Why pay to have a Debt Management Plan?
By Richard Lane, Chief Client Officer
Let’s talk about fee-charging providers of Debt Management Plans (DMP). This may seem like massive self-interest or sour grapes, given that StepChange is a free provider of debt advice and debt solutions. But as a charity, we have a duty to campaign on behalf of the thousands of consumers who are on fee-charging DMPs, and according to our research are on average paying thousands more and taking 3 years longer to pay back their debts. So enough is enough!
While we should point out that there are no rules suggesting that firms shouldn’t charge fees to administer DMPs, and we’re not suggesting any breach of regulations, our research has nevertheless identified that someone with identical debts of £15,400 could potentially take nearly 3 years longer and/or pay over £6,000 more, if they have a DMP with a fee-charging firm rather than a DMP administered for free by StepChange (or other free providers).
Here’s a worked example for comparison purposes, based on figures broadly representative of a typical StepChange DMP client. All figures are rounded for ease.
The scale of differential cost is staggering. So why would anyone choose to go down the route of a fee charging DMP, when the likelihood of them achieving a good outcome is at risk?
And why would creditors want their customers — especially now that the Consumer Duty requires them to seek good outcomes as far as they can — to have this experience, rather than one that costs them less, makes them debt-free sooner, and enables their financial rehabilitation more quickly?
It doesn’t make sense.
Our belief is that no-one really actively chooses this option. While there may — as Debt Camel blogger Sara Williams has alluded to — be some vague (mistaken) suspicion that free DMP services may have a hidden catch, the likelihood is that most people simply take the first plausible debt solution lifeline that is offered to them, whatever its source. Even though there are rules that state that consumers must be informed that free DMPs are available, by the time they are told it’s too late — they have already made the emotional leap of trust and seen a solution that feels within their grasp.
Historical research from Bristol University, suggests that this is the case. This begs the question: should we be satisfied to allow financially vulnerable customers to experience such very different levels of costs for DMPs, especially within a Consumer Duty world?
There are views in the sector that the debt management eco-system needs fee-charging providers, not least because there isn’t sufficient funding in the sector otherwise. This may be pragmatic, assuming those organisations have long-term financial longevity themselves, but is it sufficiently customer-centred in the new Consumer Duty world?
A new worry is that, since the clampdown on IVA lead generators, some of the firms that were previously in this market may have switched their attention to introducing fee-charging DMPs instead.
This Autumn we want to shout about the existence of free and impartial debt advice and Debt Management Plans that are also administered free of charge. Most people who need debt advice and a debt solution probably don’t fully realise how the market works, or quite the level of cost and time to repay difference between providers ostensibly offering the “same” solutions.
Let’s try to make sure that as many customers as possible get access to free debt advice and solutions rather than pay through the nose to become debt-free. Just think how much financial resilience these households could build, and how much sooner their finances would be rehabilitated, if they were encouraged to seek a free rather than paid-for administration of their DMP.
