In March 2016, the clients of Compass Debt Counsellors found out their debt management firm had gone into administration. Many people had thousands of pounds being held by Compass and may not get this money back.
In This Compass points to Debt Misery, Legal Beagles points out:
“This form of daylight robbery is hugely rewarding because no one ever seems to go to prison for such crime. If I walked into someone’s home and sneakily removed £5000 in cash that I found tucked away, I would rightly expect a prison sentence but if I telephone that same homeowner, flog them a debt management plan, send them some paperwork, then take money off them monthly for the next two years, keep it all to myself or buy Range rovers and Porsches as company vehicles, then shut down as the heat turns up, I can confidently say I will not go to prison.”
This article argues that the “debt settlement” model that Compass were using is both flawed and very risky. The FCA should not authorise any firm which is using it.
The debt settlement model
In a standard Debt Management Plan, a client makes a single payment to the debt management company each month. The DMP firm takes out its own fee and divides the rest up between the client’s creditors. The DMP carries on until all the debts are repaid in full.
But in the “debt settlement” model that Compass were using, the creditors are only offered low or token payments, and the rest of the client’s monthly payment is retained in a “savings pot” for the client. The plan is that in a few years:
- the firm will use these “savings” to offer a full and final settlement to the creditors;
- the client will be happy as the debts will be settled sooner as they are not being paid in full;
- the creditors will be happy to get any money after just getting low payments for years.
The problem about this scheme is that the creditors are being ripped off. They are being offered a lower payment every month than the client can afford to make.
The bargain between the debtor and the creditor in a standard DMP is that the debtor pays what they can towards their debts and the creditor freezes interest. With Compass-style DMPs, there is no reason why a creditor should agree to freeze interest or to accept the offered full & final settlement. And that can leave the clients in a much worse position after a few years, having had interest added to their debts and not getting the hoped for write-off.
It’s very high risk
There are three different risks with the debt settlement model:
1) operational risk This clever-sounding plan won’t settle the client’s debts in the predicted timescale unless the creditors freeze interest and accept settlement offers. Indeed the debts may increase if interest is being added and the monthly debt payments are less than this.
2) advice risk It is likely the firm won’t adequately explain the potential problems to the client at the start. For a client to make an informed decision that they want to go with the Compass debt settlement model, the firm would have to go through the potential disadvantages in great detail and get confirmation that the client is aware of the operational risk.
3) risk of client money being mis-appropriated Because the firm is holding large amounts of client money over a prolonged period, this risk is much larger than for normal DMP firms. Compass isn’t the only firm using this settlement model that has gone into administration. In 2014 Bournes Debt Solutions went under, reportedly with half a million pounds of client money unaccounted for and nothing has yet been returned to the clients. This simply doesn’t happen with normal DMP firms – they have to be careful with client money, having the usual administrative headaches in trying to reconcile it and trace payments without the proper references, but the vast majority of the money coming in is distributed to the creditors the same month, so there is no ever-growing pot of client money that has to be protected.
How can this be an acceptable approach to debt management?
The FCA said in its Review of debt management advice:
“Individuals trying to deal with problem debt, however, can be amongst the most vulnerable in society and can be prey to firms that do not have customers’ best interests at heart and do not treat them fairly.”
I think that is exactly why FCA should refuse to authorise any firm using the debt settlement approach. It may sound great to someone facing a big debt problem but it is simply too high risk to be sound debt advice.
So the question is, are there any more firms using this approach that are currently applying for FCA authorisation?
UPDATES 14 April 2016
(1) news about Compass
It seems increasingly likely that Compass clients’ money was not in any form of protected bank account. More bad news – a firm of solicitors, Abbey Solicitors, seems to have taken on many Compass clients with the aim of getting many of their debts written off as unenforceable. This Legal Beagles article looks at why this is another high risk, bad idea for the clients.
That article however also contains what may be good news for at least some Compass clients – Legal Beagles are asking some of the largest debt purchasers to take into consideration the amounts the clients have paid to Compass.
(2) other firms offering the high risk debt settlement model
Immediate Financial appears to be an FCA regulated debt management firm operating the debt settlement model.
Another firm Madison Financial is advertising debt settlement on its website but there are suggestions that clients who want this are being sent to a firm of solicitors in the same group, Madison Legal. And Total Debt Relief ltd seems to be another business with interim FCA authorisation at the same address also offering debt settlement.
Settle My Debts appears to be an FCA regulated firm operating the debt settlement model but their website says “We have ceased to take on any new clients while we work with the Financial Conduct Authority to improve our procedures and communications, ensuring the fair treatment of our customers. We hope to overcome these issues in the near future.”
Elite Debt Solutions who seem to have operated this settlement model are shutting down. Clients are being directed to High Street Solicitors.
If you know of any other firms, add a comment below and I will add them to this list.