Consumers who are struggling with their finances and are thinking about appointing a debt management company to help them get out of debt – by re-negotiating terms with their creditors – have been warned to be aware of the charges involved in the process.

A report issued by Money Advice Trust has revealed that many debt management companies are guilty of poor practice.  Its report was based on research carried out by the Personal Finance Research Centre at Bristol University.  Money Advice Trust is a charity formed in 1991 to increase the quality and availability of free, independent money advice to people with debt problems.

The findings in the Trust’s report reveals many debt management companies failed to sufficiently highlight the costs and charges involved in arranging a debt management plan.  The key findings were:

• Some consumers were not fully informed of all the charges and costs involved in the arrangement until late in the process
• Some consumers even felt they were worse off than before they contacted the debt management company
• Some debt management companies did not make clear, from the outset, that in addition to an initial set-up charge, ongoing fees eat into the monthly repayments of those borrowers unable to meet former terms

Money Advice Trust said that it was important that debt management companies treat their customers fairly by providing information about charges and costs upfront in a clear and fair manner.  It also said that consumers struggling financially should also be made aware of the availability of free debt advice and debt management planning.  One such free service is National Debtline which the Trust funds.  National Debtline receives more than 40,000 calls every month.  Visit www.nationaldebtline.co.uk for more information.

The fee-charging debt management sector, which differs from simple debt consolidation firms, has grown threefold over the past decade.  There are now more than 150 debt management firms in the UK.  The Office of Fair Trading regulates the sector and is due to start a fresh investigation into debt management companies as its guidelines have not been reviewed for six years.

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One of the UK’s biggest mortgage lenders, the Nationwide, is permitting its existing customers who have fallen into negative equity, but still want to move home, a mortgage deal that will lend them 125% of the value their new home.

Negative equity is where the value of someone’s home is less than the value of the mortgage outstanding on it.  Therefore, if they sold there home at that lower value they would owe their mortgage lender money.  Negative equity is not really a problem unless the homeowner is looking to sell or re-mortgage, or if they are in financial difficulties and are forced to sell.

Nationwide says that its existing customers who are in negative equity and want to move can obtain a 95% loan to value mortgage deal at a rate of 6.73% fixed for three years or 7.48% fixed for five years.  They can then borrow up to an additional 30% with increased rates of 7.23% and 7.98%. 

The idea behind Nationwide’s 125% mortgage deal is to enable its customers in negative equity who would not otherwise be able to move, the opportunity to do so and to carry the negative equity over to the new home.  It maintains that the 125% mortgage deal is only suitable for a limited number of its existing customers and that since its launch in June 2009 none of its customers have actually applied for the deal. 

The industry’s reaction to Nationwide’s announcement has been mixed.  There has been widespread criticism of mortgage loans previously available prior to the credit crunch that were more than 100% of the property value since it immediately placed the homeowner in negative equity.  Northern Rock, the now nationalised bank, was notorious for lending 125% mortgage deals.  When house prices were rising dramatically between 2005 and 2007 there was no concern about being in negative equity for long and many homeowners expected house prices to continue rising. 

It is arguable that lending more money to a homeowner already in negative equity who owns an asset that could fall further in value is not particularly wise.  It is not expected that Nationwide will give the deal to many of its existing customers, which will in turn limit any potential losses. 

However, the head of mortgages at moneysupermarket.com, Louise Cuming, welcomed the deal.  She noted that Nationwide’s flexible approach should be applauded at a time when many other mortgage lenders are still being overly restrictive with their lending practices which is stifling the housing market.  She said the fact that Nationwide is only offering the deal to its existing customers is important too.  Because of this, Nationwide already has a relationship with its customer and will be able to assess the suitability of lending to those customers more accurately.

A survey conducted by the Bank of England has revealed that the number of consumers defaulting on their loans and mortgages has increased and is expected to do so during the remainder of 2009.

Unsurprisingly, the Bank of England noted that state of the UK economy, including rising unemployment, was key to the rising figures.

It also noted that lending to UK businesses had not risen as fast as had been anticipated between April and June 2009.  However, despite this, lenders said they expected the availability of credit to UK businesses to increase between July and September 2009.

The outlook for consumers for the remainder of 2009 looks bleak.

While lending to consumers and businesses is expected to increase slightly over the next three months, it is generally accepted that lending levels will not be at a level such that that UK economy experience a strong and sustained recovery.  It is likely to be a few years until the UK economy recovers since it is clear that the pre-credit crunch lending volumes which fuelled the significant growth in the UK economy between 2005 and 2007 is very much unlikely to return.  Rather, lending volumes are likely to be much more conservative over the coming years which will lead to a slower and sustainable recovery in the long-term.

The Chairman of the Financial Services Consumer Panel (FSCP), Adam Phillips, has said that only 40 percent of homeowners experiencing difficulties with their mortgage repayments seek advice or help with their problems, following research carried out by the FSCP. 

The FSCP was set up by the regulator of the financial services authority, the Financial Services Authority, to advise the FSA Board on the interests and concerns of UK consumers and to report on the FSA’s effectiveness in meeting its consumer protection and public awareness regulatory objectives.  There are presently 13 members of the FSCP representing a broad range of consumer interests.  The FSCP is completely independent of the FSA and can raise its own concerns,  instigate its own research and publish its own reports. 

