Chapter 4
Debt management
Market participants and products
4.1
There are a number of regulated and unregulated services provided in the
debt management sector. They include:
- personal budgeting services
- debt negotiators
- debt agreement managers and
- credit repair agencies.
The details of each are set out below.
4.2
According to ASIC's submission:
The term 'debt management firms' refers to businesses that
offer a range of services to consumers in financial hardship, including:
- developing and managing budgets;
- negotiating with creditors, including lenders, telecommunications
companies, utilities companies or debt collectors;
- advising and arranging formal debt agreements under Pt IX of the
Bankruptcy Act 1966 (Bankruptcy Act); and
- 'cleaning', 'fixing', 'repairing', 'removing or 'washing away'
default listings or other information on credit reports.[1]
4.3
The first two of these functions replicate what financial counsellors
do. This will be dealt with in chapter 6.
4.4
Debt agreement management is a more formal process. A debt agreement is
in fact an insolvency, which is overseen by the Inspector-General in
Bankruptcy, who is the chief executive of the Australian Financial Security
Authority (AFSA).
4.5
A debt agreement is a proposal to pay a percentage of the debt. It is
usually submitted by a registered debt agreement administrator, to the official
receiver, and is put to a vote of creditors. If it is accepted then the debt
agreement is made. Debt agreements now account for around 47 per cent of all
personal insolvency administrations.[2]
4.6
Credit repair involves clearing negative information from credit reports
so that a consumer is more likely to get access to credit or other services in
the future. These firms operate by challenging credit default listings and
making complaints on behalf of consumers to external dispute resolution (EDR)
schemes.[3] As ASIC points out, consumers can access their credit report themselves and
challenge an incorrect listing at no cost.[4]
4.7
Debt buyers and debt collectors are not a subject of this inquiry. Debt
buyers purchase unpaid debts from creditors at a discount. Debt collectors work
for creditors to chase repayments when they have not occurred as scheduled.
4.8
ASIC observes that some firms in this sector offer a mix, or all, of
these services. ASIC notes that there is not much data available about the size
of the industry because most operators do not require a licence.[5] The Consumer Action Law Centre also observes:
Given the lack of regulation and oversight, it is difficult
to maintain comprehensive information about this industry, with new practices
and business models constantly emerging.[6]
4.9
However, the Australian Financial Complaints Authority (AFCA) has noted
an increase in recent years of debt management firms working with consumers who
are contacting AFCA as well.[7] AFSA notes that the use of debt agreements has increased markedly as a proportion
of personal insolvencies, from less than a quarter 10 years ago to nearly half
now.[8]
Impact on consumers
4.10
Community groups suggest that indebted people grasp at any prospect of
being helped out of their debt and often do not understand the services being
offered or the charges they will incur. Some do not understand that they are
dealing with a for-profit entity.[9]
4.11
On the evidence provided to the committee in submissions and public
hearings, these services rarely improve a consumer's financial position. The
charges for the debt management services increase their debt, and often consumers
are referred to inappropriate remedies which may be expensive and cause lasting
damage. The committee heard many case studies to this effect.
4.12
Debt managers and debt negotiators are accused of charging large fees
for minimal services (some of which are compulsorily provided free to
consumers), and failing to tell consumers of free alternatives such as legal
aid, or community financial counselling, or contacting a utility company and
negotiating an extension of time to pay. Often the fees are not transparent.[10]
4.13
The Salvation Army reports a $1600 set-up fee for a debt agreement that
involved only one debt. Legal Aid Queensland offered the following example of a
budgeting service:
The client and her friend signed the contract at the meeting
without the fees and obligations under the contract being properly explained.
These fees included a $45 charge to move their own money from the company's
account back into their own accounts when they requested money for things such
as paying car registration. The client was of the view that she and her friend
had been pressured into signing a contract to purchase a product of no or
little value to them. When she tried to withdraw from the contract, the
budgeting service informed her that she was liable for a large establishment
fee.[11]
4.14
Debt negotiators often charge high fees for results which do not solve
the consumer's problems:
We've seen quite a few that are a percentage of the amount
saved. If you have $150,000 in credit cards and they reduce it to $70,000,
they'll take 50 per cent, 40 per cent or 80 per cent of the saving or whatever
it is...[12]
4.15
Community groups say that debt managers often offer inappropriate
products. For example, they may offer a repayment plan that is unaffordable.
