only. Indeed,
some Claims Management Companies (CMCs) promote that based on perceived technical
errors customers can avoid paying their debts. This generates unnecessary correspondence
challenging the enforceability of agreements and unnecessary court claims. The repeal of
section 18 would reduce needless over technical approach to the drafting of loan
documentation, challenges to the enforceability of agreements, but importantly would not
reduce the consumer protection provided by section 140A of the CCA.
Repeal of s48 & 49 – ‘Canvassing’ & "soliciting"
13. Customers are protected by having a cooling off period for all credit agreements and a court
can consider unfair relationships under section 140A. These sections are therefore no longer
relevant or necessary.
14. Section 49(1) restricts the ability of credit providers in how they market and promote their
products. The aim of section 48 & 49(1) taken together prohibit canvassing to "any place" but
appears to be intended to prevent uninvited door to door canvassing of credit to consumers
at residential properties, and should be amended to simply state this clearly. Section 49(2)
requires an unnecessary "request… in writing", and restricts the ability of relationship
bankers, meeting with high net worth individuals, to discuss in the customers home credit
facilities that may be available.
Amendment to s51 – ‘Unsolicited credit token’
15. Instead of creating an offence, the sanction should simply be that without a properly executed
agreement the credit is unenforceable without a court order, and or there is an unfair
relationship under section 140A
16. This provision places an unnecessary risk of prosecution on the creditor. The definition of
"credit –token" in s14(1) of the CCA is so wide that it could in theory extend to agreements
pre-signed by the lender and sent to the customer for signature. The issue of replacement
credit tokens which incorporate enhanced functions does not arguably fall within section
51(3)(b) as it is not a like for like replacement. We would welcome express exclusion of debit
cards from the definition of a credit token as being a payment mechanism (the modern
equivalent to cheques).
Amendment to s61 – ‘signed in the prescribed manner’
17. This section should be amended so that it is possible for an agreement to be signed on
behalf of a debtor, by someone with a Power of Attorney. This would enable the provision of
credit to be more inclusive and the debtor and attorney would still have the protections
provided by s140A and 14 day cancellation rights.
18. We would also welcome review of the restrictions and formalities surrounding the signing and
entering into an agreement. Provided there is a clear indication of acceptance of the
agreement by the customer it should be possible to enter into agreements online and or by
telephone and without the need for a wet ink signature or digital signature. It is to be noted
that by contrast that the FSA does not in MCOB prescribe how the customer is to enter into
the lending agreement on a regulated mortgage.
Repeal or Amendment of section 65 –'Consequences of improper execution'
19. The CCA retains the concept that an agreement may be unenforceable without a court order
only, for minor technical breaches of section 61 and the regulations applying to agreements.
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For agreements made prior to 6th April 2007 they may be irredeemably unenforceable under
the old section 127(3). We would welcome consideration of the proposition that the concept
of an agreement being enforceable on a court order only should be repealed as adequate
sanction against a creditor and that protection for a debtor is now provided by the judicial
control under the unfair relationship provisions of section 140A of the CCA. This will eliminate
lots of small technical arguments in favour of one unfair relationship argument.
Amendment to s70 & 71 – on ‘cancellation’
20. These sections should be amended to bring them into line with charges that can be made
when a customer exercises their right to withdraw under section 66A. This would allow
creditors to recover interest at a daily rate.
21. Under section 71(2)(b) if upon cancellation the debtor repays the whole of the credit , before
the date of the first instalment is due then no interest shall be payable on the amount repaid.
Where the first repayment is deferred , for example for 2 months the customer will effectively
have an interest free loan up until the date the first repayment is due , which would be 3
months.. This is inconsistent with section 66A(9)(a) where upon withdrawal the customer
must repay the credit provided and interest accrued on it at the rate provided for under the
agreement.
Repeal or Amendment of section 75
22. Section 75 should be repealed in so far as it applies to overseas transactions. It is unfair on
lenders that they should be exposed to significant litigation risks based on the contract law of
overseas jurisdictions such as the USA, with no certainty of being able to rely upon and
enforce the statutory indemnity against merchants in overseas jurisdictions. At the very least
we would welcome consideration of the section being limited to overseas transactions made
within the EU.
23. We would also ask that the section be amended to create a statutory assignment to a lender
of a customer’s rights of claim against a merchant. This will enable lenders to better recover
their loss from overseas merchants.
24. Creditors have liabilities under section 75 & 75A of the CCA. The potential liability of creditors
should be no more onerous than those applying to European competitors.
25. Section 75 claims often involve factual disputes between a merchant and a debtor. Where
there is such a dispute and or where the merchant denies liability we would welcome
consideration that such cases should be excluded from Financial Ombudsman Scheme
(FOS) adjudication, as any decision by the FOS is not binding against the merchant and
effectively, deprives the creditor of its statutory indemnity, which would be available were the
matter to be pursued in the courts.
Amendment to s77-79 – on ‘copy agreements’
26. These sections should be amended to remove the concept of complete unenforceability
when a copy of an executed credit agreement cannot be provided. Instead the creditor
should be able to enforce via a court order.
27. Such an amendment could reduce efforts by consumers and CMCs to avoid repaying debts
based on technicalities within the Act. With annual statements and statements of arrears it is
no longer the case that a consumer will only have the original agreement (or access to it) as
a reference document to the existence of the credit agreement.
28. In addition, as there is little point in providing a reconstituted copy of an agreement entered
into many years ago, we would like requests under section 77 or 78 to be deemed to be
fulfilled if the current copy of the agreement is provided. This is especially relevant to credit
cards.
21
Repeal of s82 (2) - "modifying agreements"
29. Modifying agreements are seldom used due to the complexity governing their content. This
can prevent changes to an agreement taking place, where they would be in the best interests
of the consumer e.g. when in financial difficulties.
