Whether or how to regulate “debt management” firms comes up in the government’s decision to accept all 11 recommendations of the first comprehensive review of the EDR framework from an expert panel chaired by Professor Ian Ramsay. Debt management “services” can range from advice on the pre-insolvency unlawful hiding of assets, to “debt repair”, to advice on how to prepare a family budget. How to define what is unlawful may be difficult.
External dispute resolution
The purpose of EDR in the financial system is to provide free and timely access to redress where a consumer or small business has a dispute with their financial service provider, credit provider or superannuation trustee.
There are currently three EDR bodies:
- the Financial Ombudsman Service (FOS);
- the Credit and Investments Ombudsman (CIO); and
- the Superannuation Complaints Tribunal (SCT).
FOS and CIO are ASIC authorised ombudsman schemes, the SCT is a statutory tribunal dealing with disputes over superannuation and retirement funds.
The Ramsay panel provided its final report to government in April 2017 and on 9 May the government accepted all of its 11 recommendations.
The establishment of AFCA
The main recommendation accepted is the creation of a new single EDR scheme under what will be called the Australian Financial Complaints Authority (AFCA) which will subsume FOS, CIO and the SCT. It will be based on an ombudsman model and will be operational by 1 November 2018. It will be established by industry as a company limited by guarantee.
The government has now released some details for public consultation.
AFCA’s name is unfortunate, the term “complaints” immediately connoting a negative focus on the financial body. In many areas, valid complaints constitute only a low percentage of valid concerns.
As Mr Turnbull says, we need to change the words of the law as a way of changing perceptions and culture, and encouraging acceptance of change.
Debt management firms – recommendation 10
In respect of one recommendation, number 10, Ramsay recommended that “debt management firms” should be required to hold EDR membership.
In contrast to the word “complaint” the term “debt management” can be a euphemism for unfair predatory conduct, with “debt repair” to the fore, offering the ‘cleaning’, ‘fixing’ ‘repairing’, ‘removing’ or ‘washing away’ of unhappy credit reports.
ASIC’s research report, Paying to get out of debt or clear your record: The promise of debt management firms (Report 465) raised concerns in this area about high upfront fees, “opaque fee structures”, and services being targeted at vulnerable consumers experiencing financial stress.
While valid services may be offered – developing and managing budgets, negotiating with creditors and lenders, telecommunications and utility companies and debt collectors – many such services are already offered for free, by independent financial counsellors, FOS and CIO, community legal services and hardship teams of lenders, and utility and telecommunication providers.
ASIC is unable to compel debt management firms to promote free alternatives to their own services.
One valid “debt repair” alternative is the Energy & Water Ombudsman NSW (EWON) and other industry ombudsmen who investigate disputed credit listings for unpaid energy and water accounts free of charge. EWON has noted that consumers continue to seek the help of ‘credit repair’ agents which
“often charge large fees, often exceeding $1000 regardless of whether they are successful in removing the default listing. …. We advise those customers of our free service, but often it is after they have already paid high fees. EWON often finds that these firms do not act in consumer’s best interests and their misleading and incongruous services leave vulnerable consumers in a much worse position”.
Debt management also includes advising and arranging Part IX debt agreements under the Bankruptcy Act. Debt agreement administrators themselves are regulated by AFSA.
The government’s response
While the government has agreed with recommendation 10, it says it will wait for Consumer Affairs Australia and New Zealand’s (CAANZ) review of the regulatory arrangements applying to these firms, and any gaps that might be addressed.
There is in fact no uniform regulatory framework applying to the activities of debt management firms. Most of their services are not ‘financial services’ under the Corporations Act and they do not offer a ‘credit activity’ under the National Consumer Credit Protection Act 2009. Therefore, most are not required to hold an AFS licence and are not required to be a member of an EDR scheme. Instead, general consumer law prohibitions against misleading and deceptive conduct and unconscionable conduct apply.
In an answer to a parliamentary question on notice (supplementary budget estimates 2016-2017), ASIC has expressed its concerns about debt management firms but noted its jurisdictional limits in regulating their conduct. There are gaps between the responsibilities of AFSA, ASIC and the ACCC under the Australian Consumer Law.
As to “pre-insolvency advice”, that is harder to pin down. It remains a concern of the insolvency regulators and the profession and creditor groups. It can be encompassed within debt management. Indeed, entering a formal insolvency arrangement – bankruptcy or liquidation – is a valid way of managing unpaid debt. Actions by directors and their advisers during the proposed “safe harbour” period proposed by the government would be an aspect of debt management.
But taking those steps after having transferred or hiding cash and assets to avoid them being taken by the trustee or liquidator is unlawful, or deceiving creditors, is unlawful and can constitute criminal conduct. This applies to those advising them, including “professional” lawyers, accountants and other such advisers. An egregious example is that of a lawyer who advised his clients to hide their moneys and then assume different identities: Re Covino; or who advised clients to engage in unlawful phoenix misconduct: ASIC v Somerville.
AFSA has released a video explaining the need for care in getting debt advice, but it and other government marketing appear to be no match for the debt market industry. AFSA is not part of the CAANZ working group examining debt management.
The review by CAANZ may reveal the need for the government to regulate this debt management space, and for recommendation 10 to then be considered. A difficulty might be how and who to regulate and in terms of what criteria.
See also the Treasury website. Links to other comments made here are available on request.