Consumer Action Law Centre recounts a case:
...the MyBudget representative put together a budget for
Claire. It was only at the end of the meeting that MyBudget told her that there
would be additional monthly costs....
Claire ran into problems with the budget set up by MyBudget.
The MyBudget representative had estimated her credit card repayments to be 2%
of her balance. When Claire questioned the representative about this figure,
they told her that they had been doing this a long time and they knew. However,
her credit card minimum payments were $65 higher than MyBudget had budgeted
for. Claire said when she realised this, MyBudget said, the extra money will
need to come from somewhere else but MyBudget did not specify which part of the
budget it would come from. Claire says she had to pay this amount from her
personal allowance, which she needed for groceries, which was only $100 each
week. MyBudget had not accounted for other essential expenses, like her car
insurance...
After a few weeks, Claire also realised that she would not be
able to reduce her debt or save money if she continued to pay the monthly fees
to MyBudget and requested MyBudget to cancel the contract. MyBudget told her
she needed to go to a website link to cancel the agreement, which took them
several days to send. When she received the link and tried to cancel the
contract, MyBudget told her that she was required to give a notice period of 28
days. Claire tells us she still had to pay $790 for the establishment fee.
4.16
Another example was cited at the committee's Melbourne hearing:
An example from our casework is somebody who had a range of
expenses, one of which was child care; that was not given priority. The child
was subsequently taken out of child care because the fees weren't paid, and
that person could no longer work because they had to care for the child. So
these consequences can go on.[13]
4.17
The most egregious examples of inappropriate advice were those which
advised consumers to enter into a debt agreement. Often the consumer does not
understand the full implications of such an agreement—they often believe it is
a debt consolidation loan[14]—or
it may not be a necessary step. The Salvation Army presented this case study on
a debt agreement service:
An elderly couple presented to Moneycare stating they had
both entered into a debt agreement in March 2017. They advised when talking to
the debt agreement service, no other debt reduction options had been mentioned.
The husband worked casually and his wife was on a low income.
At the time the debt agreement was entered into, they had $20,000 arrears on
their mortgage. Previous to the debt agreement the husband had been out of work
for a long time due to an accident. During this time, he had accessed all his
superannuation under hardship to pay down debt - over $80,000. The house was
repossessed in December 2017, and when sold in August 2018 left them with a
shortfall of $90,000.
On assessment, it was clear the debt agreement was not a
suitable option because they were servicing a secured home loan that was in
arrears. Not being able to keep a secured loan up-to-date is a warning of
likely entrenched financial hardship. The debt agreement was not sustainable as
the joint income was neither sufficient nor reliable. Being in a debt agreement
further exacerbated this couples stress and anxiety as it did not fully resolve
their financial problems and the transition to bankruptcy was not something
they were expecting.[15]
4.18
Many witnesses believed that debt management firms do not act in the
best interests of their clients:
They go to see a debt management firm. The firm have made all
sorts of promises up-front about how everything will be fine and they're going
to fix everything, and often the first thing they say is, 'Please stop paying
your creditors; instead you pay that money to us.' That money may be paid to
them as being saved up towards their up-front fees, or it could be to put
together a fighting fund to negotiate with, but the result of it is always that
the client is then pressured by their creditors because they've stopped paying,
and sometimes that goes on for six or eight months, because that's how long it
takes for people to accumulate enough money to pay the up-front fee. What
happens over that time is that the person becomes quite frantic. At the
beginning they may have been asking the right questions, but, by the time they
get to the point where they're under severe pressure, it's them writing to say:
'Have you put that thing together yet? Has it gone through? Has it gone
through?' So it's a very interesting dynamic. I have seen so many people sucked
in by it that I find it hard to believe it's not a very common behavioural
trait where, no matter what we say people should do, this is what people will
do in practice. They are very vulnerable in those circumstances.[16]
4.19
ASIC points out that consumers can, at no cost, receive help from
financial counsellors or community legal services; and, again at no cost, they
can have an independent ombudsman scheme help resolve disputes with lenders,
telecommunications and utilities providers.[17]
Conduct of providers
4.20
ASIC's view is that:
The business models of debt management firms create a risk of
abuse or exploitative conduct, particularly where:
- consumers are charged fees irrespective of the quality of the
services provided by the debt management firm; and
- consumers do not need these services because of the availability
of free alternatives.[18]
4.21
Sometimes there seem to be deliberate attempts to mislead consumers, or
at least obscure the fees they will pay:
At this meeting, I was told there was a problem with their
printer, so I couldn't receive a hard copy of the contract. I was made to
digitally sign it on a tablet. I wasn't able to read it before I signed because
