OFT bares its teeth on Debt Management

The Office of Fair Trading ("OFT") issued a report in September 2010 on its finding into the debt management industry. The full report can be found here (all 107 pages of it!). It concentrates on Debt Management Firms rather than Insolvency Practitioners, who were subject to previous report in June 2010.

I was lucky enough to be asked to comment live on this on BBC Radio Stoke (94.6FM) on Drivetime with Tim Wedgwood on 28 September 2010 at around 5.35pm - BBC iPlayer territory now!!

In essence the report examines the advice provided by "Debt Management Advisors" who are supposed to help individuals deal with financial problems by negotiating settlements or payment plans on their behalf. Some 276 firms out of 829 responded to a questionnaire sent out by the OFT and the responses can be considered as statistically significant. It should be noted here that the OFT has issued (in my view) pretty clear guidelines on how debt management/advice etc should be undertaken called the Debt Management Guidelines ("Guidelines")

Various questions were posed, and of those who returned the questionnaire the % of responses where the answer was "No" or no response was given at all on a selection of questions were:

• Have your employees used the OFT's Guidelines? 30%
• Have your employees had training on the Guidelines? 43%
• Do you provide staff training on the Guidelines? 45%
• Do your employees have access to copies of the Guidelines? 38%

This is SCARY!!! A third of these so-called "advisors" don't use the Guidelines and nearly half of them have never received training on them!! You will often find that the "advisor" is simply working off a script...

All of the firms examined had a Consumer Credit Licence and were subject to review and regulation by the OFT. It found that over 130 of the firms examined were non-compliant with at least one aspect of the Guidelines and over 50 firms were non-compliant on three or more aspects. This is dreadful and I can only express my horror that individuals are relying on these firms to assist them, often with them having to pay a fee for what is frankly useless and misleading advice in many instances.

Action has now been taken by the OFT on 129 debt management companies which could result in prosecution - YES!! The OFT will also be reviewing it Guidelines and enforcement procedures as a result of the findings.

I could rant on and on with this...

My general experience as a Licensed Insolvency Practitioner is that a lot of Debt Management Providers are useless and an individual who seeks their help often ends up being worse off than they were before they contacted the Provider. (I hasten to add that there are some good ones out there, but they can be hard to find!) Individuals would be much better off taking initial advice from a Licensed Insolvency Practitioner who will have had the training and gained the experience to be able to advise themon ALL aspects of debt management (including IVAs, Bankruptcy and Debt Relief Orders) and not just a debt management plan; 9/10 times, a first meeting with an IP will be free anyway!

If you must use a debt management provider then PLEASE ensure they have a Consumer Credit Licence and will therefore be regulated by the OFT. If they don't have this - don't touch them!!

Legislation Finder

I have an obvious need to keep up to date with any insolvency-related legislation. Luckily, my trade body, R3, provides me with regular updates that have already had the legislation summarised for me. However, sometimes I need to access the actual text of the legislation and before now, finding an electronic copy to search has been a real pain.

Now, however, a new website has been launched by by the National Archives which lists all UK legislation from 1988 (and some but not all prior to this) and is a great resource if you need this sort of thing! Go to:

http://www.legislation.gov.uk/

The original Statutory Instrument [piece of legislation] (as enacted) and revised versions of legislation on Legislation.gov.uk are published by and under the authority of the Controller of HMSO (in her capacity as The Queen's Printer of Acts of Parliament, and Government Printer of Northern Ireland) and the Queen's Printer for Scotland.

Each Statutory Instrument is subject to Crown copyright, but reproduction of any piece in an unaltered form is free of charge, providing you also state "(C) Crown Copyright" somewhere in the document.

Banks are STILL bottling it!

I'm not a great fan of The Mail (more a Times person) but there's an interesting article here.

As an Insolvency Practitioner, part of my role is to help people (individuals as well as businesses/companies) deal with financial problems. Sometimes that "help" is as simple as restructuring their cash flow with the aid of a small loan. However, this isn't always as simple as it sounds. Small businesses are vital to UK plc's economic health and a small loan can often be the tonic that's needed to get them through a bad patch.

The banks however seem to have ignored this point. I regularly advise small businesses and whilst I can assure them that funds are available out there from the banks (they are, honestly!!), the hurdles that need to be cleared have simply got higher and higher over the last two years. Most notably is the almost universal requirement for a personal guarantee from the directors supported by a charge over their personal property. I would never recommend this, but often there is little choice for the directors if they are desperate for the funds...

