2. The debt advice system

CPAG

2. The debt advice system

The debt advice system is a structured set of procedures and activities that must be worked through if you are to provide the best possible service to someone with a multiple debt problem. It is designed to:

•maintain the client’s home, liberty and essential goods and services;

•advise the client about her/his rights and responsibilities, and also the rights of her/his creditors;

•give the client the information s/he needs to make informed choices to deal with the debt situation;

•treat all creditors equally;

•empower the client, where possible.

A systematic approach is essential because of:

•the large amount of information and paperwork generated by most debt enquiries;

•the need to avoid overlooking a particular strategy;

•the need to keep detailed records of the agency’s work – both to ensure effective advice and follow-up, but also to enable case material to be used for evaluating the service, quality of advice assessments, peer reviews and for social policy development;

•the need to train new workers in a clearly defined set of skills and knowledge;

•the need to guarantee consistency in spite of the diversity of clients using the service;

•the need to protect the adviser from the strain of having continually to ‘reinvent the wheel’.

However, the system should not be seen as a straitjacket, and it does not prevent you working in a creative and flexible way in the best interests of your client. Different agencies need to develop their own systems based on demand and resources, as well as any funders’ requirements.

You must undertake a wide range of tasks in order to provide effective help to clients. In practice:

•the tasks may not necessarily be carried out in the order in which they are presented;

•some tasks can be carried out simultaneously – eg, maximising income while waiting for information needed to check the client’s liability for her/his debts;

•it may be appropriate for some tasks not to be carried out at all.

Note: if you are to contact third parties on the client’s behalf, the client must provide a signed authority for this to happen (most agencies have a standard form for this). You must also comply with data protection legislation and obtain your clients’ consent to hold sensitive personal information about them and, where relevant, to share information about their cases with third parties – eg, for monitoring or quality checking purposes.

Stages of the debt advice process

Essentially, there are three stages to the debt advice process:

•exploration;

•options;

•action.

These can, in turn, be broken down into the following steps.

•Step one: explore the debt problem. This includes carrying out the Money and Pensions Service’s (MaPS) common initial assessment, where applicable (see here). The extent of the client’s debts, and the reasons for her/his financial difficulties and whether these are temporary or long term, must be established. This includes finding out who the client’s creditors are, how much is owed to each and the action each creditor has taken to collect its debt. A creditor may have passed the debt to a firm of debt collectors or even sold the debt to a debt purchaser, in which case it is necessary to see what action the collector or purchaser has taken.1The sale of a debt is known in law as an ‘assignment’ and the purchaser is known as an ‘assignee’. You should also explore whether the client has any assets as, if so, they could be at risk from creditor action (eg, bailiffs or from an insolvency option) and they might be relevant to other options (see here). Note: in this Handbook, the term ‘creditor’ includes the original creditor as well as the the debt purchaser.

•Step two: deal with urgent issues. Emergencies, such as bailiffs’ warrants, threats of disconnection of a fuel supply or loss of the client’s home or liberty, are dealt with first. Where court action is involved, you can help the client to complete court forms in order to meet deadlines.

•Step three: list the client’s creditors and minimise debts. Further information from the client, the creditor or a third party may be needed before this can be established. Specialist advice may also be required.

•Step four: list and maximise the client’s income. Maximising income involves increasing the amount of money the client has coming in, particularly by checking that s/he is receiving all the benefits to which s/he is entitled, and also increasing the client’s disposable income – eg, by reducing her/his expenditure. Although this Handbook treats these as two separate steps, in reality they are part of the same process. This is a potentially time-consuming step, for which it can be helpful to consult the MaPS Good Practice Toolkit (see here). It contains materials, resources and guidance on maximising income, including signposting and referrals where appropriate.

•Step five: list the client’s expenditure. This step should also include basic financial capability advice, including budgeting, identifying essential and non-essential expenditure and methods of money management. This also involves getting an explanation for particularly high or particularly low expenditure identified by the client.2FCA Handbook, CONC 8.5.4R(2)

•Step six: draw up a financial statement showing what income a client is receiving, her/his essential expenditure and whether there is any income available to pay creditors. The financial statement is an essential tool, not only in negotiations with creditors but also in determining which options are appropriate for the client – eg, her/his eligibility for a debt relief order (see here) or a debt management plan (see here). There may be occasions when a client’s expenditure needs to be challenged. If this is the case, discuss the reasons for this – eg, that it is unlikely to be accepted by a court or creditor.

