Some news and views from UK academia and practice on the law, policy and practice of insolvency
Friday, 10 April 2009
Symptoms of Debtor Ostrich Syndrome? R3's latest press release on Debt Denial - matters arising (unlike an Ostrich's head)
The latest press release from the Association of Business Recovery Professionals (R3) makes interesting reading for a number of reasons. The press release is entitled: "Debt denial - two thirds of those with major financial problems are not seeking advice." In the press release R3 make clear their concern, "that those with financial problems do not think they ‘need’ debt advice, while those that do seek advice are not always going to the right places for it." I will leave to one side my cynical side and any comments regarding a trade body using findings of an independent (?) survey to bolster an argument as to why their constituent members should be consulted. To do so would be churlish. R3 may also of course be correct in their conclusions that more redress should be made to Insolvency Practitioners (IPs) for this sort of debt information (if this is indeed the underlying subtext that one could take from the press release). The greater use of IPs proposition is one that I cannot of course rebut because, inter alia, the professional JIEB examinations, Statements of Insolvency Practice (SIPs), etc, all mean that an over-indebted individual would of course get more objective, clinical, and thoughtful professional advice from an IP (who is a regulated professional) than if he or she was to go to the unregulated sector. Hence my previous calls for an expansion of the work of the Insolvency Practices Council (IPC). i.e. in my view the unregulated debt advice sector (as borne out by the R3 press release) is in some cases engaging in some rather problematic behaviour, in relation to marketing, let alone actual advice. IPC observation might preclude this at best, or draw attention to the same if nothing else. Generally speaking this sort of behaviour does not happen within the realm of IPs, not least because of the IPC and the Recognised Professional Bodies (RPBs) continuos monitoring of their behaviour. Some people of course take a different view to the competency of IPs (see for example: Insolvent Abuse: Regulating the Insolvency Industry). One of the co-authors (Professor Prem Sikka) of this rather damming report (which must be read carefully and with some caution), has also written relatively recently on these negative IP competency issues in his digital Guardian column.
But these are more specific issues which require more in depth treatment and which therefore will be saved for another time. In this blog entry I will instead concentrate on the very serious issues that the R3 press release gives rise to, namely, debt advice and debtor eduction. I have addressed both these areas elsewhere in some depth in a full length report (the Personal Insolvency Project - PIP) commissioned by the Insolvency Service and Grant Thornton LLP and in two spin off articles (one and two) that appeared in Insolvency Intelligence.
The R3 press release notes that, "Last month the OFT told 11 financial management businesses to close down websites that ‘looked like’ governmental or charity advice sites." This is certainly an alarming statistic and follows findings made in the Personal Insolvency Project (PIP) in relation to web advertising by a number of debt management firms (some with IPs involved). That this sort of behaviour is still continuing is very concerning and the Office of Fair Trading and R3 are right to draw our attention to this sort of behaviour. In relation to advice itself R3 note, "According to YouGov’s quarterly ‘DebtTracker’ undertaken in February 2009, only 37% of those who had ‘fallen behind with many bills or credit commitments’ (the highest levels of debt category in the survey) sought debt advice in the previous 6 months. 65% of all those struggling with bills and commitments who do not seek financial advice thought they did not ‘need’ advice on their financial problems." At first glance this paints quite an alarming statistical picture. We need more access to the primary source material however before we can make an informed comment as to the seriousness of these findings. R3 President, Mr. Nick O'Reilly, has perhaps seen the whole picture as he is much more unreserved. He notes:
“For anyone to say they do not need financial advice is troubling, but doubly so for those in financial difficulty. The only way to sort personal debt problems is to seek advice early, it’s as simple as that...Seeking professional advice does not mean you will immediately be declared bankrupt or have your credit cards taken away. People should not be afraid of that first step. Often it could just be about budgeting, but ultimately it will cost you less if you address these issues early...While it is good that the higher numbers of respondents are contacting recognised bodies such as the Citizens Advice Bureau (CAB), CCCS and National Debtline, more people should think of contacting a local licensed insolvency practitioner (IP). An IP has undergone a rigorous training programme and has to apply every year to renew their licence. The CAB cannot actually resolve your financial problems or perform the majority of statutory debt resolution procedures and may direct you back to an insolvency practitioner anyway. Over 80% of insolvency practitioners offer their first hour of advice free of charge.”
