Just How Independent Are Credit Counselling Organisations ?
Extracts From The Myvesta UK Forum .......
Forum Question:
I have just spoken with a 'free' debt charity regarding my substantial commitment. Whilst the lady on the telephone was perfectly pleasant it struck me that she became very uncomfortable when I challenged the announced independence of this organisation. Yes they can help me and I am of course grateful but I do question just how 'charitable' this organisation proclaims to be.
I see that this organisation also claims to be 'Not-For-Profit' and maybe this is true. Can any of the advisors