During his speech to the Council of Mortgage Lenders (CML), Mr Phillips also revealed that approximately 85 percent of those homeowners experiencing financial difficulties considered their position to be serious.

In light of these findings, Mr Phillips urged mortgage lenders to be pro-active in helping homeowners by providing them with access to advice and information about what to do to before their financial problems spiral out of control which will in turn become a disaster for both the homeowner and lender.

Of those homeowners who did seek advice and help with their financial difficulties, 65 percent went direct to their mortgage lender, while 25% went to the Citizens’ Advice Bureau (CAB). 

Those homeowners who went direct to their mortgage lender experienced varying degrees of assistance.  Some felt that their mortgage lender was unhelpful and inflexible in trying to help them, while other homeowners considered that their mortgage lender did all they could to help.  There is clearly a lack of consistency between lenders when dealing with their customers who are struggling financially – it would seem that it is literally pot luck if a homeowner is fortunate enough to be with a lender that is willing to do all that can reasonably be expected of it to help them if they suffer financial difficulties.  Clearly, there needs to be consistency in the way in which lenders deal with customers who are struggling with the loan and mortgage repayments.

Part of the problem with struggling homeowners not seeking help as soon as they ought to appears to be due the negative perception they have of financial businesses and advisers, which leads them to conclude that seeking advice is either a waste of time or inappropriate.

Mr Phillips noted that mortgage lenders are bound by the principles of the regulator the Financial Services Authority and that one of these principles is to treat its customers fairly.  This means that mortgage lenders have a duty to help their customers in financial difficulties, including arrears, and also to inform them about independent sources of advice.

He concluded his speech to the CML by adding that there is still significant opportunity for the financial services industry to highlight to homeowners the importance of seeking help as soon as possible if they are struggling with their finances.

The Government has today announced measures to reduce the number of consumers spending their way into debts that they will never be able to repay.

UK consumers now owe over £233 billion on credit cards, overdrafts and other loans, according to the Bank of England. This figure is rising by the day as an increasing number of consumers face financial difficulties during the recession and try to spend their way out of trouble using credit facilities.

The Government also plans to create a Consumer Advocate who will be responsible for fighting the consumers’ corner on cases of “national importance” by referring cases to court on behalf of groups of consumers seeking compensation and refunds.

Details of the Government’s new proposals on reviewing credit facilities for consumers have been revealed in a White Paper released by The Department for Business, Innovation and Skills.

The main area of concern for the Government is credit card companies sending blank credit card cheques unsolicited to consumers. The problem with credit card cheques is that they invariably incur additional charges, have no interest-free period, as with credit cards, and they do not provide the same level of consumer protection if things go wrong. Notwithstanding this, the interest rate charged on credit card cheques is typically over 25%, on average. And unlike credit cards, there is no interest-free grace period on spending – interest is chargeable from the day the cheque is cashed. Using credit card cheques is only suitable in a very limited number of circumstances.

Consumers who are struggling financially may not worry about such matters if a blank cheque arrives through the post unsolicited and perhaps see it as easy money to spend their way out of trouble, but this often exacerbates the situation. Under the new proposals consumers can still receive credit card cheques, but will need to apply to receive them, rather than receiving them unsolicited.

In addition, the Government is concerned by the number of credit card companies who unilaterally apply an increase on consumers’ credit card limits – even though many consumers do not even request an increase. Again, the worry is that consumers who are struggling financially will spend up to the increased limit, which will make the situation worse by building up further debts they will never be able to repay, rather than seeking help with their finances earlier.

The Government also wants a review of card fees and charges to be conducted – particularly where credit card companies apply an increase in the interest rate payable on existing borrowings, or increases the minimum monthly repayment amount.

In addition to a ban on credit card cheques being sent unsolicited, the Office of Fair Trading will also be undertaking an investigation into pay day loans and door step loans where interest rates are typically over 50 percent.

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The ongoing Payment Protection Insurance (PPI) miss-selling scandal has clearly caught UK consumers’ imagination if the number of complaints about PPI being referred to the Financial Ombudsman Service, which has increased ten-fold in the past year, is anything to go by.  The Ombudsman’s office has so far received 50,000 complaints about miss-sold PPI policies.  The vast majority of PPI complaints being referred to the Ombudsman are upheld resulting in compensation payments to those consumers who have complained. 

However, Scottish consumers keen to obtain compensation about miss-sold PPI have been warned not to be hood-winked into handing over their credit card details to Claims Management Companies (CMCs) offering to help them obtain compensation.

In England and Wales Claims Management Companies are regulated.  However, there is no regulation for Claims Management Companies in Scotland and such firms are currently operating in Scotland without the fear of the law.  Because of this lack of regulation, some Scottish consumers have been duped into handing over their credit card details to pay an “up-front fee” to CMCs purporting to help them obtain compensation for miss-sold PPI.  However, these unscrupulous CMCs are just taking the up-front fee and doing little, if any work to justify the fee they have taken. 