As noted above (by me) Mr O'Reilly's point about IP training and professionalism is certainly true, if you ignore Professor Sikka's recent Guardian comments (above) and more historically Mr. Stephen Aris (whose text is now admittedly rather old and perhaps represents another age, see: Going Bust: Inside the Bankruptcy Business. Andre Deutsch Ltd, London. 1985.) Mr O'Reilly's point about the CAB cannot go unanswered however, especially in light of the new Debt Relief Order (DRO) process which the CAB are entitled to administer as a competent body. The retort to my defence of the CAB and their capabilites will of course be, "Yes, but what about IVAs and bankruptcy as an appropriate procedure? Debt advice should feature the whole gamut of options." My response would of course be - "Yes this is true, but in the context of the CAB are you familiar with the profile of people who attend the CAB for advice?" In the main they are individuals who are economically exactly those who would benefit from a DRO. They are not those who could make use of an IVA or bankruptcy. An IP would therefore be an unnessacary extravagance for the main body of those seeking advice in this way. If I am wrong, Mr Peter Tutton, or some other CAB policy official will correct me. For the very small majority of people who are not atypical of the CAB's clientele all is not lost. As Mr O'Reilly points out the CAB will doubtless refer them to an IP. The R3 press release goes on to give the following statistics:
"When seeking financial advice, 27% of respondents, the highest response for those who sought debt advice, contacted the CAB, 25% the CCCS and 15% the National Debtline. 9% contacted an ‘other advice centre’ who could be unregulated, while only 7% contacted an insolvency practitioner."
If I was an IP I would be alarmed at this statistic. I would also be grateful that my trade body was fighting my corner attempting to increase business for my services and therefore providing value for money for my subscription. The question has to be asked however: why is recourse to IPs so low in this personal insolvency context? Is it due to a lack of publicity? Are there some general marketing or perception problems? Does the lay consumer think that IPs are for 'more serious' cases than consumer debt? Has this opinion (if it exists) been exacerbated by recent press coverage on the corporate side? Are we seeing more evidence of the negativity of the term 'insolvency' precluding recourse to insolvency procedures and those that administer the same? Is it the case that consumers cannot get their heads around the notion that profit can be made from insolvent estates and that there cannot possibly be professionals who exist who provide search a service? More research in this area is certainly required. Perhaps R3 will be commissioning some research on this topic in the near future. Professor Adrian Walters' recent work on IP discipline and complaints (see: one and two) certainly makes him well placed to offer some insightful commentary on this vexed issue for IPs. The press release perhaps serves as R3's first salvo to bolster redress to IPs. A future R3/YouGov survey may reveal if they have been successful. Another survey body might be needed however as it seems as if YouGov might itself be in need of some IP debt advice according to a recent story in The Times.
A connected issue flows from debtor advice and that is the vexed area of debtor education. As one of my previous blog entries has argued, debtor education for bankrupts and IVA users does not seem to work. This is the English and Welsh experience to date (in this regard see also PIP, ibid). It should not therefore come as a shock that people are generally less inclined to engage with or discuss their debt issues when they are not as serious (possibly) as that of proven debtors, i.e. ones who have gone through an insolvency process. Should we really marvel that people tend to stick their heads in the sand on this issue? In a previous blog entry I noted that I am no evolutionary biologist. Nor am I a psychologist or educationalist (despite my PGCE). I will not therefore attempt to mull on or speculate as to why debtor education in either the ex ante or ex post sense seems to fail. This is an area which needs deep inter-disciplinary consideration. We are not alone in this quandary. The Canadians have had education programs in bankruptcy for a long period of time. Indeed, in Professor Jacob Ziegel’s early 1990’s symposium book he cites a very interesting Ph.D. thesis claiming they do not work. (hat tip to Professor Westbrook).