•Step seven: consider whether the client meets the eligibility conditions of the Breathing Space Scheme (see here). If so, you should consider whether it would be an appropriate step for the client and advise her/him accordingly.

•Step eight: deal with priority debts. These are creditors whose sanctions for non-payment include imprisonment, disconnection of essential services or loss of essential goods or the home. Usually, some form of payment is required to deal with such debts, unless a formal insolvency option is the agreed strategy and the debt can be included in that option.

•Step nine: choose a strategy for non-priority debts. Explore and discuss all available options that are suitable in the client’s circumstances for resolving the debt problem, including advising on their implications. A strategy (or strategies) should then be agreed with her/him and an action plan drawn up. For each option, explain:

◦the advantages and disadvantages;

◦actual or potential consequences and implications, including the impact on credit reference files and banking services;

◦any eligibility criteria;

◦the debts included in that option;

◦any costs involved;

◦any risks associated with that option, including the risk of costs in relation to court action.

You should also explain why these available options are considered suitable and why other available options are not considered suitable. There is no need to explain other options which are not available, unless these have been raised by the client her/himself.

Negotiate with the non-priority creditors with a view to persuading them to accept the agreed strategy. Some clients can and want to negotiate with their creditors themselves.3In one case, the Financial Ombudsman Service found that a bank had not treated a customer who had approached it for advice and assistance about her debts ‘sympathetically and positively’ by insisting that the income/expenditure form she had completed had to be checked by an advice agency. See Ombudsman News 83, 2010 (Adviser 140 abstracts). This approach enables clients to regain control of their finances and allows the advice agency to offer more support to those clients who need help with this. Such ’self-help’ clients are likely to benefit from the CASHflow process discussed on here.

•Step ten: implement the chosen strategies. This may involve representing the client at a court hearing, periodic reviews of the client’s options or strategy, referral to another agency (eg, for a debt management plan) or arranging appropriate ongoing financial capability support for her/him. Sometimes you may have to challenge creditors on whether they are entitled to recover what they are claiming from clients – eg, if clients are not liable for their debts.

1 The sale of a debt is known in law as an ‘assignment’ and the purchaser is known as an ‘assignee’. »

2 FCA Handbook, CONC 8.5.4R(2) »

3 In one case, the Financial Ombudsman Service found that a bank had not treated a customer who had approached it for advice and assistance about her debts ‘sympathetically and positively’ by insisting that the income/expenditure form she had completed had to be checked by an advice agency. See Ombudsman News 83, 2010 (Adviser 140 abstracts). »

Information to clients

It is not necessary for an agency to have any written agreement with the client, but you should provide:1FCA Handbook, CONC 8.3

•adequate written information about the nature of the service being offered;

•clear information about which debts will be included in any debt solution and which will be excluded, and the actual or potential advantages, disadvantages, costs, risks and conditions of each solution;

•impartial information on the range of relevant debt solutions available to the client;

•warnings:

◦that creditors may still continue to try to collect their debt and such action could incur additional costs, which will be added to the debt;

◦that the client’s credit rating could be adversely affected;

◦about the importance of meeting priority commitments;

◦that correspondence from creditors should not be ignored;

◦that by entering into a repayment arrangement there is no guarantee that any current recovery or legal action will be suspended or withdrawn.

At the first interview, it is also good practice to point out:

•the agency’s commitment to confidentiality;

•the steps the agency will take and the steps the client has agreed to, or is expected to, take her/himself;

•that the client should not incur any further credit commitments without discussing it first with you;

•that the client should inform you of any change in her/his financial circumstances;

•that a successful outcome cannot be guaranteed;

•details of the agency’s complaints policy and of the client’s right to escalate complaints to the Financial Ombudsman Service, if this has not already been explained.2See FCA Handbook, DISP 1

1 FCA Handbook, CONC 8.3 »

2 See FCA Handbook, DISP 1 »

Monitoring creditor practices

Debt advisers should keep a record of the collection techniques and tactics used by individual creditors. This is useful in any future choice of strategy. In addition, note practices or situations that continually cause hardship to clients and monitor which creditors are responsible. The effectiveness of any pressure for change often depends on the ability of an agency to produce evidence in support of its recommendations. For this reason, case recording must be accurate and detailed, and stored in a form that allows details of particular practices and the hardship they cause to be retrieved and patterns detected.

