2021 – the Debt Camel review of the year

This is my review of the major events of 2021 in the debt sector. It doesn’t go into detail about what happened, it mainly looks at how well the year went in practice and why bits of it didn’t go better…

Inevitably it concentrates on the areas that most interested me! And my ratings are just a bit of fun.

I’ll divide them into groups: FCA-related; Insolvency Service-related; external shocks; and MaPS.

FCA issues

Woolard Review

The FCA’s Woolard Review was published at the start of February. It was expected to focus on the potential evils of unregulated Buy Now Pay Later (aka Klarna) and it did.

The points it made about insolvency (“the IVA market is broken“) and calling for help with DRO fees were less expected and very welcome…

No progress has been made on Woolard’s call for more affordable lending to sub-prime customers by banks. The FCA has now retrieved its review of credit recording from the long grass where it was dumped at the start of the pandemic – perhaps something useful will emerge from this in 2022.

The report also said the FCA should work with MaPS on a multi-year strategy for securing debt advice. I don’t know if the FCA had any input to MaPS’s debt funding recommissioning (see below) – I really hope not, otherwise it means two major agencies working together made a complete hash of it…

Rating:
10/10 for an interesting, perceptive report.
?/10 for effectiveness – too early to tell.

Buy Now Pay Later (BNPL)

This isn’t yet in the FCA’s remit. The Treasury has issued a consultation on the changes needed to give the FCA power to regulate Klarna et al – it closes on 6th January.

The BNPL firms haven’t squeezed stealthily through a loophole in the legislation, they are driving a large assault force through at full speed – read UK Klarna boss: Our crosshairs are set on the real British banks for an indication of the full scale of their ambitions.

But the problem for the Treasury (and possibly next year the FCA) is that the loophole wasn’t a bad bit of legal drafting. It was there on purpose to prevent any firm who issues an invoice that can be paid in stages from requiring FCA authorisation. If you think it’s easy to solve this, read the Treasury consultation!

I hope the FCA is already at work and will be able to start its consultation on rule changes very soon after the Treasury has decided what to do.

Rating:
8/10 for the Treasury – losing marks because they should have got going earlier.  (Though they had other things on their minds in 2020…)

Affordability – Provident and Amigo

One of the good news stories from 2021 is that Provident doorstep lending is no more, after decades of charging 500%+ APR for short-term loans which then get refinanced because the first loan was unaffordable.

The two bits of bad news are that the 4 million previous Provident customers since 2007 are going to get little compensation. And that Provident is allowed to carry on with its high-cost credit Vanquis and Moneybarn businesses because their company structure meant the doorstep lending could just be shut down. There was little the FCA could do to stop this, and, apart from wringing its hands, it gave up.

But the FCA had permitted the relending of unaffordable loans to continue for years. And it allowed Provident to hold insufficient capital to settle redress complaints. And it failed to provide any backup such as the FSCS for when a lender goes under owing clients redress. So although there was little it could do in the end, there was a lot that the FCA could have done over the previous five years to prevent this consumer harm.

When it came to Amigo, the FCA was in a far stronger position as Amigo wants to be able to lend again from the same entity that was looking at having to pay enormous refunds to its customers and wanted to cut this.

The FCA decided at the last minute to turn up in court and oppose the Amigo Scheme, saying it was not in the best interests of Amigo customers and was much too generous to Amigo shareholders. The judge agreed and chucked the Amigo Scheme out.

Amigo then took 6 months to come up with a second Scheme which, on the face of it, offers customers much more.

So is that good news and effective action by the FCA? No, it isn’t. I really hope the FCA isn’t congratulating itself on this.

Almost all the extra money on offer for refunds to previous Amigo customers has come not from shareholders but from the repayments in the last year by customers with current loans. Many of these customers will turn out to have valid complaints but if they are upheld in the new Scheme they will be a lot worse off than if Amigo has just gone into administration in January 2021, as I pointed out at the time.