30. A simple form or letter stating the intended change to the agreement would be easier for the
customer to follow, understand and check.
Repeal of s127 (3-5) - ‘Enforcement orders’
31. These sections should be repealed for all agreements, not only those made after April 2007.
In addition and in all cases it should be for the consumer to show they have been prejudiced
by any omission or breach of the Act when the courts are considering whether to grant an
enforcement order. This effectively means a customer must show genuine disadvantage
before any breach of the Act makes an agreement unenforceable.
Amendment to s86 – ‘sums in arrears notices’
32. This section should be amended to relieve creditors of a requirement to send postcontractual information to customers, who creditors know to have “gone away” or to have
agreed to an IVA or bankruptcy, or are in fact deceased.
33. These requirements expose lenders to risk of fraud and are regarded by those in an IVA
agreement, subject to bankruptcy or representatives of the deceased as unnecessary
harassment.
34. As an example of the impact of the current requirement, a member who is an internet-only
based lender has estimated that each year it sends Notices of Sums in Arrears to 17,000
customers in an IVA and over 50,000 customers no longer resident at the held address i.e.
‘gone aways’.
Prevention of ‘soft law’ and ‘gold-plating’ by the backdoor
35. Unlike areas of financial services which rely on conduct of business regulation, consumer
credit is subject to very detailed and prescriptive legislation. In its latest form this legislation
includes a maximum harmonisation EU Directive, requiring that like-for-like credit regimes
should exist for consumers and creditors throughout the European Union.
36. Consumer Credit legislation provides creditors and consumers with clear instructions on what
is required of creditors at each stage of the lifecycle of a credit product. This gives creditors
certainty of knowing what is expected of them and consumers the comfort of legal recourse
should the creditor fail to meet their obligations. This comfort is reinforced by other consumer
protection legislation such as the CPRs and UTCCRs.
37. However, use of ‘soft law’ by regulatory bodies is removing the certainty provided by
legislation and appears to ‘gold-plate’ the UK’s approach to European legislation. Examples
include the OFT Irresponsible Lending Guidance, which introduces 95 pages of detailed
conduct of business regulation, under the section 25 ‘fairness’ provisions of the CCA; and
soft law by precedent via Ombudsman decisions, where FOS rules on credit complaints
unrestricted by the terms of due legal process or legislation.
38. The result of this regulatory creep for creditors is that lending becomes a more difficult
business and risk aversion increases. As outlined in the introduction above, this is an issue
that government needs to consider in light of its view of what the future role of unsecured
credit should be for the UK.
Implementation of new shared data resources for enhanced credit underwriting
39. BBA has worked with other trade bodies and CRAs to previously highlight to government the
benefits that could be derived from wider and more comprehensive use of credit data. Indeed
BIS has established a cross-Whitehall working group with the intention of considering this
issue in detail.
22
40. We believe that wider access to relevant data can lead to better and more responsible
underwriting and the identification of consumers who are over indebted or at risk of over
indebtedness.
41. The following data should be made available to credit reference agencies:
 Non consented portions of credit accounts
 Utilities performance data from water, electricity and gas suppliers
 Income data from HMRC
 Student Loan data
 Council tax arrears data
More stringent fitness test for consumer credit licences
42. OFT figures show that there are approximately 108,000 consumer credit licence holders in
the UK, of which only around 3000 firms are ‘true’ lenders. The remainder may offer credit as
a means to facilitate the purchase or hire of a product e.g. a car showroom or act as a credit
brokerage. Additionally there are over 40,000 licence holders who offer debt services, advice
or claims management.
43. At present there is not a particularly high hurdle criterion for a firm to gain a credit licence.
Although the OFT and Trading Standards can take action against licence holders where
breaches come to light, by then the damage will probably have been done. The consumer
has suffered detriment and the credit industry has suffered reputational damage.
44. Topical examples include debt remedy firms and claims management firms who take money
up front from the most vulnerable consumers and then fail to act in the consumer’s best
interests. Often these firms will “phoenix” and regain a credit licence should their activities be
curtailed.
45. BBA believes that Consumer Credit licensing requirements should be more stringent to
ensure a higher standard of integrity for all licence holders, including debt management
providers and CMCs.
Personal Insolvency
A holistic review of the personal debt landscape
46. The current debt management regime is fragmented and does not operate efficiently. The
multitude of remedies, both formal and informal, generates unnecessary costs and
bureaucracies for creditors and regulators and the regime is perceived by consumers to be
complex, opaque and often unreliable.
47. These inefficiencies ultimately impact on the public purse – through duplicate statutory
procedures and administrations – and on the UK economy as a whole by excluding
consumers from normal economic behaviors whilst rehabilitation is pursued and/or fails.
48. The review, and the regime which results, should cover both informal and formal debt
remedies and include the roles that creditors, third party advisors, consumers and regulators
play in the process. The government should not be afraid of considering fundamental
changes to the way in which debt is managed and should note that the system’s current
faults result largely from piecemeal initiatives previously pursued to address the system’s
weaknesses.
49. The BBA is currently working with key stakeholders to consider whether it is possible to
simplify the debt management process for consumers, whilst ensuring that creditors can
continue to efficiently recover debt, where it is appropriate to do so.
50. Streamlining the process and increasing its efficiencies is likely to require changes to:
 the routes to, and sources of debt advice
 the number and type of informal and formal debt remedies available
23
 the number of regulatory authorities required to govern the process.
51. The current structure of the debt advice industry; the incentive model which underlies the
“For Profit” agencies and the lack of regulation of advisors results in varying qualities of
advice, which can be more focused on providing a quick solution rather than long term
customer rehabilitation and can in some cases worsen the customer’s situation. During the
call for evidence for the review of personal insolvency, we will be seeking to engage with the
government to share the banking industry’s thoughts on how a more simple, efficient and
successful framework for debt management can be developed. As a principle we believe that
the first point of contact when a customer encounters financial difficulty should be their
lender.
