Time to regulate commercial debt management firms

The collapse of Home Payments Ltd highlighted the urgent need to regulate commercial fee-charging debt management firms.

Highly controversial, these firms sell products called debt management plans to distressed, vulnerable consumers. Like Home Payments, they provide a payment service in handling and distributing people’s money to their creditors.

Since 2009, any firm making payment services available to consumers has to be authorised and regulated by the Central Bank under the European Payment Services Directive. Regulations require firms to establish whether or not they should be authorised.

Should the Central Bank hold that debt managers must be authorised firms, they could be instructed to cease making payments on behalf of consumers. It’s a move that would undermine their profit model which is entirely dependent on hefty fees deducted from money handled for consumers. Firms operating from Britain would also have to cease handling money, unless authorised by the British Financial Services Authority.

Asked of its position, the Irish Bankers Federation, which is on record for some time in calling for the regulation of commercial debt management companies, said it believes they “should be regulated as payment institutions under the Payment Services Directive where appropriate and this position was made known to the Central Bank in the past.”

The sector is heavily populated by British/Irish joint venture firms and firms operating directly from Britain where they have come in for stinging criticism from the OFT (Office of Fair Trading) which licenses them as high risk consumer protection operations.

Since the Home Payments scandal broke, the Central Bank has sought to clarify the debt manager business model. It says it “has written to banks and insurers seeking details on firms that may be acting as payment agents for customers and to advise their customers that any money held by such firms are not covered by the Deposit Protection Scheme.”  Having identified a list of “approximately a dozen companies” that appear to be offering debt management/debt advice type services to consumers, it is writing to inform them “that they need to establish whether their activities require authorisation under the PSD, and if such activities are undertaken by the firms they will have to cease immediately.”

When contacted, Moneyvillage Ltd, a domestic joint venture operation set up in January last year, said that it has responded to the bank saying its position is that it does not have to be authorised. The company which  handles and distributes consumer’s money, is a founding member the Debt Managers Association of Ireland, a trade body set up last year to advocate for regulation.

A spokesman for Irish Mortgage Corporation, which recently closed down its stand alone debt management firm Credycare, believes that debt managers should be regulated and people’s money protected.

He explained Credycare closed as it found it couldn’t charge the level of fees required to become profitable. It’s a move that begs questions of the viability of other operations. If it’s the case that these firms cannot achieve commercial viability then they may not pass muster with the Central Bank’s stringent authorisation criteria.

MABS also wants to see commercial debt managers regulated. As they only deal with unsecured debt and not the totality of consumer indebtedness, it believes they risk making problems worse and not better for people. The Consumer Affairs Association, seriously concerned at the lack of consumer protection said “the way is clear for struggling consumers to be burned severely and yet the danger is being ignored” 

The Central Bank may have a quite effective mechanism to respond to calls for regulation without the need for new legislation or regulations. By requiring commercial debt managers to be authorised payment service agents, they would be regulated and supervised for solvency, fitness and probity and commercial viability. Working with the National Consumer Agency, the bank could issue strict guidelines on other consumer protection aspects such as misleading advertising and unfair terms. This approach was brought to the attention of both bodies by me in February 2010.

It seems that with a little bit of lateral thinking, fee-charging commercial debt mangers could be regulated and a glaring gap in consumer protection closed off.  

A version of this article appeared in the Irish Examiner, Business Section, Monday 3rd October 2011