Regulate debt managers before it's too late

Financially vulnerable consumers have no protection from unregulated debt management companies, writes Bill Hobbs.

 

It is said that regulators always arrive far too late and out of breath at the scene of an accident. And what an accident to arrive at! Financial service firms’ marketing of dangerous products destroyed hundreds of billions in household wealth, including people’s pensions and left tens of thousands of insolvent households struggling to pay loans they can no longer afford.

 

Responsible for consumer protection, will the Financial Regulator act to protect the most vulnerable of all – people struggling with unaffordable debt who are being exploited by a new form of financial service firm, the commercial debt manager?

 

Leading consumer protection experts maintain financial service firm regulation conflicts with consumer protection. Yet Government maintains the regulator should both ensure firm’s safety and soundness and protect people from their predilection to maximise profits from marketing dangerous products. But the regulator says regulating products for safety would stifle innovation. Instead its protection focus is to ensure firms are satisfied consumers appreciate and understand what they are buying from them.

 

It is now talking of a new sub-category of consumer it calls the “vulnerable consumer” whom it says should be afforded higher levels of protection. Everywhere else consumer advocates maintain that all consumers are vulnerable unless proved otherwise. They say financial products are far too complex and should be simplified using clear unambiguous contracts. They see financial innovation for what it really is – the opportunistic marketing of dangerous products.

 

Financially vulnerable consumers have no protection at all from a recent, potentially dangerous innovation - the unregulated, unlicensed commercial debt management company. These are the outfits who say they negotiate affordable debt repayment plans with lenders. Busy exploiting a gap in consumer protection, many are abusively marketing products to vulnerable people leading them to believe they will arrange to write off their debts but only if they buy their debt management plans. They can charge over €500 to negotiate a plan and during its lifetime levy thousands in fees based on how much people pay over to them monthly to be disbursed to lenders. Many are mortgage brokerage operations that, having profited from boom time reckless mortgage origination, are now looking to profit from a bust time household indebtedness they helped to create.

 

Search for “debt advice” or “debt managers” on the internet and a plethora of new businesses pop up. Few bother identifying who they are and some brazenly imply they are “regulated”. Others are saying they self-regulate. Some are subsidiaries of mortgage brokers and investment intermediaries. Others are non-transparent thin fronts for British based operators. Many claim they can have people’s debts written off. Those that don’t, verbally assure their customers that buying their debt management plans will result in debts being written off. Sales tactics used to hook vulnerable consumers include talking up how their products relieve the psychological stress of debt. Many are blatantly piggy backing the good work done by MABS and others who have long campaigned for a proper debt resolution system.

 

Commercial debt managers pose two quite serious consumer protection risks that must be regulated. The first is they are in the business of profiting from providing financial products and financial advice. If they were advising on borrowing or investing money they would have to be regulated, comply with business conduct rules and consumer protection codes. Their directors and managers would have to be fit and proper individuals. Their staff would have to be qualified financial advisors and they would have to divulge their fees and charges. They would have to be licensed to operate and subject to sanctions if they broke the rules. Their products would carry health warnings and their customers would have the right to complain to the Financial Ombudsman.

 

The second and most glaring consumer risk relates to the way in which they handle people’s money. Debt managers make their profits from getting people to pay over to them their monthly loan repayments which they then disburse to lenders. They charge a fee for this service based on a percentage of the amount managed. This is a money transmission business that should be regulated. Payment service providers here must be licensed by the Central Bank and regulated under its rules. In other countries such as South Africa, debt counsellors are banned from handling client’s money. Not so here, where their product provider, financial advisory and money transmission operations are currently outside of our regulatory bailiwick.

 

How have the Financial Regulator, the National Consumer Agency and relevant Government departmental officials responded? It seems no one is interested in bringing these businesses under their wing. Is this another case of waiting for an all too predictable public scandal, when people’s money has been lost before acting? I should hope not. Rushing into the stable after the horse has bolted and demanding shiny new shovels is no longer an acceptable form of consumer protection.

 

A version of this article appeared in the Irish Examiner, Business Section, Monday November 1st 2010.