52. We would welcome consideration of the efficiencies that could be achieved by court
procedures combining judgments with enforcement. This may also something that the
Ministry of Justice could take advantage of in meeting its proposed budget cuts. For example
upon making a money judgment the court should as a matter of course be able to order a
statutory charge to secure the judgment against the debtors home or attachment or earnings
without the need for further hearings. (Separate hearings would still be required to enforce
any such charge).
53. We would welcome consideration of a concept such as a statutory charge, that automatically
applies upon a debtor's death and which can be registered against the debtor's property.
24
Annex B:
A New Model for Dealing with Personal Debt
Improving the way we tackle financial difficulties
Executive Summary
The recent recession and current sluggish recovery have highlighted underlying flaws in the
debt management framework. Consumers in financial difficulty have faced confusion with
multiple organisations offering, at times, conflicting advice on dealing with debt and a myriad of
solutions of varying quality to their problems. This needs to change.
The Department for Business, Innovation and Skills (BIS) call for evidence, in support of the
Consumer Credit and Personal Insolvency Review, offers stakeholders an opportunity to work
together to establish a new framework for debt management that can deliver a better outcome
for borrowers and creditors, advisors and regulators alike. Current changes to the financial
services regulatory landscape provide an opportunity to enable this change.
The BBA and Accenture have collaborated to understand the complexities and challenges of
current approaches to dealing with debt and to develop a vision for the future of debt
management.
We call for greater consistency in the way debt advice is provided, as well as greater
consistency amongst how creditors deal with customers in financial difficulties, to ensure better
and consistent outcomes for both debtors and creditors alike.
We believe that changes are necessary under four key areas to improve the debt management
framework for consumers and creditors:
1. Establish a simplified governance model through o
a single body to administer all formal debt remedies
o
a single body to regulate debt advice provision
o
a single debt management license, covering all 3rd party intermediaries
o
a single body responsible for delivery of national over-indebtedness strategy
2. Simplify the debt remedies available by o
encouraging early intervention and proactive use of informal remedies by
creditors, as a preventative tool
o
rationalising the formal debt remedies
o
rationalising court based remedies for an effective and efficient recovery process
3. Use more comprehensive management information to o
build a complete picture of a consumer’s financial situation
o
allow early interception, proactive customer contact and resolution
4. Help consumers to help themselves by o
improving financial education across the consumer life-cycle
o
using technology to empower consumers to better manage their finances
o
establishing a single debt-advice portal
If these strands can be drawn together, and if all creditors, including non-financial services
providers, support a new debt management framework, it would lead to improved outcomes for
debtors and creditors alike. This paper outlines how fundamental changes under each of these
four key areas will simplify the landscape and produce better outcomes for all. It also offers a
model by which these objectives might be implemented, through a Debt Resolution Portal.
25
The existing debt management framework is flawed
More individuals and businesses are struggling to service their debts...
Personal debt in the UK stands at nearly £1.5 trillion. 2 While the economy was booming and
asset prices rising, the broad increase in wealth of borrowers meant that these debts were
serviceable. The recent recession has radically changed this and personal insolvency rates
have risen as many individuals have struggled to repair their personal balance sheets.
This is not only a challenge for consumers struggling with debt, who may find their health and
wellbeing profoundly affected, 3 but puts significant strain on those organisations providing debt
advice. Across the course of 2010 the Citizens Advice Bureau (CAB) in England and Wales has
opened more than 9,000 new debt cases every day. It also affects creditors - UK banks and
building societies wrote-off more than £3.5bn in bad debts during the second quarter of 2010,
up from £2bn the previous quarter and equating to a daily write-off rate of more than £38.1m. 4
Fig. 1: Write-off rate on consumer credit and personal insolvency rate.
8.0
35
Insolvency rate (per 10,000 population) ‐ rhs
Consumer credit write‐off rate (%) ‐ lhs
7.0
30
6.0
25
5.0
20
4.0
15
3.0
10
2.0
5
1.0
0.0
0
4
Q
3
9
9
1
3
Q
4
9
9
1
2
Q
5
9
9
1
1
Q
6
9
9
1
4
Q
6
9
9
1
3
Q
7
9
9
1
2
Q
8
9
9
1
1
Q
9
9
9
1
4
Q
9
9
9
1
3
Q
0
0
0
2
2
Q
1
0
0
2
1
Q
2
0
0
2
4
Q
2
0
0
2
3
Q
3
0
0
2
2
Q
4
0
0
2
1
Q
5
0
0
2
4
Q
5
0
0
2
3
Q
6
0
0
2
2
Q
7
0
0
2
1
Q
8
0
0
2
4
Q
8
0
0
2
3
Q
9
0
0
2
2
Q
0
1
0
2
Source: Bank of England
Where debt problems lead to significant write-offs by lenders the wider economy may suffer too.
Large loan losses reduce the amount of capital banks can use for new lending, reducing support
for the economic recovery. Many in the industry are concerned that action to reduce the
government deficit, and the risk of a rise in interest rates in the near future, may push more
borrowers into financial difficulty.
...but should borrowers become debt distressed they face a confusing landscape of advice
agencies and remedies...
