January 28, 2011 2:53 pm

Debt advice ‘needs simplifying’

The UK’s debt advice system should be ‘radically reformed’ to make it easier to understand, and to protect individuals from unscrupulous operators, according to a new report.

A ‘single body to regulate debt advice’ and ‘simpler debt remedies’ are two key proposals to put forward by the British Bankers’ Association on Friday to help to ‘streamline the process of debt management’.

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The report, ‘A New Model for Dealing with Personal Debt’, states that people struggling with debts should have a clear range of options, while there should also be greater consistency in the way debt advice is provided and how creditors deal with people who are in financial difficulties.

This comes at a time when personal debt in the UK stands at nearly £1.5 trillion and personal insolvency rates have risen to record levels. Individuals struggling to keep up with their debts currently face a confusing range of options, including both informal and formal solutions, while some groups offer free advice and others charge for it.

The BBA said the existing range of debt solutions, which include informal plans under which people repay what they can each month, to bankruptcy as a last resort, should be made simpler to understand.

The report, which was carried out with management consultancy firm Accenture, suggested introducing a range of options which would be based on the consumers’ financial circumstances.

These would include early forbearance for people in temporary financial difficulties, as well as Debt Repayment Plans, under which interest and charges would be frozen in exchange for people making partial repayments each month.

In other cases, creditors could use people’s assets as a security against their debt to give them breathing space at a time when their income had fallen.

In the most extreme cases, debts could still be written off through bankruptcy, if consumers had no income, no assets and little prospect of ever repaying what they owed. There would also be an increased emphasis on early intervention, to try to help people before their situation had got out of control and their debts had increased.

The publication of the report comes as the Office of Fair Trading announced that 35 debt management companies have lost their consumer credit licences as a result of a compliance review. This also follows a warning to 129 firms in September after the OFT’s review of the debt management sector found widespread problems with compliance.

Paul Ross, BBA policy director and co-author of the report, said: “Our vision is to provide a clear and coherent process to help people facing debt difficulties, to intervene early where possible and to provide a simple debt resolution solution if those early attempts do not succeed. We want to unravel the red tape to bring about a more financially responsible solution for customers.”

The report has been welcomed by the industry. Delroy Corinaldi of the Consumer Credit Counselling Service, said: “Those struggling with debt are often stressed and confused about their situation and need clear, independent advice and support of the highest standards. It appears that this is still not the case within the fee-charging debt management sector.

“Many households will be pushed closer to the edge this year. I fear that more people who may be just about managing to make ends meet now will find themselves unable to keep up with their credit commitments as the year progresses, and worried and unclear as to what help is available, will end up paying for debt advice.”

Joanna Elson OBE, chief executive of the Money Advice Trust, also said she supported a move towards more regulation of the industry. She said: “We have heard fee charging debt management companies claim their industry is necessary because not-for-profit providers are unable to meet the demand for help. But the OFT’s investigation makes it crystal clear that much of the fee charging industry is not in a fit shape to be trusted to fill that gap.

“Dealing with unmanageable debt is a difficult problem that leaves many people vulnerable. It is vital that people who take the brave step of trying to repay their debts and get on top of their finances are helped back to financial health, rather than preyed on by commercial organisations eager for a quick profit.”

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