The view of the banks
Banks have been quick to condemn fee paying debt management companies,
despite having their own agenda in terms of business growth.
The banks’ pleas for tighter regulation of the debt management sector appear
to ignore their own role in this situation, particularly as a result of the 2003
lending boom.
In August, HSBC blamed the aggressive marketing of personal bankruptcies and
insolvency agreements for a rise in UK bad debts, and threatened to reduce
lending to consumers, based solely on the number of people seeking to repay
their debts by entering into an IVA or debt management plan.
The following month, the bank warned those putting together IVAs and debt
management plans that it was only accepting proposals if it could recover 40p in
each £1 (almost double the return previously).
Michael Geoghegan, CEO of HSBC complained, that the rise in insolvencies was
directly attributed to companies which advertise the IVA solution and debt
management plans on daytime television.
Yet the amount debt management companies spend on advertising is a very small
fraction of what the banks are currently spending promoting credit to consumers.
Research by Group 1 Software showed that profit per customer at UK banks rose
13.3% last year to £75 from £66.20 in 2004 – more money per consumer than any
other sector of business including utility firms and mobile telephone companies.
Interestingly, members of the British Bankers Association, while painting the
debt counselling industry with a broad dark brush, appear to be in defiant
violation of the very code they have agreed to as a standard of fair service to
consumers.
According to Section 14.1 of the BBA’s Standard Code of Practice adopted by
UK banks, “Will consider cases of financial difficulty sympathetically and
positively.”
In fact, the banks have been very vocal about not wanting to be sympathetic,
with reports of suicides and harassment of consumers in financial trouble
continuing to hit the news desks of major newspapers.
Section 14.2 of the Code states: “If you find yourself in financially
difficulties, you should let us know as soon as possible.
"We will do all we can to help you to overcome your difficulties. With your
cooperation, we will develop a plan with you for dealing with your financial
difficulties and we will tell you in writing what we have agreed.”
Apparently, “we will do all we can” means that they will turn their back on
consumers in trouble and would rather see people file for bankruptcy.
Add to this Section 14.3, that states: “The sooner we discuss your problems,
the easier it will be for both of us to find a solution. The more you tell us
about your full financial circumstances, the more we may be able to help.”
Research shows that for those approaching their banks to work out a repayment
plans, the more restrictive and punitive the banks appear to want to make them.
Yet, Section 14.4 and 14.5 of the code states “If you are in difficulties, you
can also get help and advice from debt counselling organisations.”
“A debt counselling organisation may complete a common financial statement
(or equivalent acceptable to us) on your behalf, which we will accept as the
basis for negotiation with you in drawing up a debt-management plan.”
And this is where the debt management companies have come into their own,
providing not only the tea and sympathy, but the much needed service that the
banks are just unwilling to provide.
Home visits
One such company, EuroDebt Financial Services (a trading style of Pentagon (UK)
Limited), has a unique approach.
From the very first meeting with a client, its ethos is to help the consumer
and to weaken the level of stress in which people in financial difficulties find
themselves.
As Richard Bramham, Chief Executive of EuroDebt explained, “Before we take on
a new client, one of our advisers will have completed a home visit with the
potential client.
"In a face-to-face environment you can find out the true extent of the debt
an individual is facing.
"Often, we take a phone call, and someone says they have £10,000 of debt, but
during the home visit meeting it emerges that the true figure is three times
that amount.
"Also, if there is a couple involved, the meeting could identify something
that they have been hiding from each other.
"So for us, the home visit is essential.”
A typical meeting takes anything from two to three hours, in which EuroDebt
advisers are able to assess paperwork, and give face-to-face advice.
Getting people to talk about things that most people feel uncomfortable with
is a key to building a successful relationship.
The real value of the session is to open up and understand the true extent of
the debt, and the fact they may only be seeing the minimum payments they have
got to make, rather the total amount outstanding, and the fact that things
appear to be going backwards at a rate of knots.
“It is at this meeting we can help the client deal with unsecured creditors",
added Bramham.
" People often succumb to pressure from unsecured creditors to the detriment
of things such as child support, mortgage payments or rent.
"All our home visitors have local knowledge – unlike a call centre operator.
"And all our advisers are around the 40 year old age bracket – some having
been in the same position in the past as the client now finds themselves.”
One of the big issues with call centre solutions is that people are
predominantly calling them because they are looking for future finance, but they
get declined and are then offered, a debt management solution.
There is the old adage of ‘borrowing enough to get out of debt’.
“But in reality”, Bramham explained, “these people are trying to borrow
enough to just make the next three months payments.
"They need money, and they need it fast.”
When it comes to dealing with multiple creditors, people need support.
EuroDebt aims to have conducted a home visit within 72 hours of a client’s
first contact.
