Fee Charging Debt Management Market Assessment Autumn 2012

Transcription

1 DEBT MANAGERS STANDARDS ASSOCIATION Fee Charging Debt Management Market Assessment Autumn 2012 Grant Thornton report commissioned by Debt Managers Standards Association

2 For any questions, please contact: Grant Thornton UK LLP 30 Finsbury Square London EC2P 2YU T +44 (0) E stephen.rigby@uk.gt.com W This report was prepared solely for DEMSA's benefit. Neither Grant Thornton UK LLP nor any of its partners or staff owes any duty, whether in contract, tort or otherwise, to any person other than DEMSA in connection therewith. Anyone other than DEMSA who seeks to place any reliance on this report does so at his own risk Grant Thornton UK LLP 2

3 Contents Section Page 1. Introduction 8 2. Executive summary Methodology The DMP business model and process Debt management industry size DEMSA fee structure and profitability DEMSA customer profile Debt management company outcomes and savings Industry image with creditors Grant Thornton UK LLP 3

4 Glossary BBA BIS Consumer Creditors CCCS DEMSA DMC DMP DPA DRF IVA MDI NDI OFT PBT The British Bankers' Association Department for Business, Innovation and Skills Debtors / Debt management organisations' customers Creditors of unsecured lending Consumer Credit Counselling Service Debt Managers Standards Association Debt Management Company Debt Management Plan Data Protection Agreement Debt Resolution Forum Individual Voluntary Arrangement Monthly Disposable Income Net Disposable Income The Office of Fair Trading Profit Before Taxation 2012 Grant Thornton UK LLP 4

5 Foreword Message from DEMSA For many consumers in the country today, unmanageable levels of unsecured debt are becoming an ever increasing problem. Faced with such an issue, a consumer has the option take to advice from the free sector such as the CCCS and the Citizens Advice Bureau, who carry out excellent work in this area. However, it is clear that the fee charging debt management sector has an important role to play in assisting consumers who are prepared to pay for debt advice. As the current report estimates, the professional debt advice sector helps 53-63% of those consumers who manage their unsecured debts by way of a debt management plan, with DEMSA members accounting for circa 59-73% of the fee charging market. Up until now there has been little independent and credible assessment of the professional debt management market. Faced with this issue, DEMSA, being the leading trade body in the debt advice sector wanted to give consumers, policy makers and the media a clear and balanced view of the sector. The previous lack of evidence has given rise to some misunderstanding and criticism of the fee charging sector. It is hoped that this report will shed some light on the market and will provide a reasoned perspective of the realities of a sector which delivers real help and positive solutions for a large proportion of those seeking debt help in the UK. Michael Land Chairman October Grant Thornton UK LLP 5

6 Foreword Message from Grant Thornton Since the onset of the economic downturn, the professional debt management industry has played an increasingly important role in helping consumers manage their unsecured debt. However, this has also put the industry under increasing scrutiny. In this context, in April 2012, DEMSA commissioned Grant Thornton to conduct an independent and evidence-based market study with the aim of: estimating the UK market size for debt management plans (DMPs); investigating the consumer profile, together with the costs and benefits of enrolling into a debt management plan; and assessing the industry's image, business model and profitability levels. The report relies on the analysis of desktop and primary research undertaken up to June Grant Thornton also invited industry organisations to participate in an online survey and received responses from 20 of them, primarily DEMSA members. In parallel, Grant Thornton conducted telephone interviews with industry stakeholders, including the industry regulator, creditors and industry experts. Based on the methodology developed (explained in the report), the UK debt management industry is estimated to be sized at between 520,000 and 645,000 plans with the fee charging sector accounting for 300, ,000 of these. The average DEMSA customer has an initial unsecured debt of 18,953 and stays on a DMP for 47 months. During this period, the consumer's unsecured debt level is reduced by 30-35%. The report estimates that the fee charging sector generates 145m- 186m per year in fees from debt management plans. Based on analysing the financial statements of the major industry players, the profit-before-tax margins vary between 7.4% and 15.4%; comparable with companies operating under the SIC code (other financial services activities except insurance and pension funds). Discussions with creditors and experts identified that DEMSA members are perceived among the best in the fee charging sector and make visible efforts to ensure compliance with industry standards and drive best practice. This is also evidenced by the role DEMSA played in developing the Debt Management Plan Protocol which aims to improve industry standards and ensure that the solutions implemented are sustainable for both consumers and the debt management companies involved. Stephen Rigby Partner, Grant Thornton UK LLP October Grant Thornton UK LLP 6

7 Foreword The history of DEMSA DEMSA The Debt Managers Standards Association was formed in 2000 in order to promote good practice in the debt management industry, and to protect the interests of the public and the lenders to whom they owe money. Debt management companies act on behalf of borrowers to help them to clear their debts. They do this by entering into direct negotiations with creditors in order to facilitate the repayment of debts. In return for their services debt management companies are generally paid a fee by the borrowers. Membership of DEMSA is reliant upon debt management companies being able to demonstrate that they comply with the standards set out in the DEMSA Code of Conduct. The Code of Conduct has been developed in consultation with a number of debt management companies and major lenders. The aim of the Code, and that of DEMSA, is to encourage debt management companies to provide services of the highest standards in which the public and the credit industry can have confidence. In 2008 DEMSA became the first trade body within the debt management industry to successfully secure approval for its code of practice under the OFT Consumer Codes Approval Scheme for advice for debt management plans (DMP) and Individual Voluntary Arrangements (IVA). The OFT only approves codes that have proved effective in safeguarding and promoting the interests of consumers beyond the basic requirements of the law. Since 2000, the membership of DEMSA has grown substantially. As of autumn 2012, member firms in number had grown to 21. Collectively these firms represent the financial interests of circa 220,000 consumers Grant Thornton UK LLP 7

8 Section 1 Introduction 01. Introduction 02. Executive summary 03. Methodology 04. The DMP business model and process 05. Debt management industry size 06. DEMSA fee structure and profitability 07. DEMSA customer profile 08. Debt management company outcomes and savings 09. Industry image with creditors 2012 Grant Thornton UK LLP

9 Introduction Introduction Project objectives The Debt Managers Standards Association (DEMSA) commissioned this report to investigate the following key issues: the estimated size of the UK debt management industry by volume the profile of customers signing up to debt management plans with DEMSA the savings that debt management companies offer to their customers the typical business model of a DEMSA member including fees structure, average number of hours spent on putting together a debt management plan and average contributions of a customer to a debt management company for the services rendered the aggregate revenue and profitability of debt management companies within DEMSA the image of DEMSA members with creditors Project structure The report has been structured in such a way as to clearly address the key issues as agreed with DEMSA The report is broken down into the following nine sections: Section 1 Introduction: provides an introduction to the report, highlighting the key objectives of the work Section 2 Executive summary: provides a summary with the key findings from the primary and secondary research Section 3 Methodology: presents the methodology we followed in order to compile the report. It depicts the different types of research that we undertook including primary research (survey and telephone interviews) and desktop research. The section provides details of the survey population that answered our online questionnaire Section 4 The DMP business model, process and service: provides a perspective of the debt options available to consumers in arrears and explains the stages involved in setting up and managing a debt management plan as well as the operating business models of DEMSA members Section 5 Debt management industry size: presents our estimates of market size of debt management plans in 2011, as well as the market share of DEMSA vs. other industry players based on survey results, telephone interviews and analysis of desktop sources Section 6 DEMSA fees structure and profitability: presents a comparison of profitability of DEMSA members vs. the industry. It also assesses the structure of industry fees (including monthly and set-up fees as well as their future) and looks into marketing and labour costs in greater detail Section 7 DEMSA customer profile: provides an estimate of the number of customers advised by DEMSA members, distinguishing those who were recommended a DMP. In addition, it profiles the average unsecured debt and net disposable income of a consumer with a DMP across DEMSA and CCCS (the main free-to-consumer provider that publishes data) Section 8 Consumer benefits and attrition: uses proxies to quantify the benefits that DEMSA members achieve for their customers. In order to do this, this section presents three scenarios with the main inputs being the fees paid to the DMC and the interest rate paid over the duration of the DMP and outlining the level of savings/losses in each of these options. This section also provides an estimate of the attrition levels that DEMSA members experienced in Grant Thornton UK LLP 9

10 Introduction Introduction Section 9 Industry image with creditors provides creditors' perception of DEMSA members as well as the wider commercial debt management industry, indicating key benefits and risks associated with the activity of debt management companies. It also describes actions undertaken by creditors in order to improve the work relationship they have with DMCs and their efficiencies. The section also focuses on complaints made against DEMSA members 2012 Grant Thornton UK LLP 10

11 Section 2 Executive summary 01. Introduction 02. Executive summary 03. Methodology 04. The DMP business model and process 05. Debt management industry size 06. DEMSA fee structure and profitability 07. DEMSA customer profile 08. Debt management company outcomes and savings 09. Industry image with creditors 2012 Grant Thornton UK LLP

12 Executive summary Executive summary Sector overview As at April 2012, total lending to individuals in the UK stood at trillion, of which trillion (86%) was accounted for by secured lending on dwellings and 207 billion (14%) by unsecured (consumer credit) lending. Over the last few years, the UK economic situation, including negative or low GDP growth and the low rate of new jobs created combined with increasing unemployment and low levels of household savings (although recently household saving levels have increased compared to pre-recession levels) may have contributed to consumers falling into arrears on their loans There are a number of formal and informal debt management options available to consumers facing problems with the repayment of their unsecured debt. These include negotiated agreement with creditors, debt reorganisation and consolidation loans, debt management plans, county court administration orders, individual voluntary arrangements, debt relief orders and bankruptcy. This report is concerned solely with debt management plans and therefore the other debt management solutions are not discussed herein The DMP business model, process and service A debt management plan is an informal arrangement between consumers in debt and his/her creditors. A debt management plan is set up by a debt management organisation on behalf of a consumer with all of his/her unsecured creditors. The organisation negotiates and manages a reduced monthly payment from the debtor, which it then distributes to creditors on a proportional basis to the debt. The DMP can be set up by a free-to-consumer organisation (which is funded mainly by creditors) or by debt management companies (DMCs) who charge their customers for the services offered. DEMSA members fall into the second category, and charge a set-up fee and monthly administration fee, but do not charge for the advice given in the initial discussion with the consumer A consumer and the DMC have to go through several steps before a debt management plan is active. This includes an initial contact with the consumer which can be initiated by either the consumer or the debt management company. This is followed by a comprehensive assessment of the consumer's situation (based on a number of criteria such as number of debts, value of outstanding debt, the consumer's income, expenditure and outstanding assets) to identify the most appropriate solution, which is proposed to the consumer. The consumer's preference is crucial in determining what debt management solution will be set up. Some consumers may be best suited for an IVA or bankruptcy, but are not comfortable with the statutory nature of the IVA or the stigma attached to bankruptcy and therefore opt for a DMP There are a number of free of charge activities (including on-going liaison with a consumer, data gathering, processing and checking the accuracy of given information, assessing the best suited debt option and a consumer's preference) before a debt management plan is set in place. Only when all data has been gathered and a debt plan agreed to a satisfactory level for both the consumer and the debt management company, does the latter inform the creditors that it will act on behalf of the customer going forward As a next step, the DMC charges the customer a set-up fee for putting together and submitting the proposal for a debt management plan, as well as for liaising with creditors to negotiate the DMP. The DMCs typically request a freeze of interest rates and other charges and for pro rata reduced repayments compared to the contractual obligations of the consumer's loan/debt. The set-up fee usually consists of a sum equivalent to two months of a consumer's disposable income 2012 Grant Thornton UK LLP 12

13 Executive summary Executive summary (continued) The DMP business model, process and service (continued) Once the plan has been set up, a debt management company will charge the consumer a monthly fee, usually either the equivalent of 17.5% of the consumer's monthly net disposable income or a fee based on the number of creditors. In return for the monthly fee, the debt management company provides the consumer with a range of administrative services (such as liaising with creditors on the consumer's behalf and addressing the consumer's and creditors' questions) as well as regular reviews of the consumer's situation, which take place once or twice a year. The results of this review are passed on to creditors and a case is made for interest rate and other charges to continue to remain frozen There are two main models of delivering advice among debt management organisations, one focusing on providing telephone advice followed by postal correspondence (a model offered by a majority of DEMSA and commercial sector providers), with another allowing for face to face advice (being more expensive and, therefore attracting less financially vulnerable customers, as well as being less common across DEMSA members) Based on our survey with DEMSA members, it takes six hours on average to set up a debt management plan and 1.2 hours per month to administer it Creditors do not always agree to a concession (such as an interest rate freeze) and it depends on whether a DPA between the creditor and the debt management company is in place, as well as the presence of online platforms that allow a quick exchange of consumer data. This affects the timeline to activate the DMP and agree on concessions, which can, depending on the factors mentioned above, vary from a few days to a few months Debt management industry size There are various industry bodies that have provided market size estimates for the industry in recent years, with the 2010 BBA/Accenture report being one of the most frequently quoted and Zero Credit's reported commissioned by the Debt Resolution Forum, being the most recent (published in June 2012) Based on our desktop research, the survey and interviews with DEMSA members, other market participants and industry experts, we estimate the UK market for debt management plans to have been c.520, ,000 DMPs at the end of 2011 The market consists of commercial sector providers including DEMSA and DRF members as well as other commercial organisations, accounting for c.300, ,000 debt management plans (c.53-63% share), followed by non-fee charging sector organisations (such as CCCS, PayPlan and charities), accounting for c. 220, ,000 debt management plans (c.37%-47% share) At the end of 2011, DEMSA alone had 220,000 DMPs (of which 197,000 were active) under their management, accounting for 34-42% share in the market Grant Thornton estimates there are around 250 to 350 debt management companies operating in the UK, with the number declining over the last couple of years following the OFT actions aimed at companies not complying with the industry standards DEMSA fee structure and profitability According to our estimates, the commercial sector appears to be generating million in fees from the DMPs under their management Profit margins vary across the sector. However, our comparison of providers' margins in 2010 identified that DEMSA members achieve significantly lower PBT margin (7.4%) compared with other non-demsa commercial companies with PBT margin of 15.4%, non-fee charging companies with PBT margin of 14.9% and other companies involved in broader categories of financial services activities with a PBT margin of 14.0% On average, DEMSA members spend 72% of the total DMP cost on labour and marketing costs while their average turnover by DMP per year is c. 554, with an average EBITDA per plan per year being 109 (both figures reflect the average per year and include a mix of existing clients for which only monthly fees were charged and new ones taken on in 2011, for whom set-up fees were also charged) 2012 Grant Thornton UK LLP 13

