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ombudsman news

issue 132

March 2016

ombudsman focus: debt management

It's estimated that Citizens Advice Bureaux in England and Wales are dealing with over 4,000 new debt problems each day. And according to debt charity StepChange, more than half a million people contacted them for debt advice over the last year.

In light of figures like these, it's perhaps not surprising that a significant proportion of the complaints we receive involve people experiencing financial difficulties. A number of these people have been paying for help to get on top of their debts - but are unhappy with the service they've received from the commercial debt management company involved.

Debt management businesses are covered by the Financial Conduct Authority (FCA) - meaning we can look into complaints about them. In this ombudsman focus, senior ombudsman Juliana Francis explains more about the problems we see with debt management services - and how these could be prevented.

compared with some other types of complaints, volumes of complaints about debt management seem relatively low. If levels of personal debt are high, why aren't you hearing more about debt management?

Even though these complaints make up a relatively small proportion of our work, the impact on the individual people involved can be significant. They're some of the most upsetting cases I see as an ombudsman.

People don't turn to debt management services lightly. If their level of debt wasn't a worry - or they'd had the confidence to deal with creditors themselves - they wouldn't have sought third-party help in the first place. And on top of the practical implications, struggling with debt may well have an impact on people's mental health.

So whatever the raw figures, I think it's really important we share what we're hearing. From our independent position, we can help debt managers to improve their service and stop things going wrong - and help to improve people's understanding of what they're signing up to and what to do if they're unhappy.

Actually, the fact that we're not seeing large volumes of complaints right now could speak to a couple of things.

First, people don't always get help with their debts - paid-for or otherwise. They may tell friends or colleagues - but we know from the complaints that do reach us that people are often worried or embarrassed about seeking help. And those people who are already using a debt management service might not know they've got a right to complain if they're unhappy.

It's also the case that people tend to complain when their debt management plan has come to an end - or is some way down the line. It's often only after a few years that people find out they haven't paid off as much debt as they'd expected.

Occasionally, we hear from people who've received a court summons out of the blue - relating to a debt they thought their debt manager had been paying off for them. Worryingly, people are also contacting us after hearing their debt manager has gone out of business. At this point, it can be very difficult for us to find a satisfactory way forward.

but debt management isn't always a bad option, is it?

There are a range of options for dealing with serious debt - from debt management plans and individual voluntary arrangements, right through to bankruptcy. The ins-and-outs can be complicated. And if someone's dealing with the stress of high levels of debt across a number of different creditors, I think it's understandable they might want support to turn things round.

The fact is there are a number of organisations who don't charge for debt management services. But as I've mentioned, in the first instance people may talk about their troubles to friends or organisations they're familiar with - who aren't generally debt experts, and don't know about all the options. So people don't always know they can get help for free.

It's worth mentioning that people don't always know about our free service, either. We're aware that a number of claims management companies are contacting people who are on debt management plans. But - as we've been saying for years - it's simply not necessary for people to pay someone to complain for them. And in some cases, a claims manager's fees could leave someone in an even worse financial position.

so what types of things are you seeing?

Last year - after reviewing how the debt management market was working - the Financial Conduct Authority (FCA) said they had a number of concerns. Put simply, they found many instances of debt managers not following the rules - which meant many customers, including many vulnerable people, were being treated unfairly.

That's clearly worrying - not least because both the FCA's research and our own experience suggest people don't tend to shop around for debt management services. They're really relying on the help and advice they get from whichever debt manager they contact. But if that help and advice is inappropriate, things may simply get worse.

The things the FCA saw going wrong are reflected in the complaints that we see. For example, people often contact us after finding out how much of their monthly payments have been going towards the debt manager's fees - rather than towards paying off their debt. Especially if they've had an arrangement for some years, people can be very upset to realise they've barely moved forward.

consumer complains that debt manager hasn't been passing on payments to creditors

Mrs C - who'd been on a debt management plan for some months - received a letter from one of her creditors saying they hadn't received any payments.

Mrs C made a complaint, which was eventually escalated to us. Comparing the debt manager's records with information provided by Mrs C's creditors, we found the debt manager hadn't been passing on all the payments they should have.

We told the debt manager to refund the payments that they hadn't passed on, adding interest - and to cover the fees that Mrs C's different creditors had applied to her accounts as a result.

During our involvement, a creditor who'd put Mrs C's account into default agreed to remove the default - after learning from us that the failing was on the debt manager's part.

Mrs C told us she'd closed her account and set up a new debt management plan with a free provider - which she hadn't previously known existed.

but surely people would have known they had to pay?

People generally know they're not getting a service for free. But the debt manager's fee structure may be complex. And in many cases, we find the debt manager involved simply didn't make it clear enough exactly what was happening to their customer's money.

For example, we often see situations where a debt manager has switched from a debt-management plan to a so-called "debt reduction" strategy - where they negotiate with a creditor to try to reduce the total debt. While they're doing this, they're passing on less of the payments to the creditor - and taking more in fees. So the fees may work up from say, £25, to £200 or more.

Some people may feel it's unfair to charge a fee at all. And free help is available - if people know about it. But for those debt managers who do charge a fee, the rules say that at least half someone's monthly payments should be going to their creditors. However clearly a debt manager explains that 90% of payments will be taken in fees, it's not fair and it's not legal.

aside from problems with fees, what else do you see?