There are frequent changes in the law and procedures that affect debt, and agencies are often in a very good position to look closely at how these are working in practice. Agencies often carry out such exercises as part of a network of local and national debt services.

Credit reference agencies

**Alert: On 31 March 2020, Experian, Equifax and TransUnion announced that if clients agree an ‘Emergency Payment Freeze’ with their credit provider(s) as a result of the impact of the coronavirus outbreak, their current credit score will be protected for the duration of the payment holiday or other agreed arrangement - eg, reduced payments as the payment status of the account(s) in question will not get worse. However, credit providers will be able to see whether or not clients have taken a payment deferral since that will show up on their latest balances. The usual rules continue to apply to clients who have not made such an arrangement with their credit provider(s). To ensure there is no negative impact on their credit score, clients need to ensure that a payment deferral has been agreed with their credit provider before cancelling their direct debit or other method for making their contractual monthly payments. Equifax have produced some .**

There is no right to credit and most lenders decide credit applications on the basis of ‘credit scoring’ – ie, a system used to assess the probability of applicants meeting their financial commitments, using information supplied on the credit application form, the lender’s own records (where available) and data from credit reference agencies. Different lenders use different systems, which should not only establish the likelihood of the applicant repaying but also whether s/he can afford to do so.

There are three main credit reference agencies in the UK: Experian, Equifax and TransUnion. They provide information about clients and their credit records. They do not:

•make the decision or express any opinion about whether clients should be given credit and are unable to tell clients why they have been refused credit; or

•keep ’blacklists’ or details of clients’ credit scores.

When a creditor informs a client that it is rejecting her/his credit application, based on information from a credit reference agency, the creditor must provide details of the credit reference agency, including the name, address and telephone number.1s157 CCA 1974 Failure to do so is a criminal offence. Note: this requirement does not apply to agreements secured on land.

Credit reference agencies usually keep details of:

•electoral roll entries;

•county court judgments. These are held for six years from the date of judgment unless paid within one month, when any record is removed;

•bankruptcy orders, administration orders, debt relief orders and individual voluntary arrangements. These are held for six years from the date of the order or arrangement;

•credit accounts. A record is held until the account is paid off and then for a further six years;

•whether the client has defaulted on a credit agreement. A record is held for six years from the date the default was registered, normally when the account is three to six months in arrears;

•mortgage repossessions, including voluntary repossessions. These are held for six years;

•aliases, associations and linked addresses – ie, any other names the client has been known by, previous addresses or correspondence addresses, and whether s/he shares financial responsibility for an account with another person;

•a warning from Cifas – a fraud avoidance system developed to protect people whose names, addresses or other details have been used fraudulently by other people in order to apply for or obtain credit. It does not mean that the client is being accused of fraud, but any credit applications may be checked out to ensure s/he is, in fact, the applicant;

•information from the Gone Away Information Network (known as GAIN) – ie, on clients who have ’gone away’ without informing their lenders of a forwarding address. This information is held for six years;

•previous credit searches by lenders in the past two years. Several searches within a short period of time may indicate attempted fraud or overcommitment.

A client’s credit file should only hold information about her/him and any other person with whom s/he has a ’financial association’ – ie, joint account holders or applicants, or anyone who informs the agency that they have financial ties. This allows lenders to take account of information about anyone ’linked’ to the client. Although the client can ask a lender only to take account of information about her/him, this does not prevent the lender carrying out checks to make sure that this is not intended to hide a partner’s poor credit rating. If there is no financial association, the client should inform the agency so the link can be removed.

1 s157 CCA 1974 »

Recording defaults

Guidelines from the Information Commissioner state that a client’s account should not be recorded as in default unless the relationship between the creditor and the client has broken down. This means the client has been in arrears for at least three consecutive months on the contractual instalments or under an agreement to reschedule repayments. It should be recorded as in default if such payments have not been made in full for six months. Accounts which are subject to repayment arrangements or debt management plans should only be recorded as in default if the client:

•is only making token payments. However, in this situation, s/he can ask the agency to record this (known as filing a ‘notice of correction’) if the creditor has not done so; or

•defaults on the arrangement and the arrears are equivalent to three months’ payments under the original contract; or

•is making reduced payments, but no agreed arrangement is in place.