14 Executive summary Executive summary (continued) DEMSA fee structure and profitability (continued) Only 17% of DEMSA's annual revenues appear to be sourced from set-up fees, which indicates that set-up fees are not as important in generating revenues as management fees (and sustainable DMPs with long duration) are contrary to popular industry perception The average labour costs vary significantly across the businesses based on the services they provide to consumers. The largest share of labour costs are involved during a debt management plan's set-up, with an average weighted cost being 208 and a range of between 90 and 489 for the telephone advice providers across the surveyed sample. The labour costs may depend on the level of activities involved (e.g. maximisation of disposable income, frequent customer follow-ups to ensure their satisfaction and sustainability of plans) The average marketing cost per plan varies between 36 and 226 and depends on the marketing strategy which can vary from online advertising, to buying customer data and conducting outbound phone calls to consumers who do not opt out of telephone marketing or referrals from existing customers, all of which have very different acquisition costs The average set-up fees charged by the surveyed sample range from 90 to 495 (these are the average minimum and maximum fees applied) for the telephone model and 779 for face-to-face. The average monthly fees charged by surveyed debt management companies range from 30 to 42 (these are the average minimum and maximum fees applied) with the average of our sample being 36 There has been significant criticism around set-up fees being too high and relying on individual consumer's disposable income, instead of offering transparent fixed fees and not being an incentive for DMC to ensure plans are sustainable. The analysis undertaken on DEMSA members 2011 revenues shows that on average, 17% of revenues generated came from the set-up fees of new plans, whilst 83% of the fees were sourced from the management fees applied on the total active plans. This indicates the importance of management fees and the interest of debt management companies in the long term sustainability of DMPs The Government response to the BIS Select Committee indicates that the Government is working with stakeholders to develop a Protocol of best practice of debt management plans which will involve set up fees. The Government also stated that where set-up fees threaten the sustainability of the debt management route, it expects providers to look to a change in their business model While set-up fees are likely to undergo some form of restructuring as a result of the Protocol, our primary research identified that DEMSA members are open to consider alternative solutions for set-up fees (such as spreading the set-up fee over four to six months) in order to improve the image of the commercial side of the industry and their relationship with creditors and regulators DEMSA customer profile In 2011, 10 DEMSA members advised over 193,000 consumers of whom 45,876 (23.7% share) were recommended a debt management plan, indicating that nearly one in four consumers received advice from DEMSA to enter into a debt management plan For the same 10 companies, the number of consumers entering into a debt management plan was c.26,300 indicating that approximately one in seven consumers decide to undertake a DMP with the company that advises them In 2011, the average debt of DEMSA customers was 18,953, net disposable monthly income was 203, of which they repaid 166 to creditors, resulting in c.0.9% debt repayment per month, assuming no interest and other charges The average unsecured debt of consumers with a DMP as well as their net disposable income were significantly lower in the case of DEMSA members compared to CCCS, the free-to-consumer provider 2012 Grant Thornton UK LLP 14

15 Executive summary Executive summary (continued) Consumer benefits Debt management companies appear to be generating consumer benefits not only by lowering the interest rates on their debts, but also, referring consumers to relevant authorised parties who can arrange the utility/insurance switch nor if they are FSA authorised, advising them or actively engaging in lowering their utility bills and insurance expenditures Based on the information collected through our survey, we developed three scenarios to quantify the benefits achieved by consumers over the length of their DMP. The difference in outcome is dictated by whether a consumer will administer the plan independently or pay fees to a DMC and on whether interest rates are frozen by creditors (as well as at what level and for what duration). Our analysis shows that throughout the lifecycle of an average DMP (i.e. 47 months), fee charging providers effectively help consumers reduce the initial balance of their debt by 30-35% Industry image with creditors Our survey with DEMSA members identified there were 2,415 complaints made against eight DEMSA members in The number of complaints varied significantly between providers indicating that DEMSA members may have different definitions and procedures for recording a complaint. According to DEMSA, there were 116 complaints filled with DEMSA against 22 member companies in Similarly, according to DEMSA the total number of consumer complaints filed against DEMSA with the Financial Services Ombudsman increased to 218 in 2011 (+50 y-o-y increase) partially driven by a greater number of members and DMPs managed. However, only 64 of these complaints (29% of total) were upheld against DEMSA members by FOS As per our survey with DEMSA members, the main areas of the complaints received in 2011 included poor customer service, misconceptions around expected savings, higher than anticipated interest rates and charges and the promise of debt being written-off as well as communication issues with creditors Our industry expert and creditor interviews identified that DEMSA members are perceived among the best in the commercial market and make visible efforts to ensure compliance with industry standards and to drive best practice Creditors noted that the level of advice and customer service offered by DEMSA members has improved significantly in the last couple of years In addition, creditors acknowledged the fact that there is a place for both free-toconsumer and commercial companies in the market and that the quality of advice can be an issue for both types of debt management plan providers Non-compliance with regulations and industry standards can also be an issue across larger players, however the majority of non-compliance issues tend to be with smaller players who may lack sufficient market knowledge and experience to offer quality services According to our telephone interviews with a sample of 13 DEMSA members, their key unique selling points were responsiveness, approachability, a customised approach, the range of debt options, support services on offer, long opening hours and being non-biased towards creditors (as they are not part of the fair share system and do not depend on creditors for funding). However, we are unable to cross-reference these claims as consumer interviews were not part of the scope of this report Creditors identified a number of advantages of using a debt management company which included: ability to engage and sign up a customer (that a creditor had lost contact with) to a debt management plan, ability to act as an independent party and liaise and address the consumer's debt issues with different creditors at one time or undertake an activity that would traditionally be resource and cost intensive for creditors. However, creditors also identified key threats which they associate with commercial DMCs, including long waiting times between the start of a plan and pro rata contributions being made to the plan, focus on sales pitch rather than the consumer's best interest or not sign-posting to the consumer the existence of free-to-consumer advice 2012 Grant Thornton UK LLP 15

16 Executive summary Executive summary (continued) Industry image with creditors (continued) In our interviews, DEMSA members stated that they offer transparent, holistic and accurate advice that is in line with the voluntary codes of conduct and regulations Creditors will continue to refer consumers to free-to-consumer organisations mainly because of the PR risks associated with recommending consumers in financial difficulty to opt for a paid service when free alternatives are available (although creditors are aware that the services may not be comparable as the freeto-consumer sector may not take such an active role in administering a plan, as stated by DEMSA members) However, creditors will continue to work with commercial companies as these approach them on behalf of consumers. In the short to medium-term, one of the creditors' priorities is to measure the performance of the companies with which they work. They are also planning to focus on industry efficiencies by lobbying for an industry-wide web platform or at least a shared platform amongst DEMSA members, greater data sharing between industry stakeholders and a greater level of customer due diligence among debt management companies to ensure they recommend the most appropriate solution Note Please note that this report is not meant to be an exhaustive analysis of the debt management plans market, but it is structured to answer the scope of work agreed with DEMSA in the Letter of Engagement We have undertaken desktop research and analysis, but have only included the figures that were relevant to our scope rather than undertaking a complete literature review Given the reluctance of non-demsa members to participate in this study, our primary research and analysis with debt management companies is based mainly on DEMSA members, who despite the volume of DMPs the member organisations represent, still only account for a small survey sample in terms of number of companies compared to the 101 organisations we asked to take part in the survey 2012 Grant Thornton UK LLP 16

17 Section 3 Methodology 01. Introduction 02. Executive summary 03. Methodology 04. The DMP business model and process 05. Debt management industry size 06. DEMSA fee structure and profitability 07. DEMSA customer profile 08. Debt management company outcomes and savings 09. Industry image with creditors 2012 Grant Thornton UK LLP

18 Methodology Methodology Online survey Organisation type Organisations to whom survey sent Organisations from which survey received DEMSA members other commercial debt management companies 81 6 free to consumer debt management organisations 4 - Total In-depth telephone interviews Organisation Number DEMSA members 13 creditors 3 regulators (OFT) 1 other industry experts 4 Total 21 Primary and secondary research approach This report has been prepared based on primary research supported by secondary research to build a robust picture of the value and role of DEMSA members in the UK debt management industry. The methodology included: Online survey Following consultations with DEMSA, Grant Thornton developed a questionnaire that was sent out to over 250 contacts at 101 members of the UK debt management industry via an online survey system. The questions asked were directly linked with the topics presented in the project objectives section The survey which ran during May 2012 was sent out to DEMSA members, other commercial debt management companies and the free-to-consumer sector Following the survey, Grant Thornton conducted 20 telephone interviews with stakeholders (DEMSA members, creditors, OFT, industry experts) in May and June 2012 The tables opposite set out the survey and telephone interviews' response breakdown (DEMSA, non-demsa debt management organisations, creditors, regulators, other stakeholders) Please note that many of the interviewees did not want to be quoted and therefore all quotes have been anonymised. Some of the individuals we spoke to did not want their comments to be quoted even on an anonymous basis, therefore we are unable to name the creditors and industry experts we interviewed Our study is also supported by desktop research and analysis. However, the purpose of the report was not to restate statistics and qualitative comments for existing literature, therefore references to desktop sources are relatively limited. Research limitations Our analysis was constrained by the following limitations: Limited statistics directly relevant to our scope (eg there is no source tracking the number of debt management plans set up in the UK or the number of consumers repaying their debts to creditors via a debt management plan) The low survey response rate among non-demsa commercial and free-toconsumer debt management companies. This is due to a combination of factors: not all companies track the type of information we were asking for in order to address the client's objectives (eg interest rates paid by consumers for each of the debts before and after setting up the DMP, savings achieved on net disposable income, average duration of a DMP). Even among DEMSA members we were told that the data required took significant time to prepare for sharing with Grant Thornton 2012 Grant Thornton UK LLP 18

19 Methodology Methodology (continued) Research limitations (continued) companies outside DEMSA may have been wary of sharing confidential company data with a third party despite Grant Thornton's assurances that the data will not be shared with DEMSA or another third party and will be aggregated rather than naming the performance of individual organisations. As such, we obtained limited responses from non-demsa members, which only addressed a few sections of our questionnaire. For this reason, we have made limited use of the responses received by non-demsa members throughout our analysis the fact that the commercial industry does not speak with one voice and that the relationship between the commercial and free-to-consumer sectors may be strained, did not encourage knowledge sharing across the sector 2012 Grant Thornton UK LLP 19

20 Section 4 The DMP business model and process 01. Introduction 02. Executive summary 03. Methodology 04. The DMP business model and process 05. Debt management industry size 06. DEMSA fee structure and profitability 07. DEMSA customer profile 08. Debt management company outcomes and savings 09. Industry image with creditors 2012 Grant Thornton UK LLP

21 The DMP business model and process Introduction The DMP business model, process and service This section provides a brief background on unsecured consumer debt in the UK and the options available to consumers who fall into arrears and who are prepared to deal with their debt issues Debt management plans are discussed in more detail, giving an overview of the process a consumer goes through when setting up a debt management plan with a DEMSA member. The process of entering into a DMP is split into four main steps: 1. initial contact between the consumer and the debt management company 2. in-depth fact finding and advice provided to the consumer 3. negotiating with creditors to set up a DMP 4. administering it on behalf of a consumer This section highlights the distinction between the advice and services that DEMSA members offer free of charge and the point at which they start charging for the services offered as well as the staff hours required to provide these services This section also highlights the two main models operated by DEMSA members. The predominant model adopted by DEMSA members is telephone advice combined with some /post correspondence to finalise the sale of a debt management solution. A small number of DEMSA members operate a face-toface advice model, collecting all information needed during the agent's face-toface interaction with the customer and signing all documents during their consultation Finally, this section gives a brief overview of the negotiations that debt management companies have with creditors, specifically the various communication/relationship models and the impact these have on the time it takes for creditors to approve the concessions proposed by DEMSA members on behalf of their consumers The analysis in this section is based on desktop research (statistics on the level of UK consumer debt, market report on the debt management sector) and interviews with DEMSA members and creditors 2012 Grant Thornton UK LLP 21

22 The DMP business model and process Unsecured consumer debt and debt management plans overview Total UK lending to individuals as of April 2012 Unsecured lending 14% Secured lending 86% Total = trillion UK household savings ratio and real household disposable income Saving ratio & RHDI growth 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% (2.00)% (4.00)% 3.5% 3.9% 2.6% 2.9% 2.9% 2.5% 3.2% 5.7% 9.4% 8.3% 7.0% 7.0% 7.4% 2005 Q2 Q3 Q Q2 Q3 Q Q2 Q3 Q Q2 Q3 Q Q2 Q3 Q Q2 Q3 Q Q2 Saving ratio RHDI growth Sources: 1. BOE Total UK unsecured lending to individuals as of April 2012 lending, bn Sources: 1. IMF, 2. BOE F (Q1) unemployment & inflation, % Average unsecured consumer lending, bn Inflation rate Unemployment rate Sources: 1. ONS Consumer in debt context Unsecured lending grew from 130 billion to 233 billion between 2000 and During the economic downturn, restricted access to credit and consumers' willingness to pay off some debts resulted in a drop in unsecured lending, which stood at 208 billion in April 2012 Overall, according to ONS, during the period of , real household disposable incomes (RHDI) are estimated to have grown by 0.6% per annum (compared with 1.4% between ). However, since mid-2009, growth has been predominantly negative, as modest wage growth has been more than offset by high inflation. According to ONS, the saving ratio rose sharply during as households sought to shore up their balance sheets by paying down debt and increasing their saving. The saving ratio has risen because of a combination of continuing growth in gross disposable incomes and a decline in household expenditure, both in nominal terms. As a result, the average saving ratio in the period was 7.6% compared with 3.4% in Grant Thornton UK LLP 22

23 The DMP business model and process Unsecured consumer debt and debt management plans overview (continued) Consumer in debt context However, the economic downturn combined with unsustainable levels of indebtedness resulted in many consumers with restrained disposable income falling into arrears as they were unable to meet their contractual repayments As indebted consumers prioritised the repayment of secured debts, they may have fallen into structural arrears (three months plus) on their unsecured loans For consumers who are prepared to deal with their debt problems, there are several options available, amongst which is DMP, on which this report is focused The DMP can be set up and administered by two main categories of organisations: agencies such as CCCS and Payplan who offer a free-to-consumer service as they are funded mainly by contributions from creditors; and debt management companies who charge consumers for the service they provide These organisations negotiate with creditors on behalf of a consumer who has fallen into arrears on the contractual repayments on unsecured debt A brief overview of the options available for consumers facing difficulties in making contractual repayments on their unsecured debt is shown, followed by a more detailed explanation of the process involved in entering a DMP 2012 Grant Thornton UK LLP 23