The debt management sector now represents a sizable and maturing industry. The very
number of agencies and private enterprises that exist to help and advise debt-distressed
consumers can be overwhelming. Currently, consumers seeking independent help to deal with
financial difficulties must choose between free and fee-charging advisors. The fee-charging
advice sector has grown rapidly in the last decade and by the end of 2010 there may be as
many as 562,000 fee-charging plans in operation (compared to around 220,000 in the free
advice sector) with fees paid for debt management services expected to hit £250m. 5
Some fee-charging debt management companies (DMCs) offer a valuable service to
consumers, filling the gap which results from the scarcity of resources in the free-to-client
sector. However insufficient regulatory oversight and a lack of co-ordination by legitimate
stakeholders in the debt management sector have allowed poor practices to become
established. The OFT recently warned 129 of 142 licensed firms to take immediate action to
change their practices or face losing their consumer credit licence, and identified “significant and
2
3
http://www.creditaction.org.uk/debt-statistics.html
Joseph Rowntree Foundation, http://www.jrf.org.uk/sites/files/jrf/credit-debt-low-incomes-full.pdf
4
Ibid.
5
Payplan, April 2010
26
widespread examples” of fee-charging DMCs offering the most profitable solution for them,
rather than the solution which was in the best interests of the consumer. 6 Poor practice by
DMCs (and the confusion of consumers) is exacerbated by the multiplicity of possible debt
remedies that consumers face when experiencing.
...leading to inconsistent outcomes for borrowers and increased costs for creditors and
regulators...
Even if consumers succeed in finding good advice they face a multitude of potential informal,
formal and court-based debt remedies. There are multiple points of entry into the debt
management process and for every scenario there are different ways in which participants in the
process may progress matters. (Box 1) Much depends on the policy of the solution provider,
the creditors involved, the availability and quality of advice in an individual’s local area and their
own level of awareness and participation in the options available. This lack of consistency disempowers consumers.
The complexity, opacity and inconsistency of the current regime also generate unnecessary
cost and bureaucracy for creditors and regulators. These inefficiencies ultimately impact on the
public purse through duplicate statutory procedures and administrations, as well as on the wider
UK economy by excluding consumers from engaging in normal economic activity.
It is also harder for creditors to model recovery rates in an environment where a debt advisor
does not automatically advise the best course of action for the consumer. Unscrupulous
practices around front loading fees also harm bank recovery rates. A DMC may seek to recoup
all its costs using the initial upfront payments from consumers, as well as ongoing administration
or distribution fees, and may charge further fees if the consumer is later “flipped” onto another
debt solution. While front-loading charges minimizes the DMC’s risk, it does not necessarily
deal with the consumer’s difficulties fully and impairs the creditor’s recovery models.
Understanding the impact on the creditor is important, as it makes it harder for them to manage
their capital efficiently and can have a detrimental effect on lending to the economy.
The current debt management framework is not fit for purpose. There is currently no
consistency in the experience generated by debt management processes for either the
consumer or the creditor. The BIS call for evidence, together with the current changes to the
financial services regulatory landscape, provides stakeholders with an opportunity to work
collaboratively towards a better framework. It is time for a radical re-think.
6
http://www.oft.gov.uk/shared_oft/business_leaflets/credit_licences/OFT1274.pdf
27
Box 1: Debt remedies can be confusing
The current debt management process is a complex web of remedies, from informal
forbearance and Debt Management Plans (DMPs), to formal insolvency procedures,
such as Debt Relief Orders (DROs), Individual Voluntary Arrangements (IVAs) and
bankruptcy. There are also court enforced remedies, such as Administration Orders and
Charging Orders. Informal and formal debt remedies are subject to a wide range of
voluntary and statutory regulation enforced by different regulatory bodies:
Fig. 2: The current debt management framework in England and Wales
Consumer Credit Act
Lending Code
Debt Collection & Irresponsible Lending Guidance
Regulations
Treating Customers Fairly
Self Regulatory Codes
Mortgage Conduct of Business Sourcebook
Consumer Credit Act
Insolvency Act
Enterprise Act
Tribunals Courts and Enforcement Act
Debt Management Guidance
IVA protocol
County Courts Act
Administration of Justice Act
Attachment Of Earnings Act
Regulators
Office of Fair Trading
Lending Standard Board
Financial Services Authority
Self‐regulation
Trustee in Bankruptcy
Insolvency Service
Ministry of Justice / HM Court Service
Equity Release
Bankruptcy
Debt Management Plan
High Court Enforcement
Informal Repayment Plan1
Remedies
ss
er
ts
i
D
t
b
e
D
Time Order
Debt Relief Order
Composition Order
Full / Partial Write‐off
Administration Order
Forbearance 2
Warrant of Execution
Debt Consolidation
Attachment of Earnings
Individual Voluntary Order (IVA)
Charging Order
Remortgaging
County Court Judgement (CCJ)
Pre‐Arrears
Early Arrears (0‐90 days)
Late Arrears (0‐90 days)
High probability & value of recovery
1
2
Recoveries
Write‐off
Low probability & value of recovery
Repayment Plans include: informal arrangements / negotiated agreements / full and final settlement / debt reorganisation
Forbearance measures include: breathing Space / moratorium / token payment plans
Borrower led solution
Arrangement between borrower and lender
Third party arrangement
Courts enforced solution
Source: Accenture / BBA
There are also a variety of ways for consumers to access debt advice and a number of
entry points into the debt management process, either voluntarily or backed by some
form of compulsion. Methods of entry to the process include contacting or being
contacted by creditor(s), seeking the assistance of third party advisors, or being subject
to civil litigation. A number of different remedies can be applied to tackle a single
distressed debt case, with the outcome largely dependent on the consumer’s
circumstances or the advice they receive.
This multiplicity of rules, regulators and remedies creates tensions for creditors and third
party advisors alike as practices must be designed, and compliance ensured, in light of
the expectations of different authorities and potentially contradictory pressures.
The lack of consistency and timing in how individuals enter the debt management
process dis-empowers consumers while the multitude of remedies creates an opacity
which makes it harder for consumers to understand the different solutions, or judge
whether the advice they receive is in their best interests.