it was over 40 pages long...At this meeting I again asked about the fees, and I
was told there are only two sets of fees: a fee to set up the agreement to
liaise with the creditors and a fee to use the budget. On checking the budget,
I found there were other fees embedded there.[19]
4.22
Credit repair firms tend to use the industry dispute resolution schemes,
and the creditor pays for each lodgement. AFCA noted that debt management firms
charged 'sometimes not insignificant fees' to get financial firms to cease
enforcement action, when in fact what they do is pass the matter to AFCA. The
consumer could have come to AFCA in the first place for no cost.[20]
4.23
AFCA suggested that debt management firms prey on consumers' ignorance
of the system:
If consumers actually bring a financial hardship matter to
AFCA then, whilst the matter is being considered by AFCA, the financial firm is
not able to—is excluded from—enforcing that debt. Yet we see situations where
debt management firms are actually charging fees, sometimes not insignificant
fees, to get the financial firm to stop the enforcement action...[21]
4.24
AFSA observes that debt management firms may have a conflict of interest:
Several of the larger players for registered debt agreement
administrators have a larger business with a larger offering to consumers, and
debt agreement firms will be a part of that broader offering that they provide.[22]
4.25
AFSA's submission gives an example, referred by the Consumer Action Law
Centre, of a debtor who wanted to obtain his credit file. He rang a credit
report provider who also had a debt agreement arm:
The debtor was confused and unwittingly agreed for the
company to prepare a debt agreement proposal for him, something he would be
charged for.
When the debtor realised what he had allegedly agreed to he
attempted to cancel the agreement.
It was only with the help of the Consumer Action Law Centre
that the debtor could extricate himself.[23]
4.26
Credit repair agencies in particular are accused of over-promising and
under‑delivering, at a high cost to the consumer:
We're definitely seeing debt management firms offering
cleaning, fixing, repairing, washing away of default listings on credit
reports, which consumers can do themselves. And we're seeing fees charged,
sometimes concerning levels of fees charged, with regard to some of these sorts
of services as well. The issues that we are most concerned about really are the
charging of high up-front fees for services that provide little or no value....
Poor, inappropriate services...can leave consumers worse off in terms of actually
negotiating a settlement.[24]
4.27
Credit repair agencies have also been accused of taking fees for no
service:
...They don't have enough money to pay for the service
up-front, so they enter into a direct debit arrangement, and the money starts
coming out of their account. Often no action will be taken, because the company
is waiting for enough money to accumulate for the up-front fee to be paid. In
the meantime, life goes on, and quite often these people will find out that
actually this isn't the way to go, or they just won't have enough money and
they'll stop paying, and then we see them sued down the track. In a couple of
their cases, we've seen that the money demanded by the lawyers later on is
between $4,000 and $6,000.[25]
4.28
There are limited circumstances in which a default can be removed from a
credit record, and those can be pursued free of charge.[26] The committee was told:
Many times the default listings and credit listings on
people's reports are actually listed properly, appropriately, and they can't be
removed. So, even with the assistance of a credit repair provider, the ultimate
service isn't delivered.[27]
4.29
ASIC suggests that many debt management firms market their services to
consumers in financial hardship as an appealing way to transfer responsibility
for their difficulties to a third party.[28]
4.30
AFSA monitors the advertising of debt agreement administrators and it
too observes that they market to people in financial difficulty and offer 'a
form of welcome relief'.[29] The Consumer Action Law Centre made the same point:
A key [method] is online advertising. If you were to type
'debt help' into Google, the key listings up-front will, unfortunately, not
necessarily direct you to a free and independent financial counsellor but will
direct you to a debt management firm...[30]
4.31
The Financial Rights Legal Centre had noted predatory behaviour using
sophisticated technology:
I've even heard of people having used the screen-scraping
technology that payday lenders used to pass on information about when accounts
are empty so that people are at their most vulnerable when they get the
advertising...payday lenders will on-sell the details of people who they've
rejected for loans...[31]
Nature and adequacy of the current regulatory arrangements
Current regulation
4.32
AFCA observed that:
In areas such as the debt management firms, where there is no
code of conduct, there is almost no framework there.[32]
4.33
Most operators in the industry are not required to be licensed. Nor are
they:
... required to satisfy threshold requirements (such as 'fit or
proper' persons tests), satisfy competence standards, meet conduct or
disclosure obligations, manage conflicts of interest or belong to an EDR scheme
to resolve consumer complaints.[33]
4.34
A consumer advocate put it colloquially:
...Debt vultures and credit repair firms do not fall under any
regulatory framework, and staff who work at these firms are not required to
meet any training or professional or ethical obligations.[34]
4.35
If a debt management firm also provides credit, this aspect of its
operations is regulated under the National Credit Act, as described in the
chapter on payday loans.