24 The DMP business model and process Consumer options for dealing with debt Debt options (a) Category Negotiated agreement with creditors Debt reorganisation/ consolidation loan Debt Management Plan (DMP) County Court Administration Order (CCAO) Individual Voluntary Arrangement (IVA) Debt relief Order (DRO) Bankruptcy Definition An agreement arranged and negotiated by a consumer or a not-for-profit provider with creditors independently, which may involve payments from income or payments from lump sums A loan given to reorganise or clear the existing debts under the assumption that the repayments on the new loan will not exceed the ones made towards the existing debt A plan set up on behalf of a consumer with all its lenders by a debt management organisation, which negotiates and manages the consumer's payments to creditors An administration order made by court and application by a consumer by which a consumer makes payments from his/her income to a court, which distributes them to creditors An arrangement which is prepared, negotiated and administered by an insolvency practitioner with the aim to voluntarily repay the consumer's creditors by using a lump sum, spare income or owned assets An order submitted to a government official (official receiver) by a government approved intermediary on behalf of a consumer unable to pay their debts. After one year of DRO, a consumer will be released from debt A formal court procedure started by a consumer or a creditor by which any consumer's assets are sold to pay creditors and surplus income is transferred to cover debt. The usual length of bankruptcy is one year Free of the debt automatically No No No, liable to pay debts No, however can be when it is ordered by court Yes, after completing the terms set by an IVA No, but released after one year of DRO in relation to debts comprised within DRO Usually after one year of bankruptcy in relation to debts comprised within bankruptcy Key characteristics and outcomes Length of time Interest rate/charges freeze Automatic protection from unsecured creditors' action Minimum/ maximum amount owed No fixed time assigned Consumer can enquire with creditors to determine such option No, creditors could obtain a court judgement or an order on consumer's home No Fixed term No Yes, but comes only from creditors paid in full No No fixed time assigned Could happen post the negotiation by a debt management organisation No, creditors may impose a charge on the consumer's home No Until the moment when a consumer makes his/her last payment Yes Yes, no action to be taken without court's permission up to 5,000 and including at least one court judgement can last up to five years Yes Yes No 1 year usually Yes Yes Up to 15,000 with assets owned up to 300 and monthly surplus income up to 50 One year with payments from surplus income to be paid up to three years Yes Yes In the case of consumer petition no, 750+ in the case of creditors' petition Debt write-off Can be agreed at the start or later depending on individual circumstances No Can be agreed at a later stage, subject to consumer's individual circumstances No, a court can issue an attachment of earnings order Write off of the balance of what is owed to creditors after IVA has finished Written off at the end of DRO except student loans, fines and some debts from family proceedings Written off, excluding student loans, fines and family proceedings Notes: a. Does not cover options available in Scotland Sources: 1. The Insolvency Service "In Debt? Dealing with creditors" report; 2. Grant Thornton analysis 2012 Grant Thornton UK LLP 24

25 The DMP business model and process The debt management plan process initial contact and debt advice Initial contact and in-depth debt advice Initial contact: depending on the customer acquisitions channels, the initial contact can be initiated by the consumer or by the DEMSA member (via an outbound call/letter) Collect details on customer situation (number of secured and unsecured debts, number of creditors, value of outstanding unsecured debt, income, expenditure, assets etc.) in order to prepare a common financial statement. Collect other personal situation information that could impact on the advice and solution proposed (e.g. employment status) Explain the options and unsecured debt management solutions available to the consumer based on their situation and financial statement provided above. Explain the pros and cons of each debt management solution Identify the most appropriate course of action for the consumer. This can include advising the consumers that they should be able to repay their unsecured debt provided they budget more carefully, or if there is only one creditor, recommend the customer approaches the creditor directly. If the debt level is over 2,000, it involves more than two creditors and there is disposable income available, recommend the most appropriate debt management solution Get consumer's view on the unsecured debt solution proposed. Consumer takes time to decide if the solution recommended meets expectations. Some consumers eligible for IVAs and bankruptcy will prefer to engage in a DMP Describe the services that the company could offer in relation to the mutually agreed debt management solution, the fees charged for the set-up and management of a debt solution, the terms and conditions Send the customer an information pack, which includes a summary of the common financial statement, debt advice, fees associated with the proposed services to be provided, terms and conditions Advice and services offered to the consumer prior to and independent of the payment of set-up fees The clients are very vulnerable people and consultants first need to understand what is mostly worrying them. So it is not all about crunching into numbers at the initial stage. You need to understand that someone who is calling you is incredibly stressed and at the lowest point of their lives. There is a mental health element that consultants need to be aware of. The early stages of the consultation will be around establishing what the biggest customer concern is and around giving them reassurance and calming them down. It is important to calm the customer before taking in all the numbers information and to make sure a customer has a clear mind before it. Then you look into the different options, the size of the spare money, the size of debt, the options such as an IVA or a DMP. DEMSA member #1 Our approach is focused on delivering the best advice based on us doing a full fact find which includes income, expenditure and priority bills as well as unsecured credit commitments. We recommend the solution that we feel best suits the customer circumstances and discuss if it meets their expectations. Even when we recommend bankruptcy, it does not mean that the person chooses to go bankrupt. Lots of people don t want to because of the stigma they perceive to be attached. DEMSA member #2 All advice is free. Advisors follow a script which includes thoroughly reviewing income, expenditure, liabilities along the Common Financial Statement guidelines and then we make appropriate recommendations. We only sell to 1-2% of all of the people we speak to so there is a lot of free advice. Some customers will shop around for this advice before deciding to do something. If a DMP or an IVA is proposed, we will send an information pack then to the customers with all information collected. The customer will sign and return it (the letter of authority), and we will then start contacting the creditors to get up to date balances. DEMSA member #3 DEMSA members go through a comprehensive process of reassuring the consumer, fact finding and advice, all of which is done free of charge Sources: 1. Grant Thornton interviews with DEMSA members, May to June 2012; 2. An independent review of the fee-charging debt management industry, Personal Finance Research Centre University of Bristol, June Grant Thornton UK LLP 25

26 The DMP business model and process The debt management plan process initial contact and debt advice (continued) There is a certain amount of work done before taking any payment (ie advice and sending pack out). Normally we will do nearly two hours of work (1 hour 42 minutes) before we receive payment from the consumer regarding the set-up. DEMSA member #4 Once the solutions have been explained, the advisor would then try to get an initial response from the customers and understand their thoughts about it. Afterwards, we will send an information pack out to them that explains the pros and cons. DEMSA member #1 All advisors are trained about the advice and solutions they offer. If a consumer has more than 10,000 of unsecured debt and fits the criteria for an IVA, we will talk through the pros and cons of an IVA. By choosing an IVA you have to pay for five years and if you break the arrangement you can become a bankrupt. If a debtor has more than 10,000 unsecured debt, fits criteria and believes that their financial position is likely to remain the same for the foreseeable future, an IVA is generally the best product because of the debt forgiveness. Having said that, there are consumers with debts over 10,000 that opt for a DMP. That is because they believe they are in a temporary position and things will get better. DEMSA member #3 The client will speak to a solutions centre agent who gathers all the information, personal details and creditor details. That would probably take from minutes, depending on the number of creditors that a customer has. Then depending on the client circumstances the customer will be transferred to a senior debt counsellor who will confirm all the contact details again and then will go through a list of all the debt solutions with the client. That can take from minutes depending on who the client is and what the options for the client are. That is a part of the client take-on process. The remaining time is about making sure that the client understands the paper work, the fees and asks any additional questions. DEMSA member #5 There is a format and checklist they will have to go through (according to DEMSA standards) and there are a lot of pieces of information they need to cover. Phone advisors are given room to handle the call with some flexibility and each individual case is deemed on its own merits. DEMSA member #4 Advisors will go through full details and full fact finding, use their knowledge of debt solutions (eg is it IVA, DMP, DRO) and if we should pass the consumer to free sector etc.. That takes quite a significant amount of time. The next stage is different to our competitors. We have a PQP department (product quality and placement). This is like a police of our operation which monitors whether advisors sold the right products or whether customers are in the right plan etc. They will verify the products for the client as well as the quality of the initial sales process. DEMSA member #6 Sources: 1. Grant Thornton interviews with DEMSA members, May to June 2012; 2. An independent review of the fee-charging debt management industry, Personal Finance Research Centre University of Bristol, June Grant Thornton UK LLP 26

27 The DMP business model and process The debt management plan process setting up the DMP set-up of a debt management plan Receive completed information pack from customer, check and process the received information pack Liaise with customer for any missing information (eg banks statements, credit card statements, pay slips) Update the common financial statement in case figures are different from those initially declared by the customer Send and receive letter of authority from the customer by which the customer accepts for the DMC to represent him/her in negotiations with creditors and agrees to pay the relevant fees to the DMC based on the fee structure of the DMC Send statement of intent to creditors informing them they will act on behalf of the customer Advice and services offered to the consumer prior to and independent of the payment of set-up fees Draft and submit to creditors a proposal which includes an assessment of the customer's income and expenditure and in which the DMC argues for interest rate freezes and reduced payments compared to the consumer's contractual obligations If the creditor accepts the offer, start distributing token payments (during the months when the majority of the customer's disposable income goes towards paying the set-up fee) If a/more creditor(s) does/do not accept the offer, or accepts it under less favourable conditions, contact the creditor(s) to understand the reasons for refusal or to further argue for interest rate and charge freezes Help the consumer increase their disposable income by providing / arranging for cheaper utility and insurance provision (if they have FSA authorisation) or referring consumers to relevant authorised parties who can arrange the utility/insurance switch Services offered for the set-up fee collected Arrange for payment of set-up fees and collect part or total payment at a date that suits the customer within the next month (eg salary pay day) Set-up fee payment collected Sources: 1. Grant Thornton interviews with DEMSA members, May to June 2012; 2. An independent review of the fee-charging debt management industry, Personal Finance Research Centre University of Bristol, June 2009 DEMSA members undertake a range of activities, from data gathering to advice and processing before setting up a debt management plan and charging a customer 2012 Grant Thornton UK LLP 27

28 The DMP business model and process The debt management plan process setting up the DMP (continued) We start working on the consumer's case irrespective of whether the money has been paid or not as soon as we get the letter of authority back, signed. Typically, if a consumer is paid at the end of the month and the letter of authority is sent back to us during the month, we will start working on the case and will agree a date with the customer to take a payment. DEMSA member #3 We operate a risk based model. Provided the client meets his/her commitments, we will start distributing token payments from our accounts to back up the fact that we have started to act. The creditors know of our appointment immediately, which is fairly unique. Wherever possible, we want to demonstrate that our client will not miss payments to creditors and that this will be accurately reflected on their credit file. DEMSA member #7 We spend significant time contacting the creditors, chasing them for extra offers. If they reject an offer, we come back to the creditors to find out why they rejected the work. DEMSA member #5 We do not charge any up-front fee before a plan is achieved. We do not charge for initial advice. DEMSA member #8 We do not charge fees until we've been working for about a month on the case. Typically a customer pays once their pay check comes in, which might take a month during which time we will have done the initial proposals, faxed the creditors, responded to creditors and negotiated for charges and interest rates. DEMSA member #1 As soon as the client returns the letter of agreement and without receiving any payment from the client, we will write to the creditors. DEMSA member #9 As part of the take on process, we will check if our customers have benefits, utilities, etc.. If they are on benefits and it's a complex case, we will send them to a charity called Income Max which costs the company 24 and helps the consumer to get additional benefits and maximise their income. They will do any utility switching for the consumer and will give them advice to maximise their disposable income. anonymous DEMSA member Sources: 1. Grant Thornton interviews with DEMSA members, May to June 2012; 2. An independent review of the fee-charging debt management industry, Personal Finance Research Centre University of Bristol, June Grant Thornton UK LLP 28

29 The DMP business model and process The debt management plan process administration and review DMP administration Review DMP Collect monthly disposable income, deduct the monthly fee and distribute the remaining funds between creditors on a pro rata basis, based on the outstanding balance owed to each creditor Deal with any correspondence from creditors forwarded by the customer and inform the customer of the outcome Deal with any questions and issues reported by the customer or creditors Conduct six month or annual reviews to verify if and how customer circumstances have changed and if the DMP is still the most appropriate solution Communicate the review results to creditors and ensure they continue to freeze interest and charges Contact the customer to ensure they are satisfied with the service and they do not experience any difficulties Services offered for the monthly fees Sources: 1. Grant Thornton interviews with DEMSA members, May to June 2012; 2. An independent review of the fee-charging debt management industry, Personal Finance Research Centre University of Bristol, June 2009 DEMSA members undertake six monthly or yearly reviews of each DMP to understand if the customer's situation has changed and if the DMP is still the best solution 2012 Grant Thornton UK LLP 29

30 The DMP business model and process The debt management plan process administration and review (continued) Following the annual review, we will submit to creditors a new offer which reflects any changes in the clients' NDI. The vast majority of creditors will accept the updated proposals and continue to keep interest and charges frozen. DEMSA member #10 We encourage our clients to check their monthly statements, which they receive from creditors. This is to check whether they see no interest or charges. If there is a charge, we will see this through to completion. That's why we achieve high retention. DEMSA member #9 Generally creditors will provide 12 months of interest freeze and will then require an annual review. They will expect the DMC to contact them in a year's time to give them the results of the financial review and if nothing has changed, then they will continue providing the interest freeze. Otherwise, they will change their approach. DEMSA member #4 Once a DMP has been set up, there is the premier team who takes care of the client for three to 12 months, typically about six months. This team will then have monthly contact with the consumer and will log onto the system whether they want more frequent contact (eg on a daily or weekly basis). If it is the case, the premier team will speak to them on those timescales and keep them up to speed with offers made, interest savings. They will also try to see what their rights are and benefits should be to maximise disposable income. Then following that, they are transferred to the customer service team which will administer the plan once the routine of being on a plan has been established. DEMSA member #6 Sources: 1. Grant Thornton interviews with DEMSA members, May to June 2012; 2. An independent review of the fee-charging debt management industry, Personal Finance Research Centre University of Bristol, June Grant Thornton UK LLP 30

31 The DMP business model and process The face-to-face model Throughout our discussions with DEMSA members we have distinguished two main operating models in the DMP market. Despite its small industry presence, the face-to-face model appears to be well regarded in terms of the quality of advice provided DEMSA members operate two main models: providing telephone advice to potential customers, collecting some initial information over the phone and then finalising the remaining documents via the post; this is the predominant model followed by most DEMSA members and businesses in the field providing face-to-face advice to potential customers, collecting all information needed during the agent's face-to-face interaction with the customer and signing all documents during the visit The latter model is being used by two DEMSA members, both of which make use of the two models either under one company or different subsidiaries. One of the two companies has managed to grow significantly through the use of the face-to-face model and is amongst DEMSA's largest members in terms of DMPs under management. However, some of the remaining DEMSA members may also offer face-to-face advice if a customer walks into their branch and asks to meet with an advisor According to the main face-to-face provider, this operating model allows for a shorter turnaround time as the customer and advisor will agree and sign the agreement at the point of sale (whilst still offering a 14 day cooling off period as per selling regulations, which 99% of the clients decide to waive as they want the debt management company to act immediately). This way, the business and the customer do not lose time waiting for the postal correspondence and can set up the plan quicker Once the pack has been signed by the customer, the provider will inform creditors to ask for the 30 day 'breathing space'. Finally, the franchisee debt advisor is likely to go back to the customer if paperwork is missing The face-to-face model appears to be appropriate for the customers who can afford to pay the higher set-up fees associated and who are seeking for a more personalised approach towards resolving their distressed financial situation. Based on the customer profiling information provided by the largest DEMSA operator of the face to face model, customers of the face to face model tend to have a more complex situation involving more than just credit cards or store debts.. However, as one provider commented, if the advisors deem that a customer is rather vulnerable financially, then they will refer him/her to the phone channel Other DEMSA members also recognised that the face to face model may make it easier for the advisor to assess more accurately the customer's financial situation and, therefore, provide more appropriate advice The main advantage of the face-to-face advice is that the advisor will be able to better assess the customer's situation and better foresee some of the issues. However with the correct approach, trained consultants and a well-designed process, I believe this is also achievable through telephone and electronic contact. DEMSA member #1 (non face-to-face provider) Each of our clients has a choice of communicating with us over the phone or face-to-face. However, we will often refer them to the telephone business if they are on job seeker's allowance, have evidence of vulnerability or we are concerned that our fees may represent an obstacle to commencing a Debt Management Plan (DMP), where this is demonstrably in the client s best interests. DEMSA member #7 We do meet face to face occasionally because clients may walk in one of our branches but the vast majority of cases is handled over the phone. DEMSA member # Grant Thornton UK LLP 31