28
It is time for a change
Reforming the debt management framework to deliver fairer, more cost effective outcomes for
all, requires stakeholders to agree on a common set of desired outcomes. The BBA and
Accenture propose all stakeholders adopt a charter for a new debt management framework.
(Box 2)
Box 2: Charter for a new debt management framework
1. Consumers are treated fairly, appropriately and positively by all participants because:
a) The process is straightforward and transparent and fair.
b) They are presented with the most appropriate outcome to their circumstances.
c) They know they will receive treatment consistent with others in similar situations.
d) They experience a consistent and joined-up relationship with all creditors.
e) They are rehabilitated through information, education and support.
2. Creditors are confident that their interests are integral to all participants’ actions because
the process creates:
a) A likelihood of more predictable, consistent returns.
b) The knowledge that all creditors are acting consistently with interests aligned.
c) Reassurance that advisors are acting in the best interests of all participants.
d) Reassurance that creditors and their competitors have access to and are using
the same accurate information.
3. Advisors can operate an efficient and effective business model and create the right
outcomes for their clients because:
a) Income and outgoings can be better predicted and accounted for.
b) Creditors will accept proposals more readily and without moderations.
c) Participants are collaborative and do not seek an unfair advantage.
d) Relevant information is reliable and readily available.
4. Regulators can monitor and enforce effectively because:
a) There are clear and straightforward standards against which to regulate.
b) There is reliable and comprehensive data on performance and expectations.
The outcomes this charter establishes for consumers, advisors and regulators are readily
apparent. Simplifying the debt management process and increasing its transparency would
enable more consumers to take charge of their own affairs, reduce the burden on free-advice
agencies and make the 3rd party intermediary sector easier to regulate. It would encourage
competition amongst fee-charging advisors based on quality of service and drive out less
scrupulous DMCs, delivering objectivity in advice and consistency in results. It would ensure
fairness for consumers at the time they are most vulnerable.
But any new approach to debt management must also secure the support of creditors. It is self
evident that it will be easier to do this if they too share in the benefits of a new model. Creditors
will benefit from a process which delivers a more predicable outcome, allowing them to model
their recovery rate with greater certainty and enable improved capital management.
The challenge for any lender is to ensure that their competitors are acting in the same
responsible manner and that their interests are aligned in the recoveries process, including
greater information sharing between all parties. Reducing competition over recoveries, shifting
the competition to earlier in the life-cycle and adopting a more collaborative approach has the
potential to yield a greater share of recovered debts for all creditors.
Finally, it is in the interests of creditors that debt advisors are acting in the best interests of all
participants - both borrower and lender - rather than pursuing an approach which is not
guaranteed to deliver the best outcome for the former and constrain the ability of the latter to
recover debts. Although the benefits of such a system will not necessarily always accrue to the
individual, it will improve the aggregate position of consumers.
29
A vision for a new debt management framework
Agreeing the principles which underpin a new debt management framework that delivers a
better deal to all participants is only the first step. The real question is “how can these goals be
achieved?” Addressing the challenges outlined below would create benefits for stakeholders
and consumers both individually and collectively.
Establish a simplified governance model:
1. Introduce a single body to oversee all formal debt remedies
The current debt remedy regime is fragmented, with numerous debt remedies administered by a
number of different Government bodies, including the Insolvency Service, Ministry of Justice
(MoJ) / HM Courts Service (HMCS) and the Office of Fair Trading (OFT). At present, there are a
number of debt remedy procedures, ranging from informal arrangements such as token payment
plans and Debt Management Plans (DMPs); to formal insolvency procedures such as Debt Relief
Orders (DROs), Individual Voluntary Arrangements (IVAs) and bankruptcy; as well as formal
court-based remedies such as Administration Orders and Charging Orders.
Much policy thinking has been given to new remedies, which propose mandating creditor
concessions such as debt composition (write-off), compulsion and interest and charges
forgiveness, including regulated DMPs and Simplified IVAs (SIVAs).
The existing debt remedies offer a variety of solutions with a range of protections for debtors.
Each is different, but none in itself is a silver bullet. The aim of the Insolvency Act (1986) was to
deal with traders, but has since been extended to deal with consumer debt – a purpose for which
it was not originally intended. Furthermore, as the MoJ / HMCS has been considering extending
its powers under the Tribunals, Courts and Enforcement Act 2007 (TCEA) regime, there is a view
that suggests summoning debtors in front of the courts is neither cost-effective nor deals with
their financial difficulty sympathetically or positively, especially when the cause of those
symptoms was not a result of their own fault or making.
As a fundamental first step, we call for a comprehensive strategic review of all debt remedies
(including those yet to be introduced). A holistic review of debt remedies should identify any
gaps; highlight inconsistencies and overlaps in existing provisions; and a situation analysis of the
emerging and future debt market. The needs of both debtors and creditors can be addressed by
mapping the coverage of each remedy and addressing any identified gaps or overlaps. The
primary objective of such a review would be to test whether all debtors and creditors are being
well served by the present regime and what changes – if any – could be made to improve the
system. Any new measures should be introduced in a way that helps to clarify the ways in which
formal debt management remedies are provided.
Based on this review, we would support a blueprint for a cohesive, streamlined system of
remedies, which are understandable and accessible to consumers, and give sympathetic support
for those who struggle to repay debt. At the same time the regime should deliver the desired
recovery outcomes for debtors and creditors alike. One positive step towards achieving a
consistent and coordinated approach to debt management would be having a single body
responsible for overseeing all debt remedies, who could conduct such a review and which would
ultimately lead to a reduction in duplication and cost.