4.36
Debt agreement administrators are regulated by the Personal Insolvency
Regulator (AFSA) under the Bankruptcy Act 1966.
Changes under way
4.37
The Bankruptcy Legislation (Debt Agreement Reform) Act 2018 commences in June this year. It includes a number of changes which are aimed at
ensuring that the only proposals given to debtors are affordable, sustainable
and protect those for whom a debt agreement may result in greater hardship.
Debt agreements would generally be limited to three years unless the debtor
owns or has an equitable interest in their principal place of residence. There
will be a new test to compare the debtor's payments against their income, which
is setting up a more rigorous affordability test, and there will be an
additional discretion for the official receiver to reject a proposal where the
circumstances show that it would cause the debtor hardship.[35]
4.38
It also includes some significant regulatory changes. Registration as a
debt agreement administrator will be made mandatory, allowing for an enhanced
oversight of the industry by the Inspector-General in Bankruptcy. Further, the
Inspector‑General's powers will be extended to enable investigation of
the conduct of a registered debt agreement administrator to include conduct
prior to the signing of a debt agreement proposal. This will facilitate
investigation into administrators who may inappropriately influence debtors who
are considering entering a debt agreement. The law reform will also enable
industry-wide conditions to be established for registered administrators.[36]
Other proposed changes
4.39
The Consumer Action Law Centre recommended that debt managers and credit
repair firms be regulated more robustly, either by being brought under the
National Credit Act or with stand-alone legislation. Such regulation should
include a licensing regime, with membership of AFCA, a ban on upfront fees, and
a duty to act in the client's best interests.[37]
4.40
ASIC supported the extension of the product intervention power (in
legislation before the Parliament at time of writing[38])
to all products covered by the definition of 'financial services' under the
ASIC Act. However, this would mean that PIP would apply to some, but not all,
debt management services. Some services come under the provisions of the
Australian Consumer Law, regulated by the Australian Competition and Consumer
Commission (ACCC). The government could consider extending the power beyond the
ASIC Act to cover all debt management services.
4.41
ASIC considers that the flexibility provided by the product intervention
power makes it a better solution than a licensing regime. It notes that it is
questionable whether having many of the services available, even by licensed
providers, is desirable, given the existence of free alternatives.[39]
4.42
The proposal for a general requirement of fairness proposed by AFCA and
discussed in Chapter 3 is also relevant here. That is, AFCA considers that
treating consumers fairly should be made a standalone and enforceable standard
for financial services entities and individuals working for them.[40]
Compliance with, and enforcement
of, current regulation
4.43
Consumer groups noted that they had successfully used Ombudsman services
in this space[41].
There has also been litigation by ASIC, and litigation sponsored by consumer
groups, but that is expensive and time consuming.[42]
4.44
The marketing and advertising of debt agreements continues to be of
concern to AFSA. In 2017–18, 165 advertisements relating to debt agreements
were subject to detailed assessment by AFSA, with correction, action and/or
removal of content occurring in 79 instances. Three registered debt agreement
administrators and one adviser were referred by AFSA to ASIC for potential
enforcement action for misleading and deceptive conduct in 2017–18.
4.45
AFSA has concern about untrustworthy advisers who operate in the
insolvency sector. Such people are seen by AFSA insolvency practitioners and
stakeholders as a key threat to the integrity of the insolvency sector, and
these concerns are reflected in the submission to this committee from the
professional association the Australian Restructuring Insolvency and Turnaround
Association.[43]
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