32 The DMP business model and process The face-to-face model (continued) However, face-to-face advice comes at a higher cost both to the provider and to the consumer. For more details on the fees for the two models please refer to section 6 Some other providers argue that their trained financial advisors can offer the same quality of an advice over the phone as the face-to-face providers offer in the presence of their customer. A DEMSA member who adopts both models admits that there are many consumers who will still have a preference of using the telephone channel rather than meeting face-to-face. This view was reenforced by other providers as well. Potential reasons for this may be: the higher cost associated with the face-to-face advice (even though the advice is provided for free, if the customer accepts the DMP, he/she will have to pay a higher set-up fee than by using a telephone channel) convenience factor; distressed customers seeking debt management advice may want to discuss their financial situation and option as soon as possible rather than waiting for a financial advisor to arrive at their doorstep psychological factor; customers who are candidates for DMPs are in a very difficult condition and some providers think they may feel ashamed and may feel more comfortable discussing their issues over the phone rather than faceto-face The customers that come to us just have to pick up the phone and we can get on with managing their finances for them helping them with their unsecured debts and working with them to set a manageable budget to take care of their day to day living costs. They don't have to make a specific appointment or sit face-toface which can sometimes make people feel like they are being judged. DEMSA member #2 (non face-to-face provider) The industry has become so competitive and the drop-off rates have increased and the face-to-face model appears challenging due to the costs associated. Only large companies with efficiencies of scale can afford to operate the face-to-face model. DEMSA member #1 (non face-to-face provider) Whilst most consumers prefer the telephone advice for a number of reasons, face-to-face advice continues to attract the less financially vulnerable customers despite the higher fees associated 2012 Grant Thornton UK LLP 32

33 The DMP business model and process Staff hours required to set up and administer a debt management plan Range of staff hours to set up and administer a DMP Average man hours Set up = Admin Maximum average Lowest average Average Notes: a. Based on 13 survey answers; b. The figures above represent the range of staff hours that surveyed companies declared spending on setting up and administering a DMP; c. The range of hours spent on setting a DMP is wide because the start moment differs, with some counting from initial client contact whilst other only include the services offered from the moment the consumer sends a letter of agreement Sources: 1. Grant Thornton online survey and interviews with DEMSA members, May to June 2012 The amount of time spent with each client differs due to key elements specific to the case, (eg amount of creditors, regularity of payments, complexity of the case etc.) As a minimum, an average of 28 minutes per month on the phone is spent on each client s case; however there could be a large variance dependant on the individual case. The department that support the DM function will spend as much time as required to ensure the client s needs are met. On top of this is admin, post and creditor dealings. Also top of this time we do an annual review by the Review Team, this would typically be an hour per client. DEMSA member #6 = 1.2 We asked DEMSA members to estimate the average number of staff hours that it takes them to set up and administer a DMP. The estimates for setting up a DMP quoted were between 2.5 and 17 staff hours The variance is explained by the fact that some companies only included the number of hours it takes to process a new debt management plan from the moment a consumer consented to the debt management company acting on his/her behalf. In contrast, others have included all the activities from the first client contact to the first payment being made to creditors ie initial client contact, advice, correspondence with customers, checking the information provided by the customer, contacting creditors, processing payments On average, among the 13 DEMSA companies/groups that answered the survey, the number of staff hours required to set up a DMP is six hours Once an average plan is set up, DEMSA members spend between 40 minutes and two hours per month to administer the plan On average DEMSA members surveyed spent 1.2 hours each month dealing with a customer's debt management plan This includes collecting monthly fees and making payment to creditors as well as conducting annual reviews The time spent dealing with a client's DMP also depends on the client's situation clients that make regular payments and have no queries/issues are dealt with swiftly, while clients who have queries, need help in dealing with creditors or struggle to make payments require more attention The set-up stage is more labour intensive and therefore requires more staff hours than the plan administration. However, the activities included in the set-up process vary by company, therefore the range of hours quoted by survey respondents is wide DEMSA members spend several hours dealing with a new or existing customer, and beyond the free advice offered during the initial client interaction, they charge for the services offered 2012 Grant Thornton UK LLP 33

34 The DMP business model and process Time required for creditors to agree concessions The DMCs track record and the creditor's strategy in dealing with unsecured debt are essential factors affecting the time it takes for the concessions proposed by a DEMSA member to be agreed by a creditor The timeline for creditors to approve an offer depends on a variety of factors: whether the debt management organisation has a DPA in place with the creditor the strategy and responsive of individual creditors, with pay day loan companies being reported to be less flexible the DMC's size, reputation and track record in dealing with a creditor, which can influence the attitude that creditors will have towards its DMP offers Our interviews with DEMSA members indicate that for creditors where the debt management company has a DPA the process is quicker. The offer made by the debt management company can be accepted by the creditor within seven days, although usually it can happen within one day. However, if the debt management company does not have a DPA, it can take significantly longer for the creditor to process the request Some of the DEMSA members were already using online portals to communicate with creditors while others were in the process of developing them. However, they stated that some creditors will not accept online portals and, therefore, all communication was by post and telephone creating delays and inefficiencies which resulted in a longer period to negotiate concessions Another factor to consider is that from the moment the consumer decides to engage a commercial sector company to set up a DMP, during the first one to two months, the creditors receive no payment or only token payments and they agree to concessions only from month three once they start receiving pro rata payments. Therefore, from a consumer perspective it may take three months from the moment it decided to go the DMP route before seeing concessions applied This explains why during interviews, DEMSA members pointed out that the percentage of DMPs with concessions applied is lower in the first three months since set up and the clear and consistent picture of accounts with concessions can be seen only after months three to six For creditors to accept an offer it can take seven days. It really depends on the creditor. If they want to see the proof of income and expenditure and it can take up to three months. DEMSA member #5 Sometimes it can take one month but on average it can take two to three months from the moment the customer makes the first payment. Receiving the first payment before the plan is fully agreed and creditors have had time to check on their procedures and approve the plan. DEMSA member #8 There are a number of creditors for which you cannot do anything but write to them. They will not entertain any DPAs or portals and they are big creditors. It takes them at least two weeks to log your post. DEMSA member #11 If a debt management company has a DPA in place with a creditor and they share data through online platforms, the time between the proposal and acceptance of concessions is minimal Sources: 1. Grant Thornton interviews with DEMSA members, May -June Grant Thornton UK LLP 34

35 The DMP business model and process Time required for creditors to agree concessions (continued) We have DPAs in place with most of our creditors % of the partnerships will have DPAs with mostly major creditors. It's mainly payday lenders who we do not have DPAs with. DEMSA member #12 Having Data Protection Agreements in place with the customers creditors, as a platform for electronic file sharing, has helped considerably in accelerating the process. DEMSA member #10 The concession figure for the overall book is 96%. The figure in the first 3-6 months is closer to 89% where a DMP is being bedded in and regular payments are re-established with the creditors. DEMSA member # Grant Thornton UK LLP 35

36 Section 5 Debt management industry size 01. Introduction 02. Executive summary 03. Methodology 04. The DMP business model and process 05. Debt management industry size 06. DEMSA fee structure and profitability 07. DEMSA customer profile 08. Debt management company outcomes and savings 09. Industry image with creditors 2012 Grant Thornton UK LLP

37 Debt management industry size Introduction Debt management industry size This section provides an estimate of the DMP market size based on the volume of DMPs operating in 2011 There are a limited number of statistics on the number of debt management plans. The most widely quoted number is 562,000 commercial sector DMPs and 220,000 free-to-consumer DMPs at the end of 2010, based on a PayPlan report, re-quoted by a BBA/Accenture report In June 2012, Zero Credit launched a report commissioned by the Debt Resolution Forum which examines the UK market for debt solutions between According to this report, there were 165,090 new DMPs started in 2011, which is line with the Grant Thornton estimate of 130,000 to 175,000 new DMPs Given the lack of centralised statistics on the market, Grant Thornton has sized the market based on a top down methodology, using the estimates provided by DEMSA members and other debt management organisations in our online survey During the follow-up interviews we have asked debt management companies and creditors to substantiate their estimates, by clearly stating the methodology they used for their estimates and asking them to qualify how much was 'insider knowledge' and how much an educated guess. We then challenged and crossreferenced the answers with available desktop sources on the number of DMPs and number of DMCs, in order to ensure that the assumptions used in our market size model are robust. However, given the reluctance of commercial and free-to-consumer debt management organisations to share the volume of DMPs they manage, our market sizing is based on a sample of mostly DEMSA members. Therefore, we recommend that the entire industry from the free-toconsumer sector, non-demsa commercial companies and creditors collaborate in an industry-wide study to exactly size the market for DMPs Based on the above methodology, there were between 520,000 and 645,000 DMPs at the end of 2011 Our market size also shows the market share for the free-to-consumer, commercial and independent sectors. Based on our analysis, we estimate that DEMSA members represent 34-42% of DMPs, the rest of the commercial sector 14-26% and the free-to-consumer 37-47% of the total market. Based on this market estimate, DEMSA members would have 59-73% of the commercial sector 2012 Grant Thornton UK LLP 37

38 Debt management industry size UK DMP market size Market size estimate based on desktop research, survey and interviews c.520, ,000 DMPs Non-fee charging sector c.220, ,000 c.37%-47% of DMPs Non-DEMSA commercial sector c.80, ,000 DMPs c.14%-26% of DMPs DEMSA c.220,000 DMPs c.34%-42% of DMPs According to DEMSA, members had 220,000 DMPs in their books at the end of 2011, with 197,000 being active DMPs (ie payment had been received in the last month) DEMSA estimates that members administer 245,000 as of June 2012 and will grow to c.260,000. The growth is explained mainly by the addition of new members To estimate the market size for DMPs, I would follow the publication by Money Advice Trust of 300, ,000 DMPs for the commercial sector and then add to it the two predominant managed service providers (CCCS and Payplan). However, you would also have to account for Christians Against Poverty who are probably doing 16% of the volume of CCCS in terms of new DMPs. There remain several commercial DMCs outside of DEMSA and DRF membership that collectively account for over 10% of commercial total. DEMSA member #7 Sources: 1. Grant Thornton survey and interviews; 2. Debt Management, Mintel, September 2010; 3. A growth industry? An independent review of the fee-charging debt management industry, Money Advice Trust, July 2009 Our market size estimate is c.580,000 for the commercial and free-toconsumer sectors based on desktop research, survey responses and interviews conducted Over the past few years, a few reports have been published attempting to size the DMP market in the UK. Most prominently, the latest report published by Accenture and BBA which was based on figures published by Payplan stated the total market in 2010 was 562,000 DMPs for the commercial and 220,000 for the non-fee charging sectors. This figure was then reproduced by other studies and reports on the DMP sector However, companies, creditors and industry organisations remain uncertain about the market size. This is visible when comparing the ranges estimated: Mintel estimated that in 2010 there were 440,000 commercial and 160,000 free-to-consumer DMPs The Money Advice Trust estimated the market to be 400, ,000 DMPs in 2009, of which 133,000 free-to-consumer and 300, ,000 commercial a joint Ministry of Justice/Insolvency Service/BIS consultation paper estimated the market to be 300, ,000 DMPs in 2010 Based on our desktop research, the interviews conducted with DEMSA members and industry experts and the survey responses from DEMSA and non-demsa members, we have estimated the commercial sector at c.300, ,000 DMPs for According to DEMSA, its members accounted for 220,000 DMPs. Our understanding is that the rest of the commercial sector is split between DRF members (some of which are also DEMSA members) and a few large individual companies such as Kensington Financial and RG Financial Management. Beyond DRF and DEMSA the industry entails a number of small independent providers (c. 300 DMCs) which would undertake c DMPs each. As such, our calculations indicate that beyond DEMSA the commercial sector consisted of c.80, ,000 DMPs in However, we were unable to cross-reference these estimates in the limited timeframe of this engagement and our calculations could be out of range if there were key players in the market who are not registered neither with DEMSA nor DRF 2012 Grant Thornton UK LLP 38

39 Debt management industry size UK DMP market size (continued) An independent mandatory survey by an organisation such as the OFT, where companies outside DEMSA will not be reluctant to share the volume of DMPs they manage, would be required to provide a more accurate market size According to our interview and surveys with DEMSA's members, the total market for DMPs at the end of 2011 came up to 590,000 DMPs which consisted of 320,000 for the commercial sector. The non-demsa members that responded to our survey stated a total of 660,000 DMPs with 340,000 in the commercial sector which was a close estimate to DEMSA's responses In terms of the free-to-consumer sector, we have estimated it to be 220, ,000 DMPs for This range is based on our desktop research as well as our survey responses with DEMSA members who estimated the market at 270,000 (the three non-demsa members who responded to this question estimated the free-to-consumer market at 320,000 DMPs). However, we note that 270,000 DMPs might be the upper range, given that CCCS, the largest freeto-consumer provider appeared to manage c.109,000 DMPs at the end of 2011 (CCCS represented c.120,000 consumers at the end of 2011 and according to our interviews with DEMSA members most of the DMPs undertaken are single with 10%-30% of them being joint. Moreover, CCCS's business information department told us that only a small number of their DMPs are joint. Therefore, we estimate their joint plans to be c.10% of the total). In addition to CCCS, Payplan appears to be the second largest provider in the free-to-consumer sector with survey respondents and interviewees estimating it administering c.100,000 plans. Beyond these two providers, Christians Against Poverty (CAP) appears to be the closest in terms of size. However, in their annual report, CAP states they supported 4,504 consumers 'work their way out of debt' which indicates that the closest player to CCCS and Payplan manages a maximum of c.4,500 DMPs. As such, we have set the minimum for free-to-consumer DMPs at the 220,000 level Further to the commercial and free-to-consumer DMPs, our survey with DEMSA members returned 110,000 cases of DMPs where consumers are liaising directly with creditors. For the purpose of our analysis, we have not taken into account this group of DMPs as we did not have the time to cross reference it, which would require extensive surveys and discussions with creditors. Moreover, as discussed in section 9 creditors do not appear to hold the right level of information on their DMP customers and the ones we interviewed were unable to readily provide us with figures on the number of customers who manage their DMPs directly with them In terms of the total market debt under DMPs, DEMSA members estimate the total debt outstanding in 700,000 DMPs (market size estimate including the 110,000 managed independently by consumers) is 11.8 billion. Assuming the commercial and free-to-consumer market is indeed c.520, ,000 as we calculated, the value of the market debt could be underestimated by DEMSA members. Our survey respondents represented 184,000 DMPs with a total value of 3.5 billion, whilst CCCS has total debt of 3.7 billion for c.109,000 plans. A weighted average between these two cases would bring the total value of the unsecured debt represented by 520, ,000 DMPs to billion DEMSA members and industry experts estimated the current number of DMCs in the industry around 250 to 350 companies. An industry expert estimates that, in 2010, there were 300 to 350 DMCs. Following OFT intervention 90 businesses have exited the debt management market since September 2010 However, there are no statistics available on the number of companies at the time or on the number of companies that entered the market since the OFT intervention. Survey respondents also thought that the vast majority of the companies in the field are small independent companies 2012 Grant Thornton UK LLP 39

