The Financial Conduct Authority (FCA) yesterday published a paper: Quality of debt management advice. This review looked in detail at large numbers of cases from eight firms that provide Debt Management Plans (DMPs). It concluded:
- “our findings were very disappointing and have reaffirmed our view that poor debt management firms pose a high risk to consumers (particularly those in vulnerable circumstances)”
- “the standard of advice provided by fee-charging debt management firms was of an unacceptably low standard. The advice provided by free-to-customer debt management firms was generally of a higher standard, but there was still scope for material improvement.”
DMPs are the most common means of tackling problem debt in Britain. For an overview of how DMPs work and how to set one up, read Debt Camel’s Guide to DMPs. People often look at a DMP when they have urgent problems- illness, redundancy, separation, pressure from debt collectors, or mounting mortgage/rent/council tax arrears. They can feel desperate and are vulnerable to being sold a solution that sounds better than their current situation but which isn’t right for them, so it is essential that DMP firms:
- provide fair advice on alternatives to DMPs that could be better for the individual; and
- look in detail at the individual’s case to arrive at an affordable monthly payment, not just applying general rules about levels of expenses.
The problems with DMP advice
This article focuses on the practical implications of what the FCA found for people who are currently in a DMP or who are thinking of starting one. How can you tell if you are getting good advice? What should you look out for?
Some of the problems the FCA found included:
- customers were not asked about expected changes in their circumstances There is no point in setting up a DMP which is expected to take 6 years to repay the debts if the customer is expecting another baby, will lose tax credits because a child is leaving school in two years or will retire in in 3 years.
- a reasonable and reliable assessment of the customer’s income, capital and expenditure wasn’t made. Cases were seen where advisers didn’t exploring pet food costs when the customer had a pet, discuss what actual utility bills or phone costs were, car owners with no expenditure allowed for car maintenance; parents with school age children but no discussion of costs for uniform, clothing or school activities.
- failure to discuss variable income impacts the affordability of a DMP. Self employed, zero hours or seasonal income present large challenges for people to budget. Just putting in “the average” monthly income doesn’t explain how the customer can make the repayments in a below average month!
- playing on and reinforcing misconceptions or negative attitudes about bankruptcy Customers weren’t told that it may be possible to keep your car or even sometimes your house in bankruptcy.
- recommending very long-term DMPs when a Debt Relief Order could have been more appropriate Adequate information and explanations about DROs and the other forms of insolvency were often not given.
- fee-charging firms providing inaccurate and disparaging information about free DMPs. Some customers were told incorrectly that the free sector was “owned by the banks” and that the customer should only use the free sector if “they were prepared to do all the work themselves”.
- mis-selling additional products and services These included bank accounts with an account fee, PPI reclaims, insurance products to protect DMP payments and utility switching. Although sometimes these could benefit the client, in other cases the client could have had better alternatives.
5 checks to see if your DMP is a good one
If your DMP passes all these five checks it’s probably a good debt solution for you:
1) Are you being charged a fee?
There are simply no good reasons to use a fee-charging DMP firm if you are looking to start a DMP. They are no better than the free alternatives. Every £50 paid in fees to the DMP firm is £50 less to your debts and means your DMP will go on for longer
If you are already in a fee-charging DMP, if you only have a few months to go till it finishes you may as well let it run, but otherwise you should seriously consider switching to a free DMP firm such as StepChange or running your own DMP using the free CABmoney online DMP facility provided by Citizens Advice.
2) Is interest frozen?
If your DMP hasn’t started, you should assume that interest will be frozen as it usually is. However this isn’t guaranteed, so 3-6 months after your DMP starts, ask your DMP provider whether interest is frozen on all your debts. If it isn’t, you can try to get this changed, see What to do when a creditor won’t freeze interest.
3) Is the monthly payment affordable?
The proposed payment may sound great right now because it’s a loss less than your current debt repayments, but what if the car breaks down or the kids all need new shoes? What if your income changes? What is likely to happen in your life in the next few years? For example if you have to move to a larger place because the children are growing, you may not be able to carry on with the DMP payments – in this sort of case it may be better to look at other debt solutions now.
4) Will it complete in a reasonable length of time?
A good DMP will repay your debts in a sensible timescale. 15, 20, 25 years are way too long. Even 7-10 years is a very long while, especially if you have a family with changing needs. If anything goes wrong and your DMP payments have to be reduced, the plan will take even longer.
If you know the DMP will only be temporary – until you get a new job, or your childcare fees drop say – you may not care about this point. But don’t be over-optimistic here and assume things will get better or you can waste many years of life on a DMP when a different debt solution would have been better for you.
If your DMP is going to take too long, look at your other alternatives. If you have been in a DMP for 6 years already but it’s going to take another 10, it is still worth looking at your alternatives now, don’t stick with a DMP that isn’t right for you.
5) No unnecessary extras
It’s always a good idea to start by being suspicious when a financial firm wants to sell you something else!
- If switching utility providers will reduce your bills, great – but could you save more by switching yourself, not letting your DMP firm organise it?
- You will definitely save a lot of money if you reclaim PPI yourself and it’s now much easier to do, read Reclaiming PPI in a DMP.
- Do you need that extra insurance? Insuring your DMP payments may sound like a good idea, but the insurance cost will reduce the amount you are paying off your debts. And DMPs are flexible, you can just reduce the payments if you have problems.
Conclusion – do your own research!
A lot of the problems with dodgy advice from DMP firms can be avoided if you do some research yourself. That’s what Debt Camel was set up to help with! The more you know about what can go wrong with DMPs and what the pros and cons of the other debt solutions are, the better placed you are to make good decisions.