And this has been facilitated by the FCA allowing Amigo to send these customers emails and texts talking about court action if they stop paying, which many customers saw as threatening. I’m not aware of any court cases to date this year.

Rating:
2/10 for the FCA. Apart from winning the Amigo court case, this has been a very poor episode for the FCA, harmful to tens of thousands of very vulnerable customers.

Debt packagers / IVAs

“Debt packagers” is the FCA term for what the rest of the world calls IVA lead generators.  The FCA’s earlier “Dear CEO” letters telling debt packagers to pull their socks up and give proper debt advice were ignored. So in July, it decided to shoot a few to encourage the others, as Voltaire put it, and closed down five firms.

This didn’t seem to have any effect. So in November the FCA went for the nuclear option of shutting the industry down by telling debt packagers they could not charge any fees for referrals. The consultation has just ended – I hope the new rules will come into force as soon as possible and be very effective!

This will probably make little difference to IVA mis-selling overall, but it removes the horror of an FCA-authorised firm dishing out so-called debt advice that only benefits it and not the client.  My recent article has a shocking example of this when I mystery-shopped one of these debt packagers.

The FCA action has also passed the buck firmly to the Insolvency Service to clean up the rest of the IVA market.

Rating:
10/10 for the FCA.

Insolvency Service issues

Breathing Space

After many years of campaigning, the Breathing Space finally went live in early May.

This was originally envisaged as giving people time to resolve their priority debts and develop a plan for their non-priority debts. But under pressure from creditors, it was cut back into a brief 60-day pause, which most creditors used to give anyway. The process is cumbersome and bureaucratic for debt advisers and creditors and can only be used once a year.

It’s only really useful for a tiny minority of people. But StepChange acted like it was the best thing ever and put a lot of their clients into it. Even letting clients choose to put themselves into a Breathing Space, without warning them about the potential problems with it…

Most other debt advisers decided to not routinely use it early in the process of debt advice, but keep it until it is really needed. So the numbers have been much lower than expected.

And the mental health breathing space has hardly been used at all, even though this has no time limits and should be a major help to these clients.  This is because the mental health breathing space has been badly designed so it has to be authorised by someone the client cannot contact and who they may never have even met.

Why has this all proved to be such a damp squib?

• it was dumped in the Insolvency Service’s lap because they run the register of insolvencies and something similar was needed for Breathing Space. But it is not a form of insolvency and the IS has no real interest in how this was set up, so it didn’t challenge anything fundamental about the process;
• the Treasury didn’t ask the right people – debt advisers who actually give advice – how it should be set up;
• the advice agencies made polite objections but carried on co-operating with the implementation, even when it was obvious it should just be binned.

It shows how out of touch the FCA, MaPS and the Treasury are that they thought this was going to be one of the big achievements of 2021. We all need to make sure that the same debacle doesn’t happen with Statutory Debt Repayment Plans in 2022/23.

Rating:
2/10 for the Breathing Space.
5/10 for the Insolvency Service. It wasn’t really their fault but they should not have taken this on without listening to the people who would operate it in practice and insisting on changes.
1/10 for StepChange, who should have known a lot better.
7/10 for We Are Debt Advisers, a grassroots campaign to try to get the Breathing Space reconsidered. It didn’t get anywhere… but WADA has then proved useful in the rest of the year…

DRO limit changes

In February the Insolvency Service put out a consultation for changes to the DRO limits. With some minor amendments after the consultation – including an increase in the value of a car someone can have –  these went live in July.

A lot of the extra bits that debt advisers wanted, such as automatically including all debts, would have required legislative changes. The IS opted for the quick route, which could only change the limits. I don’t disagree with that as a quick win.

But it was a missed opportunity to make DROs a lot simpler to process, which would have been in everyone’s interest – clients, debt advisers and the IS itself. I hope the IS will pick up these extra changes and incorporate them in the review of personal insolvency it has promised in 2022.

And the price of cars… unfortunately the IS took the decision to increase the value of cars to 2k at a time before the dramatic rise in the price of second-hand cars this year was clear. In February I was suggesting 3k as the limit – now I think that it should be 5k.