40 Debt management industry size UK DMP market size (continued) Other market size estimates, 2011 KPI Number of Debt Management Companies (DMCs) Number of consumers Volume of new plans, 2011 Sources: 1. Grant Thornton survey, interviews and analysis c c.570, ,000 c.130, ,000 The OFT does not directly regulate debt management plans, only the businesses who provide them. All traders who provide debt management services are required under the Consumer Credit Act to hold a consumer credit licence covering debt counselling, debt adjusting and credit-repair as appropriate. The OFT holds data on the number of businesses that hold a category of licence, not by market size. OFT In terms of the financially troubled consumers represented by the DMPs, they would be in the range of c.110% 130% of the number of DMPs in the market (ie c.570, ,000 consumers). Based on our interviews with major suppliers, c.10% 30% of the DMPs are joint, whilst CCCS, the largest single DMP provider, stated that a very small number of their DMPs are joint. This is because most unsecured debts in a DMPs are registered under one individual versus secured debts, such as mortgages, which may be joint However, this does not imply that more than one consumer is not affected by a single DMP since more than one person in a single household is likely to contribute towards the repayment of the DMP In terms of the new plans generated during 2011, DEMSA members estimated them at c.130,000. This was in close agreement with the responses received by non-demsa members who estimated c.140,000 DMPs However, both of these figures may be underestimated judging by the new plans registered by our DEMSA respondents in 2011 (50,000) and these businesses' approximate market share (c.49%-61% of the commercial sector). Assuming both parameters are correct and accounting for the continued economic downturn, the total volume of new plans for 2011 could have been c. 140, ,000 across the market. Moreover, if we account for the number of new DMPs from CCCS in 2011 (27,793) and CCCS's approximate market share (c.17%-21%), then the total number of new DMPs across the market could have been c.130, ,000 Based on the responses to the survey and interviews with DEMSA members, there were c. 580,000 DMP in Grant Thornton UK LLP 40

41 Section 6 DEMSA fee structure and profitability 01. Introduction 02. Executive summary 03. Methodology 04. The DMP business model and process 05. Debt management industry size 06. DEMSA fee structure and profitability 07. DEMSA customer profile 08. Debt management company outcomes and savings 09. Industry image with creditors 2012 Grant Thornton UK LLP

42 DEMSA fee structure and profitability Introduction DEMSA fee structure and profitability This section provides an overview of DEMSA members' aggregate profitability and compares it to other organisations setting up debt management plans as well as companies operating under SIC code 64999, representing companies offering other financial services activities, except insurance and pension funding We have also analysed the revenues and major costs for DEMSA members both at a total and per debt management plan. The results of this financial analysis indicate that the industry size is much smaller than suggested by the statistics quoted in the BIS Committee Report Finally, we have provided an explanation of the set-up and monthly fee structures charged by DEMSA members and have quantified the average fees that they charge. As it turns out from our analysis, set-up fees only generate approximately 17% of DMCs' revenues which indicates the importance of ensuring the DMPs' sustainability contrary to industry wide perceptions against the commercial sector The financial analysis in this section is based on desktop sources (downloading and analysing profit and loss reports from financial databases both for DEMSA members and the companies operating under SIC code 64999) supplemented by the output of the online survey 2012 Grant Thornton UK LLP 42

43 DEMSA fee structure and profitability Fees generated and profitability of DEMSA members Surveyed DEMSA members' statistics, 2011 (a) KPI Total revenues from DMP activities (a) 92,153,868 Average revenue per DMP 554 Average labour costs per DMP 208 Average marketing costs per DMP 112 Average EBITDA per DMP 109 EBITDA margins from DMP activities 19.6% Total value of debt outstanding for DMPs under management (a) 3,488,670,503 Average value of debt managed by DMP 18,953 Notes: a. The total revenues are sourced from the 13 survey respondents who represent 85% of DEMSA in terms of the total volume of active DMPs being managed. The total value of debt is sourced from 14 survey respondents who represent 93% of DEMSA in terms of the total volume of active DMPs being managed. For the remaining parameters, we present above the weighted averages by DMP since not all companies responded to all questions Sources: 1. Grant Thornton survey Industry comparison of PBT margins, 2010 PBT margin, % 16% 14% 12% 10% 8% 6% 4% 2% 0% 7.4% DEMSA 15.4% 14.9% Non-DEMSA commercial Non-fee charging 14.0% UK SIC Code Notes: a. The DEMSA figures above represent seven reporting members with total revenues (from DMP activities and others) of million which control 80% of DEMSA active DMPs. The non-demsa figures represent 11 reporting companies with total revenues 61.5 million, the non-fee sector represents the figures reported by CCCS, Bristol Debt Advice Centre and Totemic (parent company of Payplan) with total revenues of 62.4 million. We then decided to compare their margins with the wider SIC Code ('Other financial services activities, except insurance and pension funding') which appeared to be the primary SIC code for most DMCs above. We obtained 2010 reporting revenues and profits for 3,963 companies Sources: 1. Fame Value There is a large misconception that fee charging DMCs are collectively making 250 million a year profit from debt management plans. I will be surprised if DEMSA members manage to make even 25 million a year in profits from DMPs. DEMSA member #13 The commercial sector appears to be generating c million in fees from the total DMPs handled whilst profitability may vary significantly across providers Assuming the commercial sector had c.300, ,000 DMPs undertaken in 2011 (as shown in page 38) and accounting for DEMSA members' revenues and market share, then the total commercial sector could be generating c million in fees Profit margins, as measured in terms of PBT divided by revenues, vary significantly. Through the use of Fame, a database with UK companies' financials, we compared DMP providers' margins for 2010 and identified that DEMSA members, which control approximately 49%-61% of the commercial sector, generate significantly lower margins compared to the rest of sector (7.4% versus c.15%). However these figures represent the total revenues and profits generated from all activities of the companies investigated (ie if a company is engaged in both DMPs and IVAs, then the margins calculated will reflect both activities). Moreover, DEMSA members' profits lie significantly below the industry average in terms of financial services providers in the same SIC Code that generate PBT margins of 14% The DMP market remains a relatively new consumer credit market, which has been growing over the past years driven by the challenging economic conditions, and was estimated to be c.520, ,000 DMPs at the end of Grant Thornton UK LLP 43

44 DEMSA fee structure and profitability Fees generated and profitability of DEMSA members (continued) According to some industry participants, the commercial DMP sector has been historically stigmatised by a few providers (predominantly small independent ones) who charge unjustifiably high fees in order to maximise their profits. DEMSA members state that these providers do not reflect on the rest of the industry and that providers such as DEMSA members are offering an important consumer service and put customer's interest and support above all. However, the OFT was keen to stress that non-compliance at various degrees happens across the market. DEMSA members' labour and marketing costs together account for 72% of the total DMP costs. The average turnover by DMP across DEMSA appears to be 554 with an average EBITDA per each plan of 109 Out of the revenues generated in 2011, 17% on average came from the set-up fees of new plans, whilst 83% of the fees were sourced from the management fees applied on the total active plans. This signifies the importance of management fees and the interest of debt management companies in the long term sustainability of DMPs The findings from our review shine a spotlight on a market where poor practices appear to be widespread. While degrees of non-compliance range from very serious matters to matters of less direct concern, it is clear that standards across this market are not as high as should be the case. OFT 2012 Grant Thornton UK LLP 44

45 DEMSA fee structure and profitability Set-up fees Average set-up fee range across companies using mainly telephone advice and sales model Maximum Average Minimum Max Set up fees (excluding face to face model) Notes: a. Based on 12 survey responses; b. Excludes Eurodebt who uses a face to face model and whose costs are higher Sources: 1. Grant Thornton online survey with DEMSA members, May 2012 Average set-up fee range including both telephone and face to face model 780 The set-up fees charged by the majority of DEMSA members are the equivalent of two months of disposable income charged over a period of two months The DEMSA members surveyed stated they charge average set-up fees ranging from to However, the higher fee is charged by a company that operates a different business model, offering advice and sales through face to face meetings, which is more costly. Among the companies that operate mainly a telephone advice and sales model, the highest average set-up fee charged is 495 The majority of companies surveyed charge two month disposable income as setup fees, although some may have operate different fee structures The majority of DEMSA members interviewed charge these fees over a period of two to three months (usually two months, but extended to three months if the consumer cannot afford to pay in two instalments). However, one of the companies interviewed charges the lowest set-up fees among our survey sample ( 90.17) in the first month and starts distributing funds to creditors from month two You can see by our average up front fee that it's much smaller and we charge it in month one. We make our money out of the monthly fee and we cannot afford to lose our customers, therefore customer retention is very important to us. DEMSA member #9 Average 365 Minimum Set up fees (including face to face model) Notes: a. Based on 12 survey responses; b. Includes Eurodebt who uses a face to face model and whose costs are higher Sources: 1. Grant Thornton online survey with DEMSA members, May 2012 The average set-up fees charged by the surveyed sample vary from 90 to 495 for the telephone business model and 779 for the face to face model 2012 Grant Thornton UK LLP 45

46 DEMSA fee structure and profitability Monthly fees Average monthly fees ( ) range quoted in the survey Average monthly fees ( ) Lowest average fee Highest average fee Notes: a. based on 13 survey answers b. The highest and lowest figures both represent average fees quoted by the survey respondents. The red dotted line represents the average calculated based on the sample Sources: 1. Grant Thornton survey with DEMSA members Our monthly fee scale is a minimum of 25 or 17.5% of the NDI, whichever is highest and cap the fees at 100. DEMSA member #11 We've always charged based on the work involved not based on NDI because quite simply if you are dealing with 20 creditors there is more work than if you are dealing with three. We charge 25 up to four creditors, and go to 40 for up to 10 creditors Over 10 creditors the monthly fee is discretionary and based on circumstances. DEMSA member #9 We charge monthly fees of 17.5% (subject to a min of 30 and a max of 100) which are in line with other agencies. DEMSA member #8 =36 Average The average monthly fee charged by DEMSA members in 2011 was 36 The main set-up fee structures are calculated based on net disposable income or the number of creditors some companies charge based on amount of work involved, which is determined by the number of creditors a consumer has, but capping the fees for consumers with over 10 creditors based on the consumer's circumstances and ability to pay other companies charge a percentage of the monthly net disposable income, usually 17.5%. However, monthly fees tend to be on average above 30, which means that in certain cases the monthly fee is a fixed fee instead of a percentage of disposable income Among the 13 survey responses, the average monthly fees vary between 30 and Some companies mentioned that the minimum fee they charge is 25 to 30 regardless of the number of creditors or net disposable income and the maximum is 90 to 100 If we divide the average monthly fees by net disposable income stated by the survey respondents, the monthly fee equates to between 13.24% and 29.33% of a consumer's disposable income. However, only four of the 12 companies that disclosed their average monthly fees and net disposable income charge up to 17.5% of NDI 29.33% monthly fees are charged by a company which charges low set-up fees ( 90), and compensates that by charging higher monthly fees based on the number of creditors that a consumer has for the remaining companies in the survey, there does not seem to be a direct correlation between the level of set-up fees and the monthly fees charged. During interviews, companies justified their fees based on the service they offer Monthly fees are calculated based on a consumer's disposable income or the number of creditors. In 2011, the absolute minimum monthly fee charged by DEMSA members was 25, while the average was Grant Thornton UK LLP 46

47 DEMSA fee structure and profitability The future of set-up fees Creditors' view on the future of set-up fees Creditors acknowledge that DMCs have the acquisition cost associated with winning a customer which involves marketing spend as well as administrative costs of liaising with the customer and creditor while preparing the plan. However concerns arise around the way that the up-front fee is being charged In the industry experts' view, charging fees up-front leaves little incentive for the plan to remain sustainable. There is no set-up fixed fee that the customers are paying, leaving some paying significantly higher contribution compared with the others given the dependence on set-up fees and disposable income There is a perception that if a debt management company recoups their charges and makes a profit within first two months (without contribution going to a creditor) the success of a debt management plan from the 3rd month onwards may be seen as less of a priority for some providers. However, as shown previously only 17% of the revenues achieved in 2011 were from set-up fees Creditors are aware of the activity, ethos and ethical standards of free-toconsumer providers and therefore are confident that the payments (fair share) passed on to them will be used in the right purposes. However they may be more reluctant to pass on their fees to commercial organisations There is a concern whether the fee will be used to assist the consumer in finding the right route to their debt problem or whether it is likely to cover other activities (such as cross sell of other products or financing of their claims management companies) Creditors perceive set-up fees as an issue mainly because they are not fixed and vary depending on consumers' disposable income. In some cases, creditors believe that set-up fees are too high and may limit the consumers' ability to pay into their debt. Spreading the set-up fees across six months rather than first two would allow contributions going to debt management plans immediately after the plans' set-up and provide a creditor with immediate contributions to a consumer's debt Sources: 1.Grant Thornton analysis and interviews with creditors DEMSA members response to set up fees While spreading the set-up fees into four to six months could have a positive impact on the image of debt management companies, it could impact negatively the cash flow of debt management companies Our primary research identified that DEMSA members acknowledge the fact that up-front fees contribute to a negative image of debt management companies and therefore are in position to consider alternative solutions that would improve their reputation and relationship with creditors. This is likely to follow the expected outcomes of the future Debt Management protocol I do believe we need to take a note of what creditors think, we want to work with them. If you have to spread your set-up fee over four to six months so that you have distributions going to creditors from month one, that is the way the industry needs to go. DEMSA member # Grant Thornton UK LLP 47

48 DEMSA fee structure and profitability Marketing costs Marketing cost per plan = Average marketing cost weighted per plan( ) Lowest average cost Highest average cost Average Notes: a. Based on 11 survey answers; b. The figures represent marketing cost per plan weighted by the number of plans in each company's books; c. The variance refers to the difference between the lowest and the highest cost per plan quoted in the survey Sources: 1. Grant Thornton survey with DEMSA members We do not share the same model the bigger companies in or outside DEMSA use. We do not buy any data from lead generators. Over the years we have built the business over self-referrals, through the website and a lot of recommendations through existing clients. We've only recently started buying leads, but not at big volumes. DEMSA member #9 DEMSA members have different marketing approaches, using a variety of channels to advertise and acquire customers, which result in a wide range of marketing cost per plan Based on the interviews conducted with DEMSA members, the customer acquisition channels and the marketing costs attached vary: some companies rely mostly on advertising, enquiries to their website and referrals from existing customers in order to enter in contact with potential customers, without undertaking cold calling on top of taking calls from customers, other companies generate the majority of their leads from a mixture of advertising (especially pay per click Internet advertising) and buying customer details either from lead generators (e.g. customers who have applied for a loan but have been turned down) or from register of County Court Judgements (CCJs) this, in turn, requires an outbound call centre to contact potential customers The companies who do not buy consumer data and do not undertake cold calling, justified their choice by: either the high cost of buying consumer data from licensed lead generators or by stating that their business model allows them to enter in contact with consumers who are more motivated to solve their debt problems, and in return, stay on plan for longer periods of time The marketing cost per plan varies between 36 to 226 per plan, with an average of 112, indicating the different client acquisition business models used by DEMSA members 2012 Grant Thornton UK LLP 48

