Requests by people desperately trying to raise finance to pay unsecured debts
by re-mortgaging hit a brick wall when First Direct, owned by the international
banking giant HSBC, sparked a panic when it withdrew its entire mortgage product
range to new customers.
Commentators would argue that for a bank of HSBC's size to withdraw its products
in such a manner, raises questions on just how hard the impact of the 'sub
prime' market has actually hit the bank.
As the HSBC shores up its finances, the Co-operative Bank and other high street
banks followed suit by withdrawing products, while two 'sub-prime' mortgage
lenders pulled out of the UK completely.
According to Moneyfacts, in the space of just one day, more than 300 mortgage
deals vanished from the market.
Almost 3,000 were withdrawn in March, taking the number of products available to
fewer than 5,000.
To put this into perspective, the figure stood at more than 15,000 before the
credit crunch began last summer.
The shutdown of the discount mortgage market is likely to prove the last straw
for heavily indebted households.
Number of declined applications soars
A survey by debt management specialists, EuroDebt, revealed that 94% of brokers
have seen more clients declined in the last
six months than ever before.
"Our survey and on-going workshops have demonstrated that the vast majority of
brokers have seen an increase in the last six
months in the number of clients not meeting tougher lending criteria," explained
Kevin Still, Director of EuroDebt Financial
"Almost all of the brokers surveyed offer both prime and sub-prime mortgages,
and of these, 9% think that there has been an
increase of over 50% in the number of clients being refused, while 32% think
there has been an increase of between 20-50%.
"This is alarming evidence that overstretched homebuyers are turning to credit
cards, personal loans and overdrafts.
"The current economy means that for those looking to consolidate their debts,
re-mortgage may not be viable.
"But a smaller secured loan alongside a Debt Management Plan may be an effective
transitional strategy until products return
to market and the consumer has a period of stability with regard to making
agreed reduced repayments to their unsecured
"This is particularly true if mortgage arrears and/or other priority creditor
arrears need to be tackled in the first 12
months of the Debt Management Plan, which we are seeing increasing evidence of."
One of the key issues to be faced in difficult times is unsecured creditor
attitudes to defaulting accounts or freezing
interest & charges on accounts and holding the CAIS/INSIGHT/SHARE status code
with the DMP flag set on, pending resumption of
This requires greater trust between creditors and debt management companies in
the on-going liaison process. But many banks
are ill-equipped to comply with the new Banking Code on Consumer Debt Management
which came into force at the end of April.
Under the new UK voluntary Banking Code, banks and building societies should
provide more support to consumers heading into
debt problems, including actively identifying and contacting those customers who
may be at risk.
Banks already have a great deal of data in place to build an accurate profile of
their borrowers but historically this data
has only been used to assess their customers' financial circumstances when
applying for new credit.
The challenge now facing the banking industry is to proactively identify those
existing customers who are falling into debt.
Credit cards, for example, are often the first to show signs of stress.
If a customer increases their cash withdrawals and, at the same time, reduces
their monthly repayment to a minimum, these two
combined behaviours are a strong indicator that the customer is struggling to
meet their financial commitments.
Another example is when cash withdrawals from a customer's credit card account
coincide with deposits being made into a
current account, to keep it within the overdraft limit to pay bills or other
With over 18,000 people in active debt management plans, representing over £450
million of debt with over 3,700 creditors and
150,000 credit agreements, the schemes have historically depended on the
voluntary participation of both the debtor and their
As a result, creditor liaison has become a core part of EuroDebt's model in
working more effectively with creditors as Kevin
"If the creditor understands what a debt management company (whether they are in
the free or fee charging sector) actually
does, then they become confident that the debtor is not about to escape.
"EuroDebt's dedicated Creditor Liaison Officer, Dionne Stocking, routinely
visits all the main creditors, collectors and debt
buyers so that they are fully aware of our work and its value to them.
"Dionne identifies whether the creditor has a genuine hardship unit or a policy
of assessing hardship cases. For bigger or
more complex groups, it is assessing how they communicate within their own
"For instance, HSBC Bank, which has HFC and M&S under its portfolio, may have
uniformity in some parts of the group, but not
"This information is then relayed to our front line staff so that they know who
the right creditor contact is from the very
outset to accelerate the communication process.
"And this dramatically increases the chances of getting proposals accepted and
getting interest and charges frozen."
Licencing approved operators of debt management plans
While under the new Tribunals, Court and Enforcement Act, the Justice Secretary
Jack Straw will be able to licence approved
operators of debt management plans and debt advisory charities, giving them the
power to force creditors to accept the plans
that they have drawn up.
EuroDebt believes that getting creditors to agree to debt management plans
voluntarily allows them to re-educate the debtor
so that they develop a track record of meeting payments on a long-term basis.
As a result, EuroDebt focuses very much on creating sustainable payment plans.
