Why do people pay for debt advice?

Firstly, to declare my interest, I am the media officer for the Money Advice Trust, a debt advice charity which, amongst plenty of other things, runs National Debtline.

Evidence shows that many people who go to a commercial debt management organisation have not made choice between free and fee-charging organisations, but have instead responded directly to advertising and/or are unaware of the free alternatives.

You only have to Google ‘free debt help’ and read the ads generated at the top of the page to understand how a vulnerable person struggling with debts could be misled.

Greater awareness of the excellent advice availiable from the likes of National Debtline, CCCS and Citizens Advice would go a long way to ensuring debtors can make an informed choice about how to deal with their debts, but achieving that awareness without the budget for large scale advertising is not easy.

There will always be some people who prefer to pay for debt management services. However, consumers should be given the opportunity to make the decision between free and fee charging alternatives from an informed position. Perhaps if fee charging companies were obliged to point out to new customers the existence of free alternatives, we might get a more accurate view of how many people would prefer to pay for a service when a free alternative is readily available.

As the Media Relations Manager at debt charity Consumer Credit Counselling Service (CCCS), I agree that it is often about awareness.

Facing unmanageable debt is incredibly stressful and people tend to stick to the first port in a storm be it a charity such as CCCS, National Debtline or Citizens Advice, who provide free debt advice, or a fee charging debt company.

That is why it is so important that people are aware of the choices available to them before they choose who to seek help from with their debt problems. Too many aren’t.

I once managed several Supporting People funded services to prevent homelessness. Many clients were paying debt management companies to manage their debt problems. By referring these clients to Citizens Advice, we were able to reduce their monthly expenditure by a considerable amount, and also teach them how to access free services should they need to in the future.

The problem is that debt management services use the same tactics and advertising methords as the loan companies that get people into debt in the first place. If you’re vulnerable to one you will be vulnerable to the other.

A long time ago, I was a PR for one of the debt advisory firms, so I will admit that I might not be the most impartial observer of this. I am however out of the game and am looking at this as an educated observer – here’s my gut feeling:

Advice and execution are valuable services. Why should they be free, if they will save a client significant sums of money and still enable the client to either service their debt or consider other options, such as IVA?

Any organsiation that receives its incentivisation from the creditor community, instead of the debtor cannot be considered impartial, but will be acting in the best interests of either its shareholders or its clients. Is the advice really the best that can be offered to the debtor, or are they simply trying to provide the best possible return to creditors?

Hidden backing in financial services is a nightmare – debtors don’t know who they are dealing with. Total transparency should be the case, so that the full equity capital structure of all debt advisory firms, and charities, can be see. Debtors then can make their choice about who they are dealing with and whether they are actually getting best advice.

Finally a lot of this comes down to apalling risk management from the major lendors. Desperate to gain income gains to impress their shareholders by growth in difficult markets, aggressive marketing at lower earners has been the norm for years. The problem is that debt is being allowed to rack up, even though it is unservicable, as either selling the debt, or writing it off makes a loss that would have to be reported and would lead to the following:

* managers losing their jobs
* a complete loss of trust in the lender by both its equity shareholders and debt counterparties that provide the necessary liquidy for arbitrage
*share prices falling through the floor leading to further corporate restructuring and the potential destruction of the institution

This is what happened when the bottom fell out of the institutional credit market. It is not impossible that it could have similar effects in the retail market.

Would CCCS and other actors on this stage agree that the problem with debt is as much with the creditor sector for manipulating and then suffocating their clients, as it is with consumers for being unable to manage their money?

Hi
Given some of the comments on the CAB – heres a defence of sort………….

There have been many healthy and heated debates between the free and fee charging debt advice sectors for years now and nothing seems to change here.

If someone wishes to pay for a service and they can afford it, then at the end of the day it is rightly their choice. It is also their right to be given full and appropriate advice and not just what makes the provider the most money.

With regard to whether the above is always the case then you do not have to look any further than the OFT reports and articles in the papers and on TV for that matter. Anybody with any serious knowledge of debt advice ‘hand on heart’ will know this is nothing new.

In my opinion there is a place for both the free and fee charging sectors and to be honest I know people who are highly satisfied with the service they have received from both, but this OFT report is pretty damning in parts, that cannot be denied or hidden by a smokescreen.

The CAB’s mostly operate an open door service along with telephone enquiry / triage lines and don’t have the luxury of being able to cherry pick their clients. They see many who people who have first been to a fee charger and end up having to sort out the mess or if they cannot afford or do not want to pay for the service. Many people end up at the CAB with failing or failed IVA’s which creates further work. All this of course makes a mockery of claims by some about CAB waiting times etc.

I understand that unlike the vast majority of the fee chargers the CAB’s advise on and assist with Debt Relief Orders and The Mortgage Rescue Scheme both of which are legitimate options and remedies that should really always be considered along with other solutions.

The CABs take on the most vulnerable and time consuming multi enquiry cases (inc referral from other agencies) having to deal with bailffs, court hearings, priority debts, threatened & actual homelessness etc often where there is no disposable income (usually not the sort of cases you will find the fee chargers getting too involved with). The CAB’S will look at income maximisation, benefit & tax credit claims & appeals as this is important and overlaps with genuine debt advice. These type of cases can save the Local Authorities thousands and can benefit the local and national economy by millions overall.

The CAB’s make untold numbers of successful applications to local and national charities (often for the most vulnerable) that can be of overall benefit to clients in the the hundreds of thousands and perhaps millions.

The CAB is involved in an award winning partnership with the Royal Britsh Legion that provides benefit, debt advice and support to servicemen and their families right across the country.

The CAB is involved with the Macmillan Cancer Project that again provides benefit, debt advice and vital support for cancer sufferers and their families.

Are there people who seriously want to see an end to all this and maybe have it replaced say…by profit making companies?

The CAB’s are not perfect – but who is?

I have to say there does seem to be people who criticise the CAB’s who perhaps have little or no true knowledge of how they actually operate and the service they provide and maybe are not too experienced in genuine debt advice either.

One can only wonder why this is?

Hi,

Although i understand both sides of this argument, it is and always will be down to personal opinion. There are too many assumptions made about fee and non-fee charging debt management companies. The free services do the upmost they can to help anyone who is in financial strain but i do feel that due to a large number of fee charging debt management companies not meeting the minimum guidelines that were set by the OFT has hit consumer confidence in this sector. What needs to be concidered is that there are actually 18 fee charging companies out there who are members of DEMSA and have their code of conduct approved by the OFT.

So what needs to be taken into account when discussing fee charging debt managment companies is to be fair in what your saying and, as always, do your research.

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