49 DEMSA fee structure and profitability Labour costs Labour cost per plan = Average labour cost weighted per plan ( ) Lowest average cost Highest average cost Average Notes: a. Based on 12 survey answers ; b. The figures represent labour costs per plan weighted by the number of plans in each company's books at the end of 2011 Sources: 1. Grant Thornton survey My job in external affairs means regularly dealing with MPs, not for profit debt advice providers and trade associations and they all accept that we have significant costs in setting up DMPs. DEMSA member #13 We strongly believe in providing holistic financial management services and all of our franchisees have been trained to look at methods of optimising income and saving on household expenditure to increase disposable income. This includes the provision of financial advice and the review will include; energy bills, bank charges, life insurance, income protection and essential general insurances like home and motor. We have specialist benefits management specialist to identify potential entitlements at the outset and through the lifetime of a debt solution. DEMSA member #7 Looking at just our income from the set-up fees it would not reflect our labour cost as the majority of that is with our advisors in the field, who are franchisees. While our set-up fees are generally higher than our telephone based counter-parts, our cost of sale is significantly higher given that we have to go into the person's home, often several times, where an 80 mile round-trip to see a family in the evening or weekend is not uncommon within hours of initial contact. DEMSA member #7 Labour costs vary significantly based on the model adopted by the provider and service provided to the client The largest share of the labour costs are incurred during the DMP's set-up process, which providers try to recover through the use of the set-up fees and which are currently undergoing heavy criticism by some stakeholders. It is that stage which is most labour intensive and requires a significant number of staff hours before the DMP is rolled out The labour costs stated by DEMSA members present a very variable picture, with costs ranging between 90 per DMP up to 489. The overall weighted average was 208 (equal to 38% of total revenues by DMP) These fees reflect primarily telephone advice providers as we were not able to obtain labour costs for the main face-to-face advice provider and draw any comparisons. However, we expect that the costs in the latter case will be significantly higher since the financial advisor needs to travel to the customer's residence and consequently gets to deal with fewer cases Costs may vary according to the communication the company maintains with the client once the DMP has been set up. Some companies will engage in frequent follow-ups to ensure the satisfaction of the client and sustainability of the plan while others may be in touch once a quarter or bi-annually Labour costs will vary by company according to the investment they make in training and certifying their advisors and in providing services such as maximising customers' disposable income through utility and insurance switching 2012 Grant Thornton UK LLP 49

50 Section 7 DEMSA customer profile 01. Introduction 02. Executive summary 03. Methodology 04. The DMP business model and process 05. Debt management industry size 06. DEMSA fee structure and profitability 07. DEMSA customer profile 08. Debt management company outcomes and savings 09. Industry image with creditors 2012 Grant Thornton UK LLP

51 DEMSA customer profile Introduction DEMSA customer profile This section provides an indication on the number of consumers advised by DEMSA members vs. the free-to-consumer providers The section also investigates the average level of debt and net disposable income of consumers who undertake DMPs with DEMSA and free-to-consumer providers Finally, it gives an indication on the average monthly repayment of consumers' debt as a % of total debt The analysis in this section is based on desktop research (such as CCCS Statistical Yearbook) as well as Grant Thornton's survey results with DEMSA members and follow-up telephone interviews 2012 Grant Thornton UK LLP 51

52 DEMSA customer profile Consumers advised and DMPs recommended Number of consumers advised in 2011 Number of consumers Recommendations 400, , , , , , ,000 50, % 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0% 193, % 23.7% DEMSA Consumers advised 369, % 29.3% CCCS DEMSA CCCS Notes: a. DEMSA figures based on 10 survey answers; b. CCCS figures represent those published in the Statistical Yearbook 2011 Sources: 1. Grant Thornton online survey with DEMSA members, May 2012; CCCS Statistical Yearbook 2011 DMP recommendations to consumers 10 DEMSA members made 45,876 recommendations for DMPs in 2011 (23.7% of consumers advised) and set up 26,300 DMPs (c.14% of the consumers advised) Notes: a. DEMSA figures based on 10 survey answers; b. CCCS figures represent those published in the Statistical Yearbook 2011 Sources: 1. Grant Thornton online survey with DEMSA members, May 2012; 2. CCCS Statistical Yearbook 2011; 3. Demand, capacity and need for advice in the UK, dr. Gathergood 2011; 4. Payplan submission to the BIS Committee Other DMP DEMSA members advised over 193,000 consumers and recommended DMPs to 23.7% of them The below comparisons with the free sector (including CCCS) are only intended to give an overview of the size of DEMSA's operator in the DMP market and not to draw any conclusions on the suitability of the free sector/cccs's or DEMSA's approaches The number of consumers seeking debt advice increased during the economic downturn and it is estimated that 2.6 million sought debt advice in % of debt advice seekers opt for free advice, 16% go to the fee charging sector and the remaining 29% seek advice from professionals (accountants, banks and financial advisors) In 2011, DEMSA members surveyed were in contact with and offered free advice to over 193,000 consumers (based on survey responses with 10 DEMSA members that have 55% share of active DEMSA DMPs). In contrast, CCCS was contacted by almost double the number of consumers (370,000) looking to solve their debt problems, while Payplan estimated that in 2011 it advised over 100,000 over indebted consumers DEMSA members recommended 45,876 DMPs in 2011 (23.7% of the consumers advised) and set up 26,300 DMPs over the same period (c.14% of the consumers advised) In its yearbook, CCCS states that in 2011 it recommended DMPs to 29.3% of cases and set up 27,793 DMPs in total Almost one in four consumers getting advice from DEMSA members are recommended a DMP and about one in seven consumers decide to undertake a DMP with the company that advises them 2012 Grant Thornton UK LLP 52

53 DEMSA customer profile Consumers advised and DMPs recommended (continued) 10 DEMSA members recommended 45,876 DMPs in 2011 (23.7% of consumers advised). Overall, these 10 DEMSA members set up 26,300 DMPs over the same period (c.14% of the consumers advised) CCCS states that in 2011 it recommended DMPs to 29.3% of cases and set up 27,793 DMPs in total 2012 Grant Thornton UK LLP 53

54 DEMSA customer profile Average debt and net disposable income 2011 Average unsecured debt outstanding of consumers with a DMP Average debt in a DMP ( ) Average NDI of consumers in a DMP ( ) 30,000 25,000 20,000 15,000 10,000 5, ,953 Average DEMSA weighted by number of DMPs 203 DEMSA weighted by number of DMPs 27,995 CCCS Notes: a. DEMSA figures based on 14 survey answers and weighted by the number of DMPs in each company's books; b. CCCS figures represent those published in the Statistical Yearbook 2011 Sources: 1. Grant Thornton online survey with DEMSA members, May 2012; 2. CCCS Statistical Yearbook monthly net disposable income of consumers with a DMP 236 CCCS Of the average 203 net disposable income, consumers repay on average 166 to creditors, or the equivalent of 0.9% of the debt value (excluding interest and other charges) Notes: a. DEMSA figures based on 12 survey answers and weighted by the number of DMPs in each company's books; b. CCCS figures represent those published in the Statistical Yearbook 2011 Sources: 1. Grant Thornton online survey with DEMSA members, May 2012; 2. CCCS Statistical Yearbook 2011 The consumers using DEMSA member services have on average a debt of about 19,000 and 203 monthly net disposable income while CCCS appears to advise consumers with higher levels of debt and net disposable income (assuming CCCS and DEMSA members calculate net disposable income in a comparable way)/ DEMSA members repay 166 to creditors, resulting in c.0.9 % debt repayment per month assuming no interest and other charges The below comparisons with CCCS are only intended to give an overview of the size of DEMSA's operations compared to the largest operator in the DMP market and not to draw any conclusions on the suitability of CCCS's or DEMSA's approaches The average unsecured debt by DMP of DEMSA members surveyed is 21,950. However, if the value of the average debt is weighed by the number of DMPs each company has on its books, the debt value drops to 18,953 CCCS consumers have a higher debt level. The CCCS debt level was calculated based on the average number of consumers on DMPs in the books in Q (120,477) and assuming 1.1 consumers per DMP (ie one in 10 DMPs is a joint DMP) as well as the total value of debt under DMP in 2011( 3.71 billion) these assumptions were made based on data in the Statistical Yearbook and a telephone enquiry to CCCS's Business Information department In 2011, DEMSA consumers had on average 203 monthly net disposable income which they could use to pay the commission to the debt management company and to make pro rata repayment to creditors DEMSA members have customers with an average debt of 18,953 and a net disposable income of 203 of which they repay 166 to creditors, resulting in an 0.76 % debt repayment per month 2012 Grant Thornton UK LLP 54

55 DEMSA customer profile Average debt and net disposable income (continued) In the same period, CCCS consumers on DMP had an average net disposable income of 236. This is considerably higher to the net disposable income of the average consumer seeking CCCS advice Given that DEMSA members follow CCCS guidelines when filling in Common Financial Statements, the assumption is that the NDIs are comparable, however some creditors expressed a concern that some debt management companies might be more lenient in calculating consumers' essential expenditures which would result in smaller NDIs (and therefore smaller monthly payments to creditors) 2012 Grant Thornton UK LLP 55

56 Section 8 Debt management company outcomes and savings 01. Introduction 02. Executive summary 03. Methodology 04. The DMP business model and process 05. Debt management industry size 06. DEMSA fee structure and profitability 07. DEMSA customer profile 08. Debt management company outcomes and savings 09. Industry image with creditors 2012 Grant Thornton UK LLP

57 Debt management company outcomes and savings Introduction Debt management company outcomes and consumer benefits This section looks into general consumer benefits generated by the commercial sector and tries to quantify some of the consumer savings achieved by DEMSA members Through the use of three different scenarios (varying in degree of conservatism), it tries to assess the interest rate savings that DEMSA members achieve The section is supported by views expressed by the creditors on the consumer savings generated by the commercial sector Finally, the section gives an overview of attrition rates and makes a comparison of these with a free-to-consumer provider The analysis in this section is based on desktop research (statistics such as CCCS' Statistical Yearbook) as well as the results of the survey with DEMSA members. The analysis was supported by scenario modelling built by Grant Thornton 2012 Grant Thornton UK LLP 57

58 Debt management company outcomes and savings Consumer savings generated by the commercial sector Both DEMSA members and a number of creditors believe that a large number of commercial DMCs act in the consumers' best interest The DMP industry currently appears split in terms of the DMCs' role in helping consumers out of a difficult situation and maximising profits for themselves. The commercial sector critics argue that DMCs charge large fees up front and have no interest in the customers' longevity. However, DEMSA members and a number of creditors support the argument that DMCs make significant contributions towards improving the customers' financial situation According to DEMSA and creditors, providers try to get a pragmatic view of the consumers' income and expenditures to allow for sustainable debt repayments over a longer period of time. However, one creditor expressed concern around this point as certain DMCs may overestimate customers' expenditures to squeeze their disposable income and enter them into DMPs despite not being in need of one Even though attrition rates are high and few customers will successfully complete their DMPs, both DMCs and creditors recognise that DMPs are not meant to be a method of full debt repayment but more of a temporary tool that consumers enrol in when circumstances change in their lives for the worse As well as taking an active role in negotiating with creditors to freeze or lower interest rates and charges across a consumer's debt portfolio (which is investigated in greater depth in the following pages), many DMCs are engaged in maximising consumers' disposable income checking their utility costs to make sure they are getting the best rates. Whilst the bigger market players may advise and do the switch on behalf of the consumers themselves, other smaller providers may just advise consumers and direct them to 3rd parties to discuss any specific opportunities and realise the benefits. Another method adopted in the industry is the case of a DEMSA member who partners with a charity called Income Max and who undertake on the company's behalf the complex cases and help maximise their net disposable income. As per the DEMSA member, Income Max has achieved 274,000 in income increase for 269 customers over 18 months. It costs the DEMSA member 24 per case being handled ( 20+VAT), which it pays for directly and does not pass on to the consumer. Income Max have been giving training to the DEMSA member to handle simple cases The DMCs that I work with are very keen for the customer to find the right solution and this involves longevity. Keeping consumers on the plan is these DMCs' primary interest. Creditor #1 We do not manipulate the income expenditure analysis on our clients to make them more fit for a DMP. If our analysis shows that the consumer has enough income to cover their debt and interests, then we will not allow the consumer to enter into a DMP. DEMSA member #4 I certainly do see a place for income maximisation and I think it should be part of the process that everyone goes through. BBA The suspicion that lenders have is that there will be some DMCs which will be totally transparent and others who may not necessarily disclose all information and may understate the consumers' income or may inflate expenditures (in the interest of attracting business and securing a lower payments for the consumer). Creditor #2 The commercial sector realises benefits for consumers not only by lowering their debt interest rates but also by advising and/or undertaking to lower their utility bills and insurance expenditures 2012 Grant Thornton UK LLP 58

59 Debt management company outcomes and savings Consumer savings generated by DEMSA members DEMSA's average consumer profile as per survey results (modelling inputs) Parameter Average level of debt outstanding 18,953 Average NDI (post entry to DMP) 203 Average interest rate prior to DMP 15.5% Share of total unsecured debt with interest rate frozen post DMP 82.0% Modelled interest rate post DMP - conservative savings scenario (scenario 2) 2.7% Modelled interest rate post DMP - higher savings scenario (scenario 3) 1.4% Management fee charged by DMCs 36 Average monthly payment made towards debt repayment 166 Set-up fee 359 Average number of months a consumer stays on a DMP 47 Sources: 1. Grant Thornton analysis Our average retention of a client on a DMP is 57 months. We stay in very close touch to the customer and offer face-to-face reviews. We use a blend of telephone, electronic and face-to-face communications with clients. Accessibility is key, including offering a Personal Case Manager, as well as the regional debt advisor. DEMSA member #7 From our perspective, we freeze interest rates and we do it for good across all DMPs. We 've started doing that during the last two to three years or so. Prior to that we were trying to get part of the interest. I think that the industry has moved during the past years so that most mainstream lenders do not charge interest on most DMPs. Creditor #2 Level Based on the information collected from our surveys with DEMSA members, we ran a scenario analysis to estimate the consumer savings associated with entering into a commercial DMP For the purpose of this analysis, we took into account DEMSA's average consumer profile with an average debt level of 18,953, average monthly NDI of 203, 82% of the debt portfolio's interest rate frozen, etc (for more information on the inputs of our analysis refer to the table on the left) DEMSA members told us that on average their customers stay on DMPs for approximately 47 months before dropping out of the plans for a number of reasons (for more details please refer to pages 61 and 62). Some of the members even stated that they keep their customers for much longer than that up to 57 months on average However, we decided to run two analyses for the period of a year and for the period of 47 months to assess the short term impact that commercial DMCs can have on enrolled consumers as well as the long term impact throughout the lifecycle of an average case DMP Our scenario analysis depicts three different scenarios: Scenario 1: Assumes no action is taken neither by the consumer nor by the creditor and therefore the consumer will keep being charged the full interest rate on all his debts. In this case, we assumed the average interest rate across the consumers' debt portfolio comes up to 15.5% following discussions with DEMSA members Scenario 2: As per our survey, DMCs manage to freeze to 0% the interest rate for 82% of the debts in their portfolio and will manage to negotiate some sort of interest rate reduction for part of the remaining debt. For this conservative scenario, we assumed that the remaining debt portfolio maintains its original interest rate (ie 18% of the remaining debts will have 15.5% interest rate being charged) and therefore the total annual interest rate applied on the consumer's unsecured debt will be 2.7% 2012 Grant Thornton UK LLP 59