2. Introduce single body for regulation
The multitude of legislation and regulation covering debt management, and independent
regulatory bodies and government agencies with a supervisory role, can make changing the
debt management framework slow, costly and difficult to implement. This framework needs
to be reviewed and streamlined to create a more responsive and dynamic mechanism for
regulating the market. Transferring the functions of the diverse regulatory bodies to a single
body responsible for legislation and administering formal, statutory and court-based debt
remedies would improve the efficiency of the debt management framework and make it
30
easier to reform. This single regulatory body might then consider regulation to support all
parties adhering to a non-competitive agreement around consumers in distress and bring all
creditors such as utility providers, not just financial service providers, into that arrangement.
3. Introduce a single debt management license
Currently intermediaries and third parties providing debt advice and remedies, including
DMCs and Insolvency Practitioners (IPs), hold either a Consumer Credit Licence or an
Insolvency Practitioner Licence. Establishing a single licence and licensing body would
leave a single supervisor in a position to actively monitor and supervise these firms.
4. Introduce a single body responsible for delivery of national over-indebtedness
strategy
The recent National Audit Office and Public Accounts Committee reports on the
Government’s Over-indebtedness Strategy concluded that co-ordination of the myriad of
interventions to improve consumer over-indebtedness had been inadequate. 7 Giving
responsibility for the delivery of the strategy to a single body, which can draw together
organisations and materials to support consumers across the financial lifecycle and monitor
the effectiveness of different interventions, would improve this. This single body should also
give consideration to whether debt advice services are currently funded in the most effective
way; to ensure innovation is not stifled as a result of a commitment to specific interventions,
and that the existing efforts of financial institutions to help consumers are recognised.
Simplify the debt remedies available:
5. Encouraging early intervention and proactive use of informal remedies by creditors,
as a preventative tool
Informal remedies offered by creditors have an active role to play in helping consumers who
‘can’t pay’ deal with debt. If competition in recoveries was reduced, the skills developed by
collections specialists in creditor institutions could be redeployed earlier in the customer life
cycle, focusing on early interventions to ensure the interests of the lender are represented
and the experience of the customer is improved. With improved use of management
information the efficacy of these remedies could be better measured and enhanced.
6. Rationalise the formal debt remedies
There are only a few generic situations that formal remedies need to deal with:
Forbearance, where extra time is needed by a debtor with temporary financial difficulties;
Repayment, where a debtor can afford to make some repayments (if not their full contractual
obligations); Security, for asset rich but income poor customers where their assets could act
as security against debts owed; and Debt Relief, where a customer has no income, no
assets and no prospect of repayment. Existing remedies should be rationalised to reflect
this.
For individuals who encounter temporary difficulties an Enforcement Restriction Order (a
derivative of that recently proposed by the Ministry of Justice) would provide a formalised
breathing space for a limited period of time (6 months, but reviewed after 3 months) to allow
the debtor to get back on their feet.
The primary income-based remedy in this new framework would be a Debt Repayment
Plan (DRP), which would replace IVAs, Administration Orders and potentially also Debt
Management Plans. There should be few specific criteria for these plans to maintain
flexibility to meet the customer’s situation, and maximise eligibility. While a customer is on a
DRP creditors would freeze interest and charges where appropriate and take no further
enforcement action. In return the customer would make repayments as agreed and agree
not to divest any assets they may hold.
For those debtors with little or no income, but who have significant assets, an Asset
Securing Order (ASO), in effect a ‘pro-rata’ Charging Order securing the debts against the
7
http://www.publications.parliament.uk/pa/cm200910/cmselect/cmpubacc/475/47502.htm
31
asset in proportion to the value of debts owed to each creditor, should be considered. This
would provide all creditors with reassurance/ security, without the need to necessarily force
the sale of any assets. This way, all creditors would be treated consistently, without
individual creditors competing to obtain a Charging Order first to secure their debts against
any asset.
Debt relief, whether as part of the existing bankruptcy process, or as a write-off by the
creditor, if they wish to make a good will gesture in exceptional circumstances, would remain
as the last resort.
By streamlining the formal debt management process (Fig 3), the costs associated with it
would diminish. This would enable creditors, regulators and advisors to invest more in
supporting customers before they enter the formal debt management or recovery process.
It should also rationalise the fee-charging market and drive improved standards across the
sector.
Fig. 3: Simplified debt remedies
Debt Informal Remedies
Debt Formal
Breathing Space /
Moratorium /
Token Payments
Debt Management Plans
Debt Consolidation / Remortgaging
Full and final Settlement /
Full or partial debt write‐off
Enforcement Restriction Order
Debt Repayment Plan
Asset Securing Order
Debt ‐‐ relief
Remedies
Source: Accenture / BBA
7. Rationalise court based remedies
Court based remedies have an important role to play in the debt management framework
as an enforcement mechanism of last resort, particularly for debtors who ‘won’t pay’.
However, with improved formal remedies, court based remedies could be rationalised. A
government review of court-based remedies may offer the opportunity for underused
enforcement mechanisms such as Time Orders, Administration Orders and Composition
Orders to be scrapped and further consideration given to whether the remaining
enforcement solutions could be amended and improved.
More comprehensive use of management information:
8. Build a complete picture of consumers’ financial situation
At present no one stakeholder in debt management has a complete picture of the consumer
and creditor experience. For instance, data is not consistently collected or interrogated on
the performance of DMPs and no single resource exists to capture, analyse and compare
the success or failure of different remedies or the movement of consumers from one remedy
to another, or into and out of the debt-cycle. Creditors should work together across the
credit data sharing community to agree to the use of ‘white data’ on consumers’ borrowing
and repayments for account management. Currently lenders are able to access this data
once a customer has defaulted, but cannot do so before hand, due to concerns that the data
could be used by less reputable lenders as an opportunity for inappropriate marketing.