“With debt, time is a crucial factor. You can walk into a meeting when people
are despairing and take so much off their shoulders. In many ways, it can be
life changing.”
“We have all seen the press reports of people committing suicide because they
were in debt and were unable to get the right advice at the right time.
"Or they have been taken down the path for refinancing without recognising
that they did not have the means to support the expenditure being put in place.
"It just needs one small life event to tip the balance.”
It is this immediacy and the rapport that EuroDebt is able to establish that is
proving so popular with clients.
In some circumstances, the company has also undertaken cases for free.
“To us, the longevity of a relationship is crucial.
"We see so many people come to us from other debt management plans – because
they can’t do it any more after three or four months due to the amounts that
they have to repay being so high.
They just can’t sustain it”, said Bramham, “Creditors are aware of our
operation, and that we go for sustainable amounts rather than the ultimate
amount.
"From the creditor’s point of view, the plan will deliver, the client will be
there for a long time.”
Unlimited reviews
As part of this sustainability, EuroDebt clients receive unlimited reviews.
Changes in circumstances can happen quickly: family numbers can be added or
lost; income cut; and sickness can have a major impact.
With unlimited reviews being all part of the service, EuroDebt believes this
is part of the reason why so many people stay on board with its debt management
plans.
Another key facet, explained Kevin Still, Director, EuroDebt, is that a lot of
people contacting the company have some form of court action either pending or
directly occurring at the point of contact.
Provided that 10% of the instruction fee has been paid, EuroDebt will
immediately act on any priority actions.
“If a variation order needs to be put in place to deal with the court, then
we have a specialist team ready.
"Paperwork coming into the building is clearly flagged.
"At our morning meetings, all cases are reviewed complete with a
comprehensive set of documentation already in place – something practically
impossible for a call centre operation to do.”
The use of technology and training
EuroDebt handles over 3,000 variation orders a year.
In addition, it also acts on over 3,000 accountable claims, including
handling all the legal paperwork.
As a result, the use of technology and process efficiency is also high on the
agenda at EuroDebt, particularly when dealing with multiple creditors, their
agents and their lawyers, and all the additional correspondence.
“We are currently in the process of restructuring our training programmes, first
to keep abreast of legislative issues, and secondly, we are liaising with
organisations like the Money Advice Trust to further understand the pressure the
consumer faces when under stress and establish best practice in debt advice
across the commercial and charitable sectors.
"We are also addressing exactly what collection agencies can and cannot do –
unfortunately, we have found incidents of genuine harassment and pressure which
is not in keeping with the OFT or CAB guidelines”, said Kevin.
Debt sale
Debt Sale is an issue that is having a big impact on those arranging debt
management plans.
“What we are finding is the crossing of borders on the debt buyers side
with what is going on in the debt advisers side.
"During the lifetime of a debt management plan, a debt can change hands two
or three times.
"In many instances, the buyer of the debt does not know that it is subject to
a debt management programme when that debt is acquired.
"So you go through all the same issues each time the business is put into the
hands of a new collection agency.
"As a result, the consumer can get harassed unnecessarily – adding to their
stress”, said Kevin.
“Although we are seeing more debt being sold at a primary level, we are also
seeing an increase of debt being sold at a secondary level.
"There are challenges facing the market, particularly at a political level.
The banks themselves are raising awareness without necessarily addressing the
root of the problem – responsible lending and borrowing in balance."
Educating the consumer
"We need to raise education of the consumer.
"Not only does that happen at our initial visit, but also over the period of
the debt management programme.
"People grow wiser and have a better understanding of credit and debt, to the
extent that some clients actually learn to save money.”
One of the things EuroDebt is looking at now is how do you make sure that the
repatriation is concluded so that, at the end of the programme, the client is
actually aware of their own credit rating is, and can see that their default
record has been satisfied.
“The onus here is to make sure that the debtor’s information is not lost”,
explained Kevin.
“This overlaps with what the Debt Buyers & Sellers Group is trying to do.
It is important that when a debt is sold, the default record is properly
transferred – so that someone’s history just does not disappear, and it can be
seen on the Credit Reference Agency files that payments made against that
default have been properly shown.
At the end of the day, someone who has shown and track record of meeting
payments on a long-term basis (satisfying a default or judgment) is a better
credit risk than someone who left unsatisfied debts behind”, concluded
Bramham.
Carol Baker has
been the Editor and Marketing Director of Credit Control Journal since 1992.
Carol is the author of three books, ‘Computer Applications in Credit’, ‘Export Credit’ and ‘Retention of Title’, and specialises in corporate insolvency, banking law, fraud, trespass in insolvency, corporate credit and asset management, and consumer finance.
Source:
Getting Paid (Volume 27, No
7/8,
2006)
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