60 Debt management company outcomes and savings Consumer savings generated by DEMSA members (continued) Modelled consumer savings by scenario (assuming a period of 12 months) Scenario 1 - Consumer and creditor taking no action Scenario 2 - Commercial DMP with conservative interest savings Scenario 3 - Commercial DMP with higher interest savings Debt payment made by customers at end of period 2,432 1,998 1,998 Set up fee paid for DMP Management fees paid by end of period Interest charges by end of period 2, Debt balance at the end of the period 19,290 17,786 17,537 Consumer saving, % of debt -1.8% 6.2% 7.5% Months to total repayment Notes: a. As per the first table on top, scenario 1 accounts for 15.5% of average interest, Scenario 2 for 2.7% and Scenario 3 for 1.4% Sources: 1. Grant Thornton analysis Modelled consumer savings by scenario (assuming a period of 47 months) Scenario 3: For this scenario, we assumed that DMCs manage to halve the interest rate across the remaining debt portfolio and therefore generate higher interest savings compared to scenario 2 (ie the remaining 18% of the debt portfolio will have 7.7% interest rate being charged). In this case, the annual interest rate applied on the consumer's unsecured debt comes further down to 1.4% As it can be seen from the two tables, the average consumer ends up paying a relatively small amount in interest which comes up to 2,048 for the period of 47 months under the more conservative scenario 2 Under the more conservative scenario 2, by the end of the 47th month, the consumer has made total payments of 9,813, has repaid 30% of his total initial debt since he first entered into the DMP and has paid 1,990 to the DMC in management and set-up fees Scenario 1 - Consumer and creditor taking no action Scenario 2 - Commercial DMP with conservative interest savings Scenario 3 - Commercial DMP with higher interest savings Debt payment made by customers at end of period 9,527 7,824 7,824 Set up fee paid for DMP Management fees paid by end of period 0 1,631 1,631 Interest charges by end of period 11,176 2,048 1,172 Debt balance at the end of the period 20,602 13,178 12,301 Consumer saving, % of debt -8.7% 30.5% 35.1% Months to total repayment Notes: a. As per the first table on top, scenario 1 accounts for 15.5% of average interest, Scenario 2 for 2.7% and Scenario 3 for 1.4% Sources: 1. Grant Thornton analysis Throughout the lifecycle of an average DMP, fee charging providers effectively help consumers reduce the initial balance of their debt by 30-35% 2012 Grant Thornton UK LLP 60

61 Debt management company outcomes and savings Attrition rates Industry players define and measure attrition rates differently, which makes comparisons difficult even among DEMSA members Debt management companies refer to 'good' and 'bad' attrition which is dependent on the debt management company finding a more suitable solution or outcome for the client. 'Good' attrition includes consumers who are able to repay their debt either by the contractual monthly instalments or by engaging in a full and final settlement. Consumers who at the DMP review opt for a different debt management solution or those that feel empowered to continue making repayments through creditors directly are also usually accounted in this category. Although many of these consumer categories result in a loss of revenue for debt management companies, they are considered to be 'good' attrition as they result in an appropriate solution for the consumer In contrast, 'bad' attrition refers to consumers who either stop making repayments to creditors or switch debt management companies There are various reasons for which consumers leave the debt management plan they set up: some consumers are unable/unwilling to keep up the payments and stop contributing in their DMP. Debt management companies do not have a good visibility on the reasons why these consumers drop out as usually they do not respond to any communications from debt management companies after concessions have been negotiated on their behalf by debt management companies and it proves a workable solution, a few consumers feel empowered to continue administering their plan independently in order to avoid paying the monthly management fees and potentially increasing the monthly payments they make to creditors there may also be a proportion of consumers that are unhappy with the service they receive from their current debt management organisation who decide to switch providers. Our primary research indicates that this may not be as widespread among DEMSA members When attrition is measured in terms of the percentage of DMPs completed, lost and earned over 201, nine DEMSA members surveyed who were DEMSA members in both 2010 and 2011 had an attrition rate of 43% (as measured by dividing the number of DMPs that dropped off the books during 2011 vs. the active DMPs in the books at year end) the above figures are estimated based on the following assumptions and data points: we calculated the share of active DMPs as a percentage of total DEMSA DMPs in 2011 (89.5%) and applied this percentage to the total DMPs in 2010 to derive the active DMPs in 2010 (147,500) we calculated the total number of DMPs for the nine companies that were DEMSA members in both 2010 and 2011 (147,500 and 132,000 respectively) we then accounted for the new DMPs added by these companies in 2011 (41,500) The total attrition rate for surveyed DEMSA members in 2011 was 43% accounting for both 'good' and 'bad' attrition Sources: 1. Grant Thornton survey and interviews; 2. DEMSA data request; 3. CCCS Statistical Yearbooks 2010 and Grant Thornton UK LLP 61

62 Debt management company outcomes and savings Attrition rates (continued) The figures above include both 'good' and 'bad' attrition and we are unable to distinguish the proportion that each type represents of the total attrition Based on survey responses from DEMSA members, in 2011, 3.4% of the DMP book was settled through full debt repayment while 1.4% of the DMPs resulted in full and final settlement. DEMSA members indicated that the repayment figures in recent years have been lower as consumers struggled with unemployment and a drop in real disposable income The total attrition rate will include a good attrition and a bad attrition. The bad attrition will be customers that have left us for a variety of reasons. For us, good attrition would be customers finding a solution with us that is more suitable to them, such as an IVA, or paying a lump sum from their family to repay their debt. There is also a small number who pay off completely their debt and their debt management plan is complete. DEMSA member #8 We know historically that with we will not be able to speak to 50% of the people that stop contributing to their plan and, therefore, have means of identifying what happens to them. For the other 50%, evidence that we have subsequently gathered points to the fact that many consumers feel, after a period of time, empowered to deal with creditors themselves. In those circumstances we believe that to be a successful outcome for the consumer. DEMSA member #4 Sources: 1. Grant Thornton survey and interviews; 2. DEMSA data request; 3. CCCS Statistical Yearbooks 2010 and Grant Thornton UK LLP 62

63 Section 9 Industry image with creditors 01. Introduction 02. Executive summary 03. Methodology 04. The DMP business model and process 05. Debt management industry size 06. DEMSA fee structure and profitability 07. DEMSA customer profile 08. Debt management company outcomes and savings 09. Industry image with creditors 2012 Grant Thornton UK LLP

64 Industry image with creditors Introduction Industry image with creditors This section starts by analysing the number and nature of complaints filed by consumers against DEMSA members Also provides an overview of the image of DEMSA members as well as the wider commercial sector according to creditors and other industry experts. We outline the key benefits provided by a DMC to both creditors and consumers as well as key areas of risk. In response, we have included DEMSA members' views to the risks outlined above as per evidence gathered through telephone interviews Finally, it presents creditors' attitudes towards commercial and free-to-consumer organisations and ways in which creditors are seeking to drive efficiency and better cooperation with DMP providers Our analysis is based on evidence and feedback received from creditors and industry experts as well as relevant commentary provided by DEMSA members 2012 Grant Thornton UK LLP 64

65 Industry image with creditors Consumer complaints survey results Consumer complaints The Grant Thornton survey conducted with DEMSA members identified there were 2,415 complaints made against eight DEMSA members in They were the equivalent of 1.8% of debt management plans managed by these companies The number of complaints reported by DEMSA members varied significantly depending on the provider which may have been a result of different definitions of a complaint or systems associated with their registration The major reasons behind consumers' complaints included: poor customer service or quality of advice (eg perceived as misleading) debt levels, fees and/or interest charges not reduced as initially pitched or expected (eg duration of a plan differing to the one quoted during the sales call, no debt being written off as initially pitched, actual fees being larger than originally discussed with client, fee transparency, interest rates not being completely frozen by creditors as originally expected) issues surrounding creditor contact/communication (eg contributions to creditors being belated and therefore triggering creditors' calls or interests and charges) Seven of the above companies reported a total of 70 complaints made against them to the Financial Services Ombudsman (FSO) resulting in a total of c.6 decisions made against these companies (with four complaints being still under consideration by FSO) Sources: 1. Grant Thornton survey with DEMSA members Based on the survey results from eight companies, approximately 1.8% of the customers who set up new DMPs with DEMSA members in 2011 submitted a complaint with six complaints being filed against these companies to FSO 2012 Grant Thornton UK LLP 65

66 Industry image with creditors Consumer complaints DEMSA results Complaints handled by DEMSA a Number of complaints and reason DEMSA members: 2010:14 members; 2011: 22 members Number of DMPs in 2010: 165,000, 2011: 220,000 Adequacy of Information Plan Withdrawal Issues Plan Formulation Issues Service Issues DEMSA the history of complaints The total number of complaints handled by DEMSA increased to 116 in The main reasons behind consumer complaints were service issues, followed by plan formulation issues and adequacy of information Notes: a membership did not include Eurodebt, Atlantic, Churchwood Financial, Vincent bond, Fresh Start Financial Management, Debt Movers, Valour Finance, FH Debt Solutions who all joined during 2011 Sources: 1. DEMSA Refunds and Ex-gratia payments handled by DEMSA (continued) a Number of complaints 10,000 8,000 6,000 4,000 2, ,557 Refunds Made 7, ,917 1,500 Ex Gratia Payments Made DEMSA members: 2010:14 members; 2011: 22 members Number of DMPs in 2010: 165,000, 2011: 220, According to DEMSA data, the number of complaints held by DEMSA as well as made against DEMSA members to FOS has increased in 2011 vs the previous year. This may have been a result of a higher number of DEMSA members in 2011 vs. the previous year. However, the average number of plans per 1,000 complaint decreased in 2011 compared with 2010 Notes: a membership did not include Eurodebt, Atlantic, Churchwood Financial, Vincent bond, Fresh Start Financial Management, Debt Movers, Valour Finance, FH Debt Solutions who all joined during 2011 Sources: 1. DEMSA 2012 Grant Thornton UK LLP 66

67 Industry image with creditors Consumer complaints DEMSA results (continued) Financial Ombudsman Service (FOS) complaints against DEMSA members ( ) Number of complaints Number of complaints Upheld complaints Rejected complaints DEMSA members: 2010:14 members; 2011: 22 members Number of DMPs in 2010: 165,000, 2011: 220,000 Notes: a membership did not include Eurodebt, Atlantic, Churchwood Financial, Vincent bond, Fresh Start Financial Management, Debt Movers, Valour Finance, FH Debt Solutions who all joined during 2011 Sources: 1. DEMSA Comparison of Financial Ombudsman Service (FOS) complaints on DMPs, credit cards and mortgages (complaints per 1,000 units) DEMSA the history of complaints (continued) The total number of FOS complaints against all DEMSA members also increased to 218 (2011). This may have been a result of a lower number of DEMSA members in 2010 (14 members) vs (22 members) and consequently a lower number of DMPs in The average number of FOS complaints decreased from 1.02 complaint per 1,000 DMPs in 2010 to 0.99 complaint per 1,000 DMPs in 2011 This was followed by an increase in upheld number of FOS complaints (+4 increase in 2011 YoY) despite a significant increase in complaints being rejected. The average number of FOS upheld complaints per member decreased from 4.3 in 2010 to 2.9 in 2011 The average number of FOS complaints filed against DEMSA members per 1,000 units is above the figures for other widely used financial services products such as mortgages and credit cards. In 2011, there were 0.57 FOS complaints per 1,000 active credit card accounts whilst in 2009, there were 0.74 consumer complaints per 1,000 mortgages. However, it needs to be noted that the market for DMPs remains much smaller than for credit cards and mortgages and therefore the number of complaints per 1,000 units is likely to be higher Number of FSO complaints by 1,000 product units DMPs (DEMSA) Credit cards (active accounts) Mortgages Notes: a. Reflects FOS complaints against DEMSA per 1,000 units Sources: 1. FOS; 2. BBA; 2. ONS 2012 Grant Thornton UK LLP 67

68 Industry image with creditors Consumers' benefits according to DEMSA members Benefits identified by DEMSA members Our primary research with DEMSA members identified the following benefits that DEMSA members provide their customers with: responsiveness, quality of advice and regular system updates of consumer's balance and individual circumstances approachability/easy access which does not require long waiting times or waiting lists non-creditor biased advice given that DEMSA members are not funded by creditors. Therefore, DEMSA members state they can make more impartial, objective judgements of a consumer's individual situation and provide a consumer with a more appropriate and sustainable solution variety of debt solutions available in many cases (ie not just offering DMPs) which involves providing a more rounded advice with better knowledge of alternative options to DMPs long opening hours allowing for greater flexibility and more frequent contact with a consumer strong relationship management allowing a consumer to be in touch with a designated account manager throughout the duration of their debt management plan a range of support services spreading from income maximisation activities and benefits claims to preparation of court applications Grant Thornton was not assigned to test and validate these benefits as part of this engagement Sources: 1. Grant Thornton interviews with DEMSA members In the case of free-to-consumer organisations, people often cannot get through or have to wait for six to eight weeks for an appointment. DEMSA member #8 We've had a number of customers who transferred to us from a free-toconsumer organisation. The reason they came to us was lack of communication on progress with the debt management plans and also sometimes due to a lack of commerciality by the free-to-consumer organisation. DEMSA member #11 I think the commercial sector is much more process driven. Free-to-consumer organisations have significant backlog in the processes. Some of our customers who come to us are desperate and want a solution to be set up as soon as possible. DEMSA member #12 Most of DMCs offer most of debt solutions whereas some free sector companies do not. DMCs tend to have offices open for longer hours including Saturday and Sunday. In our organisation we also tend to have individual account managers. When a plan is set up a consumer can speak to the same person every time they have a question, instead of speaking to a call centre. DEMSA member #5 We look at maximising their income, help with benefits claims and priority bill arrears. We also provide access to a personal finance manager; who is the person that will work with them to manage their finances throughout their DMP. Based on our experience of customers that left the free to consumer sector, we have a much more hands-on approach and provide more help when it comes to preparing applications for courts, negotiating with creditors, utility providers or secured lenders; who are not always as considerate as they should be of such difficulties. DEMSA member #2 Some consumers are sceptical about the fact that free sector organisations are funded by creditors and therefore there will not be sufficient objectivity whilst a fee organisation will act on their behalf. DEMSA member #4 DEMSA members state that they provide consumers with a number of benefits across many areas which are not widely available to consumers in the industry 2012 Grant Thornton UK LLP 68