Agreement via an industry protocol on the use of this data would allow lenders to get a more
complete point-in-time picture of a consumer’s financial health and improve lending and
arrears decisions.
9. Proactively contact, early interception and resolution
In many circumstances the journey from a manageable level of debt to debt distress will be
gradual, and there are steps that creditors can take to flag up potential problems before they
emerge. At present creditors who subscribe to the Lending Code will attempt to contact a
32
consumer if the information available to the creditor indicates that an individual is heading
towards financial difficulty. 8 Adoption of this practice throughout the credit industry could
have a positive impact on preventing over-indebtedness.
Building a more complete, point-in-time picture of a consumer’s financial health would help
maximise the potential of proactive contact and enable the lender to assist individuals in
avoiding further indebtedness, signpost sources of debt advice and, if necessary, consider
debt remedies at an early stage if the consumer’s financial position appears unlikely to
improve. Consumers value ongoing service very highly and a more proactive approach to
servicing and supporting the customer is likely to deepen the relationship between creditor
and consumer. A feedback loop, where data from the debt management process is fed into
future lending and arrears management decisions would also enable stakeholders to better
judge the effectiveness of preventative action, collections activity, different debt remedies or
rehabilitation, and enhance lending and arrears decisions.
Helping customers to help themselves:
10. Improving financial education across the consumer life-cycle
The creation of the Consumer Financial Education Body (CFEB) is intended to lead to the
development of a coherent financial education landscape. In the debt arena, this should
focus on prevention and rehabilitation, enabling consumers who have struggled with debt to
access help and guidance which will facilitate their re-entry to the consumer life-cycle in
future. Currently there are a number of organisations operating various educative
programmes including CFEB, charities and lenders. The consumer experience could be
enhanced by streamlining these programmes and providing a single point of entry to them.
Research should be commissioned to better understand what programmes and delivery
methods work well, and what works less well. The results of this research should be used to
drive improvement of existing programmes.
11. Using technology to empower consumers to better manage their finances
Technology exists to enable consumers to be better informed about their finances as shown
by the increase in types of accounts that allow an individual to analyse their spending and
saving. Online and mobile banking has moved beyond electronic statements; creditors
should seek innovative approaches to serve borrowers. By enabling consumers to visualise
their income and outgoings (including debt servicing), and supporting scenario planning,
creditors would be able to change consumer behaviour and improve their understanding of
their debts.
12. Establishing a single debt-advice portal
Customers experiencing financial difficulties are often reluctant to take positive action to
deal with their debt problems. This is not necessarily because they are unaware of the
availability of information and support, but they may feel there is stigma associated with
seeking help, or that they are responsible for managing their own finances. 9
A single portal through which all free sources of internet, phone and face-to-face information
and debt advice are accessed should be established. This would simplify the current
process and could become the focus of promotion and awareness raising by current
participants in the debt environment. If this single portal offered advice and support across
the life-cycle, it would reduce the risk of stigma associated with a pure debt management
source of advice. The portal could filter enquirers towards the most appropriate types and
channels of information and could also act as the starting point for any subsequent debt
management and rehabilitation activity.
Empowering the consumer in this way, enabling them to take the right decisions to repair
their personal balance sheets at an earlier stage, would reduce the burden on free debt
8
Proactive contact, as per sections 141 – 144 of the Lending Code (http://www.bba.org.uk/customer/article/the-lending-code)
9
Joseph Rowntree Foundation, http://www.jrf.org.uk/sites/files/jrf/credit-debt-low-incomes-full.pdf
33
advice and consumer reliance on fee-charging debt management companies. This in turn
will leave a smaller market for the less scrupulous DMCs to exploit, and is likely to improve
the arrears rates for creditors and be easier for regulators to monitor.
Fig. 4: A simplified debt management framework
Simplify governance
Help consumers help themselves
Emphasise informal remedies
formal remedies
Minitice Single Regulatory Authority
Regulators
Rationalised court‐
based remedies
Equity Release
Financial Management Support
Forbearance 2
Enforcement Restriction Order
Informal Repayment Plan1
Debt Repayment Plan
Debt Consolidation
Asset Securing Order
Remedies
Active Servicing
‐
Attachment of Earnings
Charging Order
Debt Distress
Pro
Remortgaging
Customer Education
Full / Partial Write‐off
Debt ‐relief ‐
Bankruptcy
Customer Education
Pre‐Arrears
Early Arrears (0‐90 days)
Late Arrears (0 ‐90 days)
High probability & value of recovery
Recoveries
Write ‐off
Low probability & value of recovery
1 Repayment Plans include: informal arrangements / negotiated agreements / full and final settlement / debt reorganisation
2 Forbearance measures include: breathing space / moratorium / token payment plans
Borrower led solution
Informal creditor‐led remedies
Formal Remedies
Courts enforced solution
Source: Accenture / BBA
A way forward: implementing change through a debt resolution portal
How to implement these changes is a challenge. One model for doing so is a Debt Resolution
Portal. Such a portal could function as a simple, cost effective, self-financing and consumerfriendly body; it could help consumers manage their debts; it could automatically identify the
appropriate resolution for any distressed borrower; it could help creditors recoup monies owed;
and it could support consumers’ rehabilitation. It would be designed to remove competition for
business from DMCs around those customers in severe difficulty and ensure creditors received
a fair-share of recoveries, which would encourage them to focus their efforts earlier in the debt
life-cycle. Set out below is an operational vision of how such a portal might work.
The entity: A single, dedicated, multi-channel consumer-facing portal designed to simplify the
existing plethora of advice and debt management agencies. It would sit under the auspices of
an appropriate authority and become the default resource for any and all matters relating to
personal debt. Such a portal might draw on, and draw together, the tools and expertise of
existing charity based advisors such as the Consumer Credit Counselling Service (CCCS),
National Debtline (NDL) and Citizens Advice. Not only would consumers use the portal to
access advice, information, budgeting tools, and signposts to useful sources of additional
information, but it would become the single accepted route into the debt management process
either via creditor referral (whether financial institution or other creditor such as utilities), other
stakeholders, or through direct contact by the consumer.
