We need an integrated approach to solve debt crisis

Leaving debt resolution to individual creditors and 'case by case' arrangements is a recipe for disaster, writes Bill Hobbs

Most people have no idea of how to plan a way out of unaffordable debt. Even where they access information and advice, they will not have the expertise and skill to negotiate with their many lenders.

Convened last week to consider the Keane report on mortgage arrears, Social Protection Minister Joan Burton’s stakeholder forum heard from consumer protection advocates of the urgent need to adopt an integrated approach to resolving the consumer debt crisis. 

They maintain that as mortgage debt cannot be dealt with in isolation, any consumer protection response must deal with all debts. Participants also highlighted how, despite the Central Bank’s mortgage arrears resolution process and improved consumer protection codes, lenders are treating indebted consumers as wallets to be sweated to maximise loan repayments. If the intention is to ensure fair treatment, it seems that regulatory codes and supervision are not having the desired effect.

Government’s response to the consumer debt crisis needs to appreciate the totality of consumer protection solutions needed. While the Keane report recommended the establishment of an “independent mortgage advice function” which would “advise and support mortgage holders in assessing their options”, its response falls far short of the protection supports required. Critically it failed to frame its solutions within a properly constructed debt mediation approach through which people are ensured fair treatment and proper standards of customer care by their lenders. 

This is to be expected as one of the problems experts have is they cannot know what ordinary people don’t know. Because financial and legal experts know too much they cannot put themselves in a position of knowing nothing and will always assume people are more skilled than they are. Most people do not have the experience or competence to assess their financial situation. Nor do they have the skills to propose the solutions needed and they do not have the bargaining power or status to negotiate agreements with their many lenders. They are, in effect, powerless and acutely exposed to lenders' exploitative behaviour within a non-transparent system that accommodates bankers’ insistence on a “case by case” approach.

Can all bankers be trusted to treat people fairly and equitably and not to favour some over others? There are indications that some banks would welcome a “total debt” mediation and settlement system that they can themselves can rely on.

It makes absolute sense that mortgage affordability cannot be dealt with without also dealing with all other debts.  The scale of debt settlements and scope of solutions needed to work out billions in unaffordable debt and unsustainable mortgages is seen in what little data is being made publically available. With banking and credit union consumer expected loan losses amounting to over €13bn, chances are that close to 100,000 people will need to arrange over well over 300,000 debt settlement agreements with dozens of creditors that include not only banks and credit unions but revenue, utility companies and local authorities.

Leaving debt resolution to individual creditors and their “case by case” arrangements is a recipe for a social and economic crisis. It’s in Government’s, lenders, other creditors and consumers best interests that a transparent system is established through which people can arrange to settle their debts and creditors can face up to the business of debt settlement.

Consumers will be best protected by a dedicated, expert debt advice and resolution system that proposes and achieves debt settlement arrangements and agreements on their behalf. Such a system would see competent, experience, qualified advisors proposing and agreeing realistic mortgage solutions and other personal debt settlement arrangements with a consumer’s creditors. Properly structured this approach would ensure fair treatment and high standards of customer care. It would also integrate with the state’s new insolvency regime which will see a legally enforceable non-court based debt settlement regime through which people will earn a fresh start after a short period of time. Indications are this regime will include for mortgage debt and allow a fresh start after three years.

The focus of a debt advisory and resolution service should be on establishing and mediating sustainable agreements and getting lender’s agreement on these. It should also be a consumer protection advocate with the status and muscle to get banks and others to treat people fairly and ensure best practice in consumer protection. 

But such a system cannot be shoe-horned into existing state supports as they are not designed to provide the scale and depth of expert based service required. Many observers consider existing services have become captive of banker’s interests.

Any new national debt advice and settlement mediation service will have to be built as a new service and not a bolt-on to existing service providers. It should also have the reputational standing and status of a senior stakeholder with powers to ensure fair treatment. 

A version of this article appeared in the Irish Examiner, Business Section, Monday 14th November 2011.