The banks also insist on a ridiculous level of security where this is available. One instance I came across a few months ago was that the bank would lend £100,000 to a small business (turnover around £3.5 million) but insisted on a 400% security coverage against the company's freehold trading premises which was owned by the directors. I have absolutely no objection to a bank securing its lending (perfect business practice in a difficult economic climate) but 400% is way too excessive.

Without help through the difficult economic conditions, small businesses WILL fail. Yes it's more business for me as an Insolvency Practitioner, but I would much rather be in a position to help a business to recover than be the last resort to give it a decent burial.

Come on banks, get off your backside and make some sensible (and vital) lending decisions.

Rogue Directors Banned

The Insolvency Service has disqualified two “reckless” financial directors who claimed to sell financial products to people with poor credit ratings. The "financial products" were initially franchises which were being sold to supposedly help people out of their financial troubles by providing them with 6-figure incomes. Average franchise purchase costs were about £6,000 plus VAT and over 27 people got caught out for £120,000! The recorded commissions they earned amounted to just £450!

After being caught out the business transferred to another company and began offering advice on debt management and IVAs, as well as again selling franchises.

This vividly illustrates the need for anyone suffering from financial troubles, to seek proper and professional advice, rather than trying to get out of their problems using a "get rich quick" scheme. I'm very sorry to say that if it waddles and quacks it's usually a duck and you should stay clear of it! This is where a Licensed Insolvency Practitioner is worth his weight in gold (although sadly I don't get paid that way...!) in providing good, sound advice on dealing with financial problems.

It also shows that, eventually, rogue directors will get caught and punished appropriately.

The disqualification follows the Service liquidating the directors' companies last year, which included Charter Financial Solutions and Finance Select on the grounds of public interest.

Investigators found that, amongst other matters, the directors had deliberately given false information to a high street bank when applying for a company bank account. The directors wrongly stated they had never been associated with a business that had had a court order of a debt registered against it. In all five companies were closed down and Christopher Lake and Stephen Knight have been banned for a total of 16 years.

Further information can be obtained from The Official Receiver, Public Interest Unit North 2nd Floor, 3 Piccadilly Place, London Road, Manchester, M1 3BN. Telephone No: 0161 234 8531. Email: piu.north@insolvency.gsi.gov.uk.

Insolvency Reform plans dropped

A huge re-vamp of Insolvency Legislation came into effect on 6 April 2010 (the last major re-vamp was in 2003). Whilst it didn't change the underlying structure and principles of the Insolvency Act 1986 in dealing with personal and corporate insolvency, it did modernise the legislation to take account of such things as electronic submission of forms, documents etc, use of email and particularly allowing remote meetings of creditors where appropriate. It also simplified the procedures by harmonising these across both the personal and corporate processes.

This was intended to be the first of a major series of reforms aimed at bringing the insolvency legislation into the 21st Century and simplifying it as much as possible. For those of you who are interested, this area of legislation has grown to almost unwieldy proportions since the abolition of debtors' prisons (a mistake some may say...!) in the late 1800's.

It was further proposed that more reform was needed, specifically by introducing a Chapter 11-style process as operated in the USA. This is where a CVA style process is entered into (even for companies that are hopelessly insolvent and should be closed) by the directors of a company in order that they can carry on trading and an orderly winding-up of the company is conducted under a process where the Court (rather than an Insolvency Practitioner as is the case currently in the UK) presides. However, an article in Insolvency News (here) confirms that further reform is unlikely in the short to medium term future.

THIS IS NOT A BAD THING!! In my opinion anyway! I'm slightly nervous of Chapter 11 (or similar) becoming the norm in the UK, as we already have an analogous process called "Administration" that as far as I am concerned works particularly well. This has been around since 1986 and has been tweaked several times since, particularly from April 2010 to provide a much higher level of transparency to the process.

Any major reform needs a lot of back office support to make sure it works in practice as well as theory and that support is generally provided by the Government's Insolvency Service in its monitoring capacity. Given the upcoming Government spending review in October 2010 and the already known requirement to reduce the Insolvency Service's costs by over 10%, such support would not be available to ensure the reforms worked properly.

All legislation is imperfect - you can't have a "one size fits all" statute. What we have got to date is a set of reasonably workable statutes and further tinkering with some areas and not others (i.e. a piecemeal approach rather than an overall one) simply makes it more confusing for everyone (even the IP's occasionally!)