69 Industry image with creditors Debt management industry according to creditors/industry experts Image of commercial debt management companies Our primary research with industry experts and creditors identified that there is a place for both free-to-consumer and commercial players as long as the latter provide a quality advice and service Creditors are not likely to judge a company based on their fee or free status as long as they provide the right level of advice. Currently, creditors think that the quality of advice can be good or bad in the case of both commercial and free-toconsumer providers According to industry experts, in some cases, consumers prefer to select a fee charging company under the assumptions that paying for an advice and management of their plan will provide them with a more professional service. Grant Thornton was unable to test this statement through primary research Our primary research indicated that commercial debt management companies may adapt better practises and are more actively seeking ways to work more effectively with creditors According to an industry expert the majority of non-compliance cases are likely to be with smaller players, despite the fact that limited non-compliance may occur with larger players In all honesty, the commercial debt management companies are adapting better practises and they are looking to work more positively with creditors. Obviously I do not work with just DEMSA members but with a wide spectrum of commercial businesses. There are still companies that have not adopted practises that we would want them to and have not adopted the practises as per the debt management guidance. We will try, influence and work with those companies to understand their business processes and get them on track. Creditor #1 There is a place in the market for the commercial sector. There are consumers who are willing and happy to go to a fee charging company rather than a free-to-consumer organisation. They want someone to manage their DMP professionally. Assuming that this criterion is fulfilled, customers are happy to use a commercial organisation. Creditor #1 There is good and bad advice in both commercial and free-to-consumer sectors. Our members do not work on a simple assumption that free is good and fee is bad. Ideally as long as the standard solutions are appropriate, consumers should decide whether to pay or get a free advice. However consumers in debt do not operate in the rational sense, do not tend to shop around or operate in the free market approach where they can make informed decisions. BBA The OFT s Debt Management Guidance applies to all businesses engaged in the provision of debt advice. This includes, where applicable, organisations or individuals that do not charge for their services or are non-profit seeking, for example, charities. OFT 2012 Grant Thornton UK LLP 69

70 Industry image with creditors Debt management industry according to creditors/industry experts (continued) The performance of fee vs. free sector companies Our primary research with a limited sample of creditors did not identify creditors conducting a thorough comparison of fee and free-to-consumer organisations' performance (ie quantifying and measuring the benefits brought to creditors by the two sectors in terms of managing their customers' debt portfolios). However creditors stated they are increasingly looking into this area whilst some of them are already in the process of developing the appropriate systems and databases to measure the performance by each debt management company Creditors will need to have robust processes in place in order to assess DMCs on a number of variables. Only this way, will creditors be able to assess and compare the performance by each company both in repaying consumers' debt (and therefore acting on behalf of both consumers' and creditors' interests) as well as keeping customers on the plans for as long as possible and guaranteeing sustainable plans and debt repayments Despite an improvement in the image of commercial organisations, there is a perception that creditor referrals to commercial debt management companies involve a degree of brand and reputational risk for creditors. According to one creditor, they are likely to continue recommending free-to-consumer organisations to their customers as a first point of reference even if the their future performance measurement systems indicate that commercial businesses bring more benefits to them. However, creditors expressed the will to work closely with DMCs to build a stronger relationship and encourage best practises amongst companies that do not comply with their standards I do not think that banks collect the information needed to distinguish the value of debt paid back by DEMSA vs non-demsa members and free-to-consumer organisations. BBA We cannot comment on the differences of returns between DMPs handled by the free and fee sector. We are trying to get to that level of information but we are not there yet. Over the least six to 12 months this has become a much greater area of focus for creditors. The guidelines of our industry say that we must signpost customers to the free sector. A difference in returns between fee and free-toconsumer organisations have not been proved by statistics, therefore a default position lenders will take will be to refer consumers to free sector. Creditor #2 Even though our interviews with industry experts and creditors outlined areas where established commercial businesses are well perceived, creditors are unlikely to start referring their customers to the commercial sector in the medium term because of the reputational risks involved 2012 Grant Thornton UK LLP 70

71 Industry image with creditors Image of DEMSA members Image of DEMSA members Our industry expert and creditor interviews identified that DEMSA members are on the better end of the commercial advice market which is explained below According to our interviews, DEMSA members make significant efforts to prove that they are respectable providers which has been noted by creditors particularly over the last year Creditors interviews suggested that it is easier for them to deal with the largest commercial sector providers (of which majority are DEMSA members) rather than smaller players who may lack in experience and knowledge Creditors believe that the OFT investigation that took place in 2010 resulted in improving the way information is given to customers during the advice process by DEMSA members and in greater transparency over fees DEMSA members are also perceived as the ones who do not try to make a quick gain and will try to extend the longevity of DMP (beyond the initial two month period covered by the set-up fee the customer pays) According to some interviewed creditors the quality of advice offered by DEMSA members has improved over time DEMSA also commented on the fact that its members have the OFT approval code and as an organisation, DEMSA works closely with OFT to ensure compliance with the code. Any form of non-compliance would have to be followed up with disciplinary action. Historically, DEMSA has proven that it is ready to take action against its non-compliant members in order to set a good example and prove it is seriously following the code agreed by the OFT Generally there are four major companies in the commercial sector handling most of the volume on the commercial side of DMPs. It is generally easier to deal with big companies as smaller players who do only a dozen or so DMPs may not have sufficient experience and knowledge. Creditor #2 DEMSA is a current code sponsor under the OFT s Consumer Codes Approval Scheme (CCAS). DEMSA members co-operated fully throughout the OFT s compliance review and its members took corrective action to address identified issues of non-compliance. The OFT welcomes DEMSA approach to monitoring, training and disciplinary action to help improve and maintain standards in the fee charging debt management sector. OFT I think DEMSA are at the better end of the commercial advice market. They are making efforts to prove this to the wider world and to disassociate themselves from the less scrupulous debt management providers. BBA In terms of DEMSA members I liaise with, I do believe that the transparency is there and they are trying to drive the best practises across the board. Creditor #1 DEMSA as an organisation is actively seeking for compliance with the OFT code of practice amongst its members and is ready to act through disciplinary actions against any non-compliant members 2012 Grant Thornton UK LLP 71

72 Industry image with creditors Key benefits of commercial DMCs to creditors Key benefits to a creditor There are a number of benefits that a debt management company provides a creditor with. The key ones include: ability to engage with a customer that the creditor lost touch with ability to sign up a customer to a debt management plan, ensuring at least a partial debt repayment to the creditor (which might have previously been perceived as unlikely due to the lost customer contact/customer's difficult situation) ability to handle the process of liaising with a customer through the use of trained staff prepared to handle a volume of cases and verify quality assurance; maintaining such activity in-house would incur a significant cost to creditors acting as an independent party negotiating with lenders and consumers usually having more than one debt with more than one lender; as a result, DMPs are in a good position to arrange a debt management plan involving all consumers' debts with all creditors under one bundled plan aiming to reassure longevity of payments and a fair distribution of payments across all creditors involved with a consumer's DMP; DMCs reduce the level of complexity from the consumer's perspective associated with handling a number of debts and lenders while lowering significantly the level of interest rates being charged across a customer's debt portfolio; therefore consumers are likely to extend the longevity of their payments while the DMC is in charge of uniformly distributing the customer's repayments across his creditors We do not tend to have the capacity to deal with consumers directly in terms of setting their debt management plans. We give advice on mortgage lending but debt advice would require a lot of resources both in terms of handling the volume but also in terms of getting the right training, being compliant and verifying the quality assurance. That is why we leave it to the specialists. Creditor #2 Another reason why the current market model works effectively is that a debt management company acts as an independent party negotiating with other lenders. Most of our consumers will have more than one debt with more than one lender. Therefore, if creditors acted as a debt management company, it may seem biased and other lenders might have hard time agreeing to the terms presented while a DMC may seem more impartial. That is a benefit that a DMC brings to lenders and consumers. Creditor #2 Commercial DMCs act as an independent party between consumers and creditors aiming to ensure sustainable plans while guaranteeing a fair distribution of debt repayments across the creditors involved 2012 Grant Thornton UK LLP 72

73 Industry image with creditors Key concerns associated with a debt management company's activity Key threats associated with a debt management company's activity Our primary research identified key risk areas which creditors and industry experts associate with the activity of commercial DMCs. These include: longer time between the start of a plan and pro rata contributions made to the plan more cases of consumers receiving further communication letters from the creditor due to inefficient communication between the creditor and DMC advice provided by some companies that may not be in the best interest of a consumer up-front fees which may misalign the customer's best interest (ie sustainability of DMP) with the DMC's perceived best interest (ie selling and maximising sales and profits) failure to be transparent about the business' commercial nature, fees charged and costs involved bad reputation originating primarily from sole traders/new market entrants who do not have sufficient experience and knowledge competition across DMCs combined with consumers' attitude towards shopping around in search for the least 'invasive' solution which may result in a consumer paying the smallest possible monthly amount in debt repayment (and therefore prolonging or defeating the purpose of the DMP at the expense of the consumer and the creditor) debt management companies not sign-posting free-to-consumer providers during their discussions with consumers The biggest issues we have see in the commercial sector is the widespread noncompliance with the Debt Management Guidance, misleading advertising (in particular misrepresenting debt management services as being free), frontline advisers lacking competence, and a low awareness of the Financial Ombudsman Service scheme for resolving complaints. Following the compliance review the OFT has increased the scrutiny applied to new applicants entering the debt management market, and we have continued to take enforcement action on the basis of the lack of skills, knowledge and experience of new entrants. OFT I have no doubt that there are companies for which product offering is more about selling DMPs and collecting the fees rather than looking at slightly longer term outcomes for the consumer. BBA The suspicion that lenders have is that there will be some DMCs which will be totally transparent about their activities and others who may not, in the interest of attracting more business. There is a risk that consumers may get away by paying the smallest possible amounts each month. It has been noted that some consumers are also shopping around in search the lowest payment that a DMC can offer even if they can afford more. Creditor #2 Poor quality of advice and hidden fees by certain commercial players in the debt management market are seen as the biggest threats by industry experts and creditors 2012 Grant Thornton UK LLP 73

74 Industry image with creditors DEMSA response to industry's criticism Throughout the debt management process, all DEMSA members interviewed stated they adhere to regulations, voluntary codes of conduct and ethics and believe they offer transparent, accurate and holistic advice DEMSA members insisted that the debt advisor will make a recommendation based on all the information collected in the financial statement and the consumer's circumstances without being driven by any need to sell and bring in business at the consumer's expense They mentioned that for customers with small levels of debt, they would advise that a debt solution is not required and that the consumer simply needs to learn to manage his/her finances and pay attention to his/her expenditure in order to repay the debt. Similarly, for consumers who only have one or two creditors, they will recommend that the consumer deals with the creditors directly and only if they fail to negotiate any better terms (eg lowering of interest and charges), they should get in touch again with the DMC to discuss how the company can be of service Once all customer facts have been gathered, the debt management options discussed and the DMC has presented the customer with their recommendation, the client needs to decide which option to pursue. This is because the solution recommended by the DMC may not always be accepted by the consumer. For example, many consumers are reluctant to accept IVAs or bankruptcy and will opt for DMPs despite the advisor's recommendation that IVA or bankruptcy are more appropriate solutions for his/her circumstances DEMSA members were very keen to stress that they do not charge for the advice provided and that the set-up fee should not be confused with an up-front fee at initial customer contact. The set-up fee is charged only if a consumer decides to proceed with a DMP after the advice stage. For more details on the time spent by the debt management company dealing with a consumer before any charge has been made please refer to section 4. Details on the fee structure are provided in section 6 DEMSA members insist that their advice is not sales driven and will turn down customers if they judge that the customer's circumstances do not require undertaking any debt management solution 2012 Grant Thornton UK LLP 74

75 Industry image with creditors Improving collaboration and efficiencies between creditors and DMCs Creditors are becoming increasingly engaged in the field of debt management plans to improve their collaboration with DMCs Our primary research identified that a few creditors are becoming more actively engaged with recording management information for internal purposes to identify the best performing DMCs that they work with. Over the longer term, creditors are likely to build more elaborate league tables measuring a number of variables such as breakage rates, the amounts collected by DMP and DMC, number of DMPs in their books, etc. Currently some creditors also operate internal databases indicating their experience and satisfaction levels in dealing with debt management companies. Depending on the creditor, this information is shared with DMCs in order to improve the relationship with both the creditor and the consumer. Creditors report to DMCs on any issue such as training, take-on-process or the customer's journey. A creditor stated that in the future they plan to get more involved in lobbying for the implementation of the required changes As an example of the efficiencies achieved through increasing collaboration in the industry, the creditors already hold preferred list of suppliers (ie DMCs) with whom they have established DPA as discussed on page 34. The DPAs facilitate and accelerate the process of getting a customer on board a DMP and freezing the interest rates across his/her debts with those creditors We started to provide feedback to free-to-consumer and fee charging companies. Both make mistakes and need to be managed from the liaising point of view. Our staff have a database which they complete regarding their experience with DMCs and we are starting to share this information with DMCs. We can help identify if these companies have employee training issues or if their process is not quite right. In the future we would like them to be open to that feedback so that we can get the best customer output where we can. Creditor #1 We only recently started to actively record management data and it is not something that we would share with anyone. We are in the process of building management information packs that will demonstrate who is in the top of the league among our providers. We are looking to build a league table with a mixture of variables like breakage rates or the amount collected. Creditor # Grant Thornton UK LLP 75

76 Industry image with creditors Improving collaboration and efficiencies between creditors and DMCs (continued) Our primary research identified the following industry issues as well as actions that are likely to strengthen the relationship of creditors and DMCs and improve the creditors' visibility over the consumer's case under DMP Currently, creditors may be using a few different web platforms for the DMPs they have with different DMCs, which does not allow them to look into a single source for their whole customer base. In the future, creditors and DMCs would like to see single electronic platforms being used at least across the two big industry associations. This would bring down the cost and would help both parties with having a better view of their whole customer base An emphasis will be put on greater data sharing between creditors as well as utility companies, housing associations and telephone companies, which will allow prevention of debt management problems at an early stage rather than having to cure these problems after they have occurred. Most creditors already have early intervention teams but a few of them are currently investigating a more effective use of the data available to them for more effective customer management. These creditors try to focus on monitoring any changes in consumer's income and expenditures activity to determine areas of risk that could lead to consumers falling in arrears with their debt obligations Moreover, as already discussed, creditors believe that in some cases the commercial sector companies do not conduct the appropriate diligence at the beginning of the process during the initial discussions with the customer. This results in engaging the customer in the wrong type of solution from the very beginning which is bound to fail sooner or later. Therefore, creditors are very keen for DMCs to further improve the quality of advice given, which will help improve the time span and sustainability of DMPs We have a few different portals for data exchange. We have asked DEMSA and DRF as well as Money Advice Service to consider a single portal. It would be much easier if they all used one portal. Creditor #2 We use three to four different web portals and are always looking for ways to improve efficiency. The more portals we use within our business can become confusing for our advisors because each portal may look different. Having a portal allowing a single view would help in the process. Creditor #1 There is room for improvement around the sustainability of plans. Although there will be DMPs put together with the best will that will still fail after six months, consumer due diligence should mean that a consumer is not put into a debt management plan if it is not going to be sustainable. DEMSA and non- DEMSA members should focus on doing good diligence to ensure that creditors' contributions are achievable and affordable to a consumer for a period longer than the initial two to three months of the plan. BBA Creditors and DMCs are working towards developing their relationship and improving the efficiencies achieved to benefit both parties as well as the consumers 2012 Grant Thornton UK LLP 76

77 2012 Grant Thornton UK LLP

78 West Point, Westland Square, Leeds, LS11 5SS Tel Fax Web demsa.co.uk This report was prepared solely for DEMSA's benefit. Neither Grant Thornton UK LLP nor any of its partners or staff owes any duty, whether in contract, tort or otherwise, to any person other than DEMSA in connection therewith. Anyone other than DEMSA who seeks to place any reliance on this report does so at his own risk.