The Senate Committee inquiry into debt management firms comes at an odd time, given pending regulation of such services by the new Australian Financial Complaints Authority, from 1 November 2018. The concern about debt advisers has been around for some time, including in England and Canada.
The Senate Standing Committee on Economics is inquiring into credit and financial services targeted at Australians at risk of financial hardship, with particular reference to:
(a) the impact on individuals, communities, and the broader financial system of the operations of:
(i) payday lenders and consumer lease providers,
(ii) unlicensed financial service providers including ‘buy now, pay later’ providers and short term credit providers, and
(iii) debt management firms, debt negotiators, credit repair agencies and personal budgeting services;
(b) whether current regulation of these service providers meets community standards and expectations and whether reform is needed to address harm being caused to consumers;
(c) the present capacity and capability of the financial counselling sector to provide financial counselling services to financially stressed and distressed members of the community; and
(d) any other matters.
It is due to report by 22 February 2019. It has a very short submission time, by 8 November 2018.
The Australian Financial Complaints Authority
AFCA’s role comes from the recommendations of a panel chaired by Professor Ian Ramsay for a new EDR framework for resolution of financial services complaints and disputes.
Its role is to resolve customer complaints about a financial firm in respect of its financial services. Under AFCA’s Rules, those services include credit reporting and debt administration and credit repair, with a focus on ‘vulnerable and disadvantaged communities’. This is in accord with recommendation no 10 of the Ramsay report, that “debt management firms” are required to hold AFCA membership and be subject to its dispute resolution regime.
Other inquiries and issues
There have been earlier inquiries into this area. ASIC’s research report, Paying to get out of debt or clear your record: The promise of debt management firms (Report 465) raised concerns about high upfront fees, “opaque fee structures”, and services being targeted at vulnerable consumers experiencing financial stress. Debt management includes advising on and arranging Part IX debt agreements under the Bankruptcy Act. AFSA’s review of debt agreements has led to the heightened regulation of debt agreement administrators, with the new law commencing in June 2019.
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, community legal services and hardship teams of lenders, and utility and telecommunication providers.
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.
But taking those steps after having transferred or hiding cash and assets to avoid them being taken by the trustee or liquidator, or deceiving creditors, is unlawful and can constitute criminal conduct. This applies to those advising them, including “professional” lawyers, accountants and other such advisers.
The Senate inquiry does not appear to be examining corporate or business debt advisers, although such debts are often intertwined with personal debt.
Similar concerns are being raised in England, with the strongly worded “Dear CEO” letter of 5 October 2018 from the Financial Conduct Authority setting out its expectations of ‘debt packager firms’ providing debt advice and counselling services. The FCA has found ‘poor standards’ of advice, focused more on the benefits to the adviser than to the consumer, and warned the industry of prompt enforcement if it does not behave. The FCA letter sets out its guidance as to how such services should be provided, pointing out the obvious to such firms that they “need to pay due regard to the interests of your customers”.
Canada faces similar issues, with concerns raise by the Superintendent in Bankruptcy about relationships between debt consultants and Licensed Insolvency Trustees (LITs). The concern is that LITs have established referral arrangements as a means to secure what are often exclusive and sustained relationships for the sourcing of insolvency work from unregulated third parties in the debt advisory industry.
In all countries, and Australia, many good services are provided, including by financial counsellors. The Senate inquiry is looking into the capacity and capability of that sector to provide its services, which opens up the large issue of the sector’s government support and funding.
The Senate inquiry is being monitored and updates on its progress will be reported.