By taking a face-to-face model approach with its home visits, it is able to
determine what is truly affordable for the
debtor, and identify any inflated expenses or people who are actually trying to
hide away from their creditors instead of
facing up to the reality of their situation.
"But more importantly," says Richard Bramham, Managing Director, EuroDebt, "we
help debtors do something to improve their
situation. It can be a slow, but methodical process which certainly pay
dividends for the debtor, especially as creditors
meetings are far more warming in accepting payment plans.
Sometimes there will be quite a major creditor who has never met a third party
debt management company but Dionne has made
very successful inroads and opened doors both ways to find a common ground and
"The level of debtor stress continues to be a big concern for us" said Richard.
"In July 2007 we introduced a 'cooling off' clause in our contract with the
option to waive that right if the client wants us
to act for them immediately.
This allows us to inform creditors on day two of our appointment, irrespective
of whether any fees have been paid to us.
The effect of this is to stop further collections activities and to request that
interest and charges are frozen at that
"Ultimately in 95.6% of those requests, we have been successful in freezing
interest and charges.
"For those creditors who have a hardship unit, they are able to move the case
immediately to that unit, or advise the
collections agency of the hardship case so that the aggressive action normally
taken by outsourced collection agencies can
"This gives a fairly immediately stress relief to the debtor, and a high degree
of comfort from the debtor's point of view
knowing that the balance is not going to continue to rise."
Alongside this, as many of its clients may not be able to fund the initial
instruction fee in a single payment, EuroDebt now
operates a scheme that sees token payments made to creditors in months 2 and 3
of the plan, with clients moving on to the
full payment plan by month 4.
Also, the company is far more committed to taking on pro-bono cases where there
is a genuine hardship and it feels that debt
management is in the debtor's best interest.
From a creditor's point of view, they get much more certainty on the payment
process if someone funds the instruction fee
earlier before going on to a proper full payment plan.
For EuroDebt the goal is to ensure that both creditors and debtors are satisfied
with the process and client surveys show
exceptional results, not only from the debtors' point of view, but also of
ongoing value the plans have for creditors.
"We now survey all new clients six months after they signed their agreement"
"The results echo our survey of our main client base, but as these new clients
have only recently come onto their plans, the
stress is perhaps most acute.
"Yet some of the testimonials we have received have been quite exceptional -
some of them are life saving comments.
"We have also introduced fee capping so that there is a limit to both our
instruction fee and to our overall fees to give a
finite position with regards to how long our fees will need to continue to be
"To some extent, we have to be guided by what the market dictates and can bear,
and clearly the banks and finance houses are
looking to provide pressure, particularly to insolvency practitioners with
regard to their fees and how speedily they
disburse money back to the banks - which used to be around the end of year two,
if they are lucky.
"But unlike insolvency practitioners, debt management companies are able to
disburse funds to creditors very early in the
life cycle of a debt management plan."
"Right at the very start of our client relationship we request that the client
completes the Experian Subject Access Form -
paid for by us" said Kevin Still.
"The report is then returned and we use that information to validate the
client's financial planner information in terms of
the number of creditors, creditor information and the balance information on the
"Equally importantly for us, and one of the things that regularly comes out of
the Office of Fair Trading communications is
what impact a debt management plan will have on that client's credit standing.
"So most of our front line staff have been trained by the former Director of
Regulatory Affairs at Experian so that they know
how to interpret a credit report.
"Therefore, when we send out our draft statement of affairs we will be able to
comment with confidence on what the credit
report is actually saying.
"We are also able to quote on what the expectations are for the report's
improvement over the course of the debt management
EuroDebt sees the credit report as a key tool in is annual review process with
clients, along with regular bulk balance and
status updates from creditors when EuroDebt confirms the accounts they are
"This electronic and encrypted process allows an efficient exchange of
information between the debt manager and the
creditors, allowing EuroDebt to focus on accounts where charges are still being
applied or where the appropriate status codes
haven't been set.
Since the move to its new offices in Priory Park, Bedford last July, EuroDebt
has continued to grow at a steady pace,
reflecting the company's predictions that there will be a doubling in the
requirement for professionally managed debt
solutions in 2008.
Through EuroDebt's flexible introducer agreements, brokers can simply refer
cases or submit a full 'fact find' and the
company already has over 300 Introducers, typically IFAs and mortgage brokers,
reaping the benefits of the system.
The success of its workshops goes further to illustrate the growing uptake of
debt management by brokers as a means of
supporting clients in difficulty and securing the future of their business.
Indeed some brokers have taken advantage of the free co-branded web portal with
EuroDebt as part of their Introducer
Agreement, which allows them to offer referrals for clients in financial
difficulty who require an urgent "no obligation"
face-to-face meeting with a trained debt advisor.
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.
Getting Paid (Volume 27, No