We've also seen issues with the quality of advice that debt managers are giving people about how to deal with their debt. Again, this reflects the FCA's conclusion that, while there's room for improvement among free debt managers, the standard of paid-for debt advice was unacceptably low.

Take the "debt-reduction" strategy I mentioned. The code of practice for debt managers says they should act in their customers' best interests. And if we find these sorts of negotiations have dragged on, we're unlikely to agree this has happened. That's because ultimately, the creditor might not agree to reduce the debt. In the meantime, the customer has paid a substantial amount of fees - when they could have been reducing their debt faster.

We've also seen some instances of debt managers making false promises - such as telling people their debt will be cleared in an unrealistically short time. And we've found debt managers don't always explain the impact that setting up a debt management arrangement will have on people's credit file.

As I mentioned earlier, at the point they seek help, many people aren't in a position to shop around - and don't have the wider knowledge needed to question what they're being told.

how do you go about resolving complaints about debt management?

Unfortunately, some people who contact us don't have much paperwork relating to what they've signed up to. I think that's understandable - bearing in mind many people we speak to have had their debt management arrangement for some years, while at the same time facing precarious and unpredictable circumstances.

For their part, debt managers can't always give us evidence about what they told their customer - or how they've handled their customer's money. So we can see the money going from someone's bank account to the debt manager, but the debt manager can't explain what they've done with it.

These things certainly make it harder for us to establish exactly what's gone on. But like any other type of complaint, we reach our answer based on what we believe is most likely to have happened - after listening to what both sides have to say.

consumer complains that debt manager hasn't settled her debts

Miss F contacted us after closing her account with a debt management company. She said the debt manager hadn't settled her debts, despite saying they had.

Miss F sent us bank statements showing the monthly payments she'd made to the debt manager. And the debt manager sent us internal records indicating they'd paid Miss F's creditors.

But the debt manager's records didn't tally with the information we received from Miss F's different creditors about how much they'd each received. The evidence suggested that the debt manager hadn't been paying Miss F's debts.

We told the debt manager to refund all the money they'd taken from Miss F, with interest - and to pay her £200 for handling her complaint poorly and causing unnecessary stress.

you mentioned debt managers going out of business - can you explain more about that?

Over the past few years, a number of debt management companies have left the market or gone out of business - which is clearly very worrying for people who've been relying on them.

It also means that if someone's got a valid complaint about a debt manager, the options become very limited. For consumer credit businesses that were previously licensed by the Office of Fair Trading - and which are now covered by the FCA - there's currently no "final safety net" like the Financial Services Compensation Scheme.

so how can you help?

If the company's gone out of business, we'll look into whether funds are available to compensate customers. If they are, then we're often able to work with the administrator or liquidator to get the compensation paid. If not, then we'll explain the position to any customers who contact us.

Either way, the most constructive recommendation we can make is that people contact a free debt management service - who can review their arrangements and help them continue on the way to becoming debt-free.

consumer complains that debt manager - in liquidation - hasn't been paying creditors

Mr N emailed us after his debt management company went into administration. He'd been very upset to find out that the debt manager hadn't been paying his creditors.

We contacted the debt manager's administrators - who told us that the debt manager wasn't in a position to pay compensation.

When we explained this to Mr N, he was understandably concerned. We suggested he stay in touch with the administrators - who'd already written to him - in case the position changed.

We also encouraged Mr N to let his creditors know what had happened - and to contact a free debt advice service.

Disappointingly, we also encounter problems in resolving complaints with debt managers who are still in business. We hear from a significant number of people who've tried to raise their concerns with their debt manager - but simply haven't got a response. And sometimes, the debt manager doesn't respond to us either.

These communication issues can have very serious consequences. If the trouble's been going on for some time, by the time we get involved people may have run up unmanageable debt interest and charges - or in the worst cases, may be threatened with court action.

Not responding to a complaint - and leaving a customer in such a vulnerable position - clearly isn't acceptable. So we'll report unresponsive debt managers to the FCA.

If we decide someone's out of pocket, we'll be upfront about the likelihood of getting their money back - and explain the option of enforcing our ombudsmen's decisions in court.

aside from reporting poor practice to the FCA, how can you stop things going wrong?

It's not right that taking steps to get help with debt could result in even deeper difficulties - including becoming a target for claims management companies. So we'll continue to share what we're seeing - with the FCA, with debt managers directly, as well as through ombudsman news.

Importantly, we'll also keep conversations going as part of our outreach with local communities. By explaining to front-line advisers what we're seeing - and by hearing about the problems people are bringing to them - we can work together to make sure people are getting the help they need.

That's not just about knowing we're here if something goes wrong. As I've explained, by the time a complaint reaches us, the options may be very limited. It's about identifying why people are getting into trouble with creditors in the first place - and what we can do to stop that happening.

And we'll continue to maintain our relationships with organisations offering free debt advice. That way, when complaints are escalated to us, we're able to signpost people efficiently to the specialist support they need to get things on track - which generally goes beyond putting right one individual problem with a debt manager.

upcoming events: meet the ombudsman roadshow, working together with the ombudsman, payday lending workshop

ombudsman news

Juliana Francis,
senior ombudsman

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.