Secured loan volumes are expected to rise as the debt management plan protocol beds in, ensuring that those firms signed up to the rules explore all debt consolidation options on day one.
The protocol, brought in by the Office of Fair Trading last month, states a plan can only be offered after a full assessment of the client’s circumstances has been carried out to avoid unscrupulous practices.
Gary Bailey, sales and marketing director at Blemain Finance, said: “Some debt management companies have been focused on only offering the one solution rather than offering a range of financial solutions, however other companies have created a suite of resolutions that allows secured loans, mortgages and debt management plans to be considered.
“For those solely offering a debt management program there will always be a suspicion that a secured loan may have been a more appropriate solution for the customer.”
The rules also specify that DMP providers are independently monitored by a recognised auditing or regulatory body every 12 months to demonstrate compliance which will include vetting the day one advice.
This has prompted some in the sector to anticipate consumers who have been incorrectly sold a debt management plan to be “flipped” into a secured loan or an individual voluntary arrangement over the next 12 months.
However there is expected to a mad dash to flip all consumers from mis-sold plans into secured loans before their back books are subject to independent monitoring.
Lee Birkett, managing director of eMoneyGroup, said: “The firm needs to ensure the product is fit for purpose and no other suitable product is overlooked, and it must be able to evidence the advice which has been given.”
The consequences of not supplying the correct product can result in the licence holder having their licence revoked.
Sean Vickery, managing director of The Select Partnership, said: “The biggest issue we have found is when debt management companies use plans for a short period of time. They claim they are using the plan as a holding vehicle while they resolve the client’s situation but it is probably more to do with generating fees.”
However, when a consumer enters into a debt management plan creditors are obliged to change the status of the credit to default, therefore a consumer may enter the plan with missed payments but end up with multiple defaults.
Vickery said the knock-on effect of this practice is that consumers end up with limited options a lot because they are not willing to lend to debt management customers.
Paul Ford, director of Fluent Money, agreed that entering a client into a debt management plan is not a decision which should be taken lightly.
He said: “Once someone is put into a debt management plan it becomes very difficult to get them out of it via a lending solution.”
Shawbrook are one of the only secured loan lenders willing to consider debt management plan customers for a loan but this is on a closed distribution basis, with specialist partners and assessed on a case by case basis.
Blemain Finance has confirmed it has no plans to enter this area of the market at this time.
Ford said the voluntary nature of the protocol is being described by the industry as an “opportunity missed”.
He said: “This is not a mandatory set of rules and from discussions I have had with major debt management companies they agree that this is a lost opportunity. Those firms which are doing things that they shouldn’t be are hardly likely to be the firms that will sign up to it.”
Vickery said that his firm had not seen an upturn in enquiries from debt management companies and that it would take some time before the effects of the protocol filtered through.
But other brokerages are experiencing early indications that the protocol is having an impact on the industry.
Steve Walker, managing director at Promise Solutions, said: “We have seen an increase in enquiries from debt management firms who are clearly looking to integrate secured loans into the front end of their sales process.
“It appears they are trying to treat customers more fairly than they have in the past.”
But the absence of TCF principles at the outset may mean some consumers may find themselves with limited options as lenders are put off by the legacy issues of debt management plan holders.
Bailey said: “Transferring customers out of a debt management plan will certainly have its challenges. It will be difficult for brokers in some circumstances to justify transferring clients out of debt management plans into a secured loan.”
Bailey said when a customer is in a debt management program some or all of the credit interest may have been frozen, monthly repayments may be significantly reduced and their credit profile affected. There is also the issue that they will be moving unsecured credit to secured credit.
He added: “From a TCF perspective there has to be a significant betterment for the customer in perhaps the overall amount repayable, significantly reduced monthly repayments, improved affordability and sustainability, and a noteworthy impact on the customer’s credit profile.
“There has to be an obvious benefit to the customer and that is what lenders will be looking at.”