Rating:
8/10 for the Insolvency Service.

IVAs (again)

After the FCA’s clear and effective action against IVA mis-selling in the part of the market under its control, what has the IS done for the wider market?  The answer: some bits. But they haven’t yet added up to anything that has made a difference so far:

• In February it issued a Dear IP on IVA advertisements, saying “It is extremely disappointing that similar advertisements, including seemingly impersonating debt advice charities, continue to be found online.”  The ads have continued.
• A new protocol came in in August. My article The 2021 IVA protocol explained why I thought the provisions in it about mis-selling were ineffective.
• A consultation has been held on changes to SIP 3.1 – this has only recently closed.
• In December, the IS announced a consultation on Insolvency Regulation. This includes proposals for a single regulator (good!), regulating firms not just the IPs (good!) and the potential for financial compensation for clients who win complaints (good!) But this will take a long while to be implemented – I will be astonished if anything changes in 2022 and 2023 may be a stretch.

In the meantime, tens of thousands of clients a year may be mis-sold IVAs. Some of these will fail, leaving the client back with their debts. Others may put clients who have no need of insolvency into an IVA, destroying their credit rating and defrauding their creditors. This is a problem that can’t wait for years to be solved.

Rating:
2/10 for the Insolvency Service. It would have been zero if it wasn’t for the new consultation on insolvency regulation.

External Shocks

Universal credit cut

It never looked likely that the DWP would listen to reason and retain the £20 a week UC uplift. But many debt advisers will have felt something close to despair when the cut came in October.

Rating:
0/10 for the DWP. Every DWP senior civil servant and all ministers should have to live on UC for three months.

Energy prices

Unless the government does something dramatic, energy prices will again be going up for most people in April – a lot.

Competition didn’t deliver cheaper prices for everyone and now it is costing a fortune to pick up the pieces. Ofgem has spectacularly failed as Citizens Advice has detailed in Market Meltdown – How regulatory failures landed us with a multi-billion pound bill. From wafer-thin capital requirements and poor customer complaint handling, to supply-side failures such as allowing the closure of the Rough gas storage facility, the UK’s energy system is in crisis.

I look at some of the implications in Debt advice in an age of inflation.

Rating:
Off the scale bad. Ofgem, BEIS and the CMA should all get a negative rating.

MaPS debt funding

MaPS is the major single funder of debt advice in the country. In the summer it announced a total overhaul of debt advice funding, making advice agencies bid for commercial contracts with more money being made available. Its aim was to deliver a more efficient debt advice service reaching a lot more people.

From the start, the failure of MaPS to specify how much face-to-face advice it wanted bidders to provide seemed a glaring omission. Face-to-face advice is expensive – any advice agency wanting to win a contract will probably try to include as little as it thinks it can get away with… But it is the best way to deliver a lot of the complicated end of debt advice, where helping clients with paperwork, talking to their creditors and having local contacts all come in useful.

MaPS said it wasn’t intending to cut face-to-face services, but advisers started being told their jobs were at risk and some left when they saw a job outside the sector. Vacancies have become impossible to fill.

We Are Debt Advisers organised meetings with MPs. The IMA, Advice UK and MMHPI all wrote to MaPS and asked for a halt to the process.

Just before Christmas, MaPS announced it was stopping the bidding for the regional contracts, where most face-to-face advice is expected to take place

As I said in my weekly news round-up, that has to be good news. But how good depends on what happens next, how MaPS will fund local services over the next year to stop them from disintegrating, which is already happening. And how much money there will be for local debt advice on a longer-term basis.

Rating:
2/10 for MaPS. It would have been zero if it wasn’t for the U-turn last week.

What was your debt story of the year?

It has felt like a very, very long year.

Other stories include changes to bailiff regulation (not a lot seems to be happening after the initial flurry in July), StepChange redundancies (a precursor to the MaPS debt recommissioning) and the way Equifax changed its scoring on the quiet.

What else do you think should have been included in this review?