Scottish consumers should therefore be wary of any Claims Management Company that makes an unsolicited call to them offering to assist them obtain compensation for miss-sold PPI, but insisting that a fee be paid up-front first by debit or credit card.

MPs have warned consumers to think carefully about using Claims Management Companies or revealing their credit and debit card details over the telephone to any firms that make unsolicited calls.

Despite these warnings about Claims Management Companies operating in Scotland, many UK consumers may in fact have legitimate claims for miss-sold PPI policies and be entitled to compensation.

PPI is an insurance policy usually sold with loans, finance agreements or credit cards.  It is designed to provide a monthly benefit equal to the repayments required under the credit agreement in the event that the policyholder is incapacitated or unemployed. 

However, there is no need for consumers to use a Claims Management Company, which typically take up to 25% of any compensation payment as a fee, to puruse a complaint about miss-sold PPI.  Rather, consumers can make a claim for compensation about PPI absolutely free by referring the matter to the Financial Ombudsman Service.  In the first instance, the consumer would need to complain to their bank or credit card company which provided the PPI policy.  If they remained dissatisfied with the response from their bank or credit card company they could then refer it to the Ombudsman’s office for free.  Any compensation payment they receive following the Ombudsman’s intervention would not be reduced by any Claims Management Company fee. 

It is difficult to see what value a Claims Management Company offers a consumer to warrant the substantial fee it charges for its services.  This is because if the Claims Management Company cannot successfully persaude the bank or credit company that the complaint should succeed it will refer the matter to the Ombudsman’s office anyway – something the consumer themselves can do, but without having to pay a hefty fee to a Claims Management Company.

As more and more UK consumers struggle during the current economic downturn, an increasing number of them are using loan sharks to make financial ends meet. 

Loan sharks are unlicensed lenders who operate illegally.  Consumers invariably turn to loan sharks when nobody else will lend them money.  In many cases, money that is desperately needed for simple things like bills and food – in those circumstances, consumers may feel they have no other choice but to use a loan shark.   

However, consumers should avoid using loan sharks at all costs since it is likely they will only make their financial situation worse.  This is because the rates of interest loan sharks charge on the money they lend is very high and consumers will probably find it difficult to keep up the repayments.  This may lead to the consumer being forced to take out subsequent loans which will only serve to exacerbate the problem, causing the debt to spiral out of control.  It is not unheard of for loan sharks to use violence or intimidation to collect outstanding debts.  

A study carried out by a Government organisation, The New Local Government Network, has revealed that an estimated 35,000 more consumers could turn to loan sharks during the current economic downturn because the sources of easy credit that were available prior to the credit crunch have now dried up, as banks have tightened their purse strings.  

The New Local Government Network, which was set up to raise the credibility of local government, has urged local councils to increase funds available from Credit Unions to help consumers who are struggling financially.  Credit Unions offer affordable credit to consumers who cannot access traditional high street loans.  

The hope is that by increasing funds available from Credit Unions fewer consumers will need to use loan sharks. 

Worryingly, The New Local Government Network noted that at least 165,000 UK consumers already use loan sharks.  This is perhaps not surprising given the number of loan applications currently being refused by traditional lenders and even sub-prime lenders.  It would seem that this figure of 165,000 will only increase given that desperate consumers struggling with their finances have little option but to borrow from the loan sharks until the traditional lenders start to lend again.

The Insolvency Service has released alarming figures revealing that the number of consumers currently being declared bankrupt in England and Wales is unprecedented.

During the first three months of 2009 there were just over 19,000 bankruptcies and approximately 10,700 individual voluntary arrangements (IVAs).  This is some 1.6% higher than the previous three month period and nearly 20% up on a year ago.  Since 2006 the number of consumers declaring themselves insolvent has been steadily increasing.  However, the sharp increase since the middle of 2008 has been a reflection on the UK economy falling into a recession.  It is expected that the numbers will grow in the foreseeable future due to the gloomy outlook on the UK economy.

However, the number of businesses going under reduced in the first quarter, but were still 54% higher than a year ago.

It has been reported that personal insolvencies in the UK might rise above 125,000 for 2009.  The reason for this outlook is due to rising levels of unemployment and a record number of businesses going bust.  There are three types of insolvency, but only two of which are included in the figures above.  Once the third type, which is effective from April 2009, is taken into account the number of recorded personal insolvencies is likely to increase even further.

Bankruptcy

• This is the traditional route consumers have historically taken to escape overwhelming debt.   Although a bankruptcy ends after one year, the consumer is very likely to lose all their assets including their home in order to pay at least something to the creditors that are owed substantial amounts of money

Individual voluntary arrangement (IVA)

• This is deal made between a consumer and their creditors which will be overseen by an insolvency practitioner.  By taking this route it means there is less chance of the consumer losing their home, but it does involve paying at least some of the outstanding debts over a number of years (typically five years)

 Debt Relief Orders

• This new type of insolvency was introduced in April 2009.  A Debt Relief Order will enable consumers with debts of less than £15,000 and minimal assets or surplus income to write off debts without an official bankruptcy.  It is expected that a significant number of consumers in the UK will apply for Debt Relief Orders.