This multi-channel portal would be a closed ecosystem - individuals who engaged with it would
only need to interact with the portal. They would not be competed for directly by debt
management providers, ensuring the vulnerable were protected. The initial costs of establishing
such a portal could be funded via a combination of government funding, industry contribution
and existing advice agency resources, but ongoing costs for maintaining and developing the
portal would be met via a fixed proportion of the recoveries from the debt management process.
The debt repayment process: After accessing the portal, the consumer, depending on their
individual circumstance, would either be encouraged to speak to their creditors and signposted
34
to appropriate money and debt advice tools, or enter the debt management process. When in
the debt management process, after consumers have provided the requisite personal
information and data from credit reference agencies (CRAs) has been received and the
consumer’s identity verified, the most appropriate debt remedy for the consumer would be
automatically identified.
Depending on the consumer profile, individuals would either be subject to an Enforcement
Restriction Order, a Debt Repayment Plan (DRP), Asset Securing Order or Debt Relief. It
would also be possible for individuals to pass from one remedy to another if their circumstances
changed. Once an individual is within the debt management process they would also be in a
position to be provided with appropriate educative resources to support the rehabilitation
process.
Debt management plan providers: To ensure fair treatment of customers in a non-competitive
environment, providers must demonstrate accreditation of appropriate standards (regulated and
monitored by the appropriate statutory authority). Consumers would be referred to participant
providers through the portal on a weighted basis depending on prior performance. As a DRP
would already be identified by the portal as the appropriate remedy, the role of the provider
would be to collect any outstanding and necessary data such as proof of income and
expenditure, administer the scheme and distribute dividends. On completion (or termination) of
the remedy, the DRP provider would be assessed on standard criteria by creditors and the
consumer for use in the weighting system, distribution fee and continued accreditation.
Although the creditor would receive the major part of a consumer’s total debt repayments a
proportion would be retained for the funding process, with this residual sum being used to fund
the ongoing portal costs, and a rehabilitative fund to finance debt prevention and education
tools.
A Debt Resolution Portal would create a range of savings and benefits, including:






Less complex process for consumers
Rationalisation of duplicate sources of debt advice, and associated cost savings
Fewer formal or court based remedies reducing complexity and cost
Increased repayment of debt to creditors (and less diversion of funds to 3rd parties)
Ability to collect and analyse data on debtors and performance of all remedies
More structured and comprehensive rehabilitation of the debtor as relationship
between consumer and portal continues throughout the process
Moving towards the vision
It is clear that moving towards a unified recoveries process will take some time; however there
are steps that can be taken in the short term to enhance the current framework and lay the
foundations for the improved framework of the future:
1. Review the governance model. The Consumer Credit and Personal Insolvency Review
should be used as an opportunity to gather feedback on the existing processes and
authorities, and their complexity with a view to reducing overlapping roles and
responsibilities amongst regulators and supervisors and establishing a single authority to
authorise, supervise and monitor the effectiveness of DMCs, debt advice and remedies.
2. Propose a code of practice amongst lenders for customers in distress. Agreement
between the regulators and creditors on the appropriate treatment of distressed customers,
on the point at which customers enter the recoveries process, debt solutions they are
offered at stages of the debt life-cycle, and the agreement of all creditors to adhere to these
guidelines, can form the foundation of an improved debt management framework. If
principles on non-competitive collection were agreed across the industry, treatment of
individuals in distress would be fairer, and lenders would be able to model recoveries better
and feed that data back into lending and arrears management decisions.
3. Encourage creditors to pilot strategies that focus on early interception. Development
of education, use of technology supporting better, regular, graphical statements, put in
35
place of reactive customer debt management and pilot schemes on proactive debt
prevention have the potential to reduce the number of consumers entering the recovery
process and enhance creditors’ profitability. Better use of analytics should support
decisions across the life-cycle, from lending to managing the best solution for consumers in
early arrears. Technology also offers creditors a point of differentiation as online and
mobile banking offerings move beyond online statements. Applications which enable
consumers to analyse their income and outgoings, linked to improved financial education
can empower individuals to take more personal responsibility for their finances.
4. Encourage more open effective data sharing. Open, effective and regulated use of
‘white’ data between creditors and CRAs, which gives a clear picture of a consumer’s
financial circumstances would not only enable lenders to make better risk-adjusted lending
decisions but also discourage competition around consumers in distress and help identify
the best recovery solution for individuals, while not subjecting them to unfair marketing.
Government should consider allowing additional data to be shared so that creditors and
advisers can get a full picture of the debtor’s financial circumstances (e.g. council tax,
student loan, utilities arrears, etc.).
5. Establish working group to research and develop a single debt management portal
based on reforms to the debt management framework. A working group established under
the proposed single regulatory authority body could work with a core set of delegates and
industry representatives to set out the code of practice amongst lenders for customers in
distress which would underpin the portal. They could consider how to enhance and build a
management information and feedback solution and use improved data sharing to support
the portal and enhanced credit decisioning.
They should also consider extending the
reach of the portal to cover broader credit providers (non-FS providers).
Consensus on a new framework must be achieved between politicians, lenders, borrowers,
charities and the advice bodies that represent them, and stakeholders must work together to
make fundamental changes throughout the cycle to have a positive impact on the way debt is
managed through the rehabilitation of debtors and the prevention of new or repeated debt
behaviour.
Government, regulators, creditors, advisors and consumers all have a role to play in improving
the debt management framework. All would benefit from change.