New Industry Statistics Highlight Need For Tighter Debt Advice Regulation

Recent industry research on Debt Management Plans (DMPs) has revealed the financial nightmare many consumers are facing due to ill-advised debt solution schemes – further reinforcing the need for a new regulatory framework for debt advice providers.

Last week, R3 – the insolvency trade body, provided an insight into the pitfalls of Debt Management Plans and claimed that people are becoming “slaves to their debts”, with a quarter of those who signed-up to a DMP taking at least a decade to repay their debts*.

So can a ten year DMP ever be justified? Well, the length of time someone should be required to pay back an impaired debt is very much a cornerstone of the ethical debt advice equation. Without it, we have no way of deciding when debt impairment becomes serious enough to warrant legislative intervention. We believe that five years is about right in situations where there has clearly been no reckless or dishonest behaviour (our reasoning for this can be seen in the Framework for Ethical Debt Advice section of our website), although this figure will require a rigorous industry debate in order to achieve consensus amongst debtor, advisor and creditor groups.

Perhaps the most damning evidence we have that Debt Management regulation can’t come soon enough is that according to the R3 research, 30% of people have become bankrupt having previously tried the DMP route, without success. If nothing else, this suggests that individuals are not receiving advice that is appropriate to their financial situation.

As a charity, Debt Advice Foundation does not charge for arranging Debt Management Plans; however, fee-driven organisations can typically charge between 10% and 15% of the person’s monthly payment – so an unsuccessful DMP can be a costly waste of time.

We receive calls on a daily basis from people who have entered into an unsustainable DMP after receiving advice elsewhere, and in the majority of instances we find that there is a more suitable solution available.

Of course, when used in the right circumstances, Debt Management Plans can be an extremely successful way for people to resolve their financial problems, but it is important for people to be protected from misguided advice.

Debt Advice Foundation is now campaigning for a new regulatory framework to underpin the UK’s debt advice industry – and in doing this we intend to help make the debt management industry a safer place for consumers.