If the lender does not agree to accept reduced payments (including token payments), although any payments the client makes are reflected in the outstanding balance recorded, arrears continue to accrue and a default may be recorded once the equivalent of three months’ arrears is reached. If a creditor fails to record a default within the three- to six-month period but, for example, delays registering the default until the client misses an agreed repayment, the Financial Ombudsman Service may order the creditor to backdate the registration. A default cannot be registered in respect of an irredeemably unenforceable agreement.1See Adviser 166 abstracts and Grace v Black Horse (Adviser 167 abstracts)

A zero balance on a credit reference report marked ’balance satisfied’ (with or without the flag ’partially satisfied’) indicates that there has been a default, but that:

•the account has been paid in full; or

•the account was included in an individual voluntary arrangement which has been satisfactorily completed, or in a bankruptcy from which the client has been discharged or in a debt relief order which was not revoked during the moratorium period; or

•the creditor has agreed to accept less than the full amount due in full and final settlement of the account.

1 See Adviser 166 abstracts and Grace v Black Horse (Adviser 167 abstracts) »

If the information held is incorrect

A client can obtain a copy of her/his file at any time, free of charge.1s158 CCA 1974 As the different credit reference agencies hold different data from different credit providers, it is useful to get reports from the main three agencies. Request for reports can be made:

•online from:

◦Equifax (equifax.co.uk);

◦Experian (experian.co.uk);

◦TransUnion (transunion.co.uk);

•in writing. The client must provide details of her/his full name and address (including any previous names or addresses used in the past six years). See ico.org.uk/your-data-matters/credit for more information about making a written request.

If the client considers that any of the information in the file is wrong and that it is likely to cause prejudice as a result, s/he can write either to the lender or the credit reference agency. However, as the credit reference agency would have to contact the lender to ask it to investigate the complaint, it might be quicker to write to the lender and send a copy to the credit reference agency. The client should write to the lender and credit reference agency stating why the information is wrong and submitting any supporting evidence – eg, that a debt has been paid. The agency must respond in writing within 28 days, stating either that it has corrected or removed the information, or done nothing.2s159 CCA 1974 In the meantime, the information is marked ’account query’ while the agency checks its accuracy. If the agency fails to remove the information or the client does not agree with the proposed amendment, s/he can ask the agency to add her/his own ’notice of correction’ to the file – eg, an explanation of how the debt arose. This must be no more than 200 words long and must be sent to the agency within a further 28 days. The agency must inform the client within 28 days if it accepts the notice. If it does not, the agency must refer the case to the Information Commissioner for a ruling.

If, after writing to the lender and/or the credit reference agency, the client receives no response, s/he can complain to the Information Commissioner. A client can also complain to the Information Commissioner if s/he believes inaccurate information is being held but a ’notice of correction’ is not appropriate – eg, it should be completely removed. If the information about the client’s credit history is factually correct, however, it is not removed just because s/he does not want it made public.

Under the General Data Protection Regulation (GDPR), clients have the right to access the information that their creditors hold about them by making a ‘subject access request’ (SAR). No particular form of words is required so long as the client makes clear that s/he is asking for details of her/his own personal data held by the creditor. The creditor must respond within one month of receiving the request. The creditor cannot charge a fee for complying with the request in most circumstances. A reasonable fee can be charged to cover administration costs where requests are excessive or unfounded or if the client requests further copies of the data.

Credit repair companies that claim to be able to ’clean up’ people’s credit reference files (in return for a fee) should be avoided, as the information they give may be misleading or worse.

Experian has recently published a new guide entitled Understanding your credit information and how lenders use it, which is available at: experian.co.uk/consumer/product-factsheets/understanding-credit-information.pdf. The Information Commissioner’s Office (see Appendix 1) has a useful leaflet, Credit Explained, available on its website at ico.org.uk. The Information Commissioner also collaborated with the credit industry on the production of a guidance document, Principles for the Reporting of Arrears, Arrangements and Defaults at Credit Reference Agencies, available at scoronline.co.uk/key-documents.

1 s158 CCA 1974 »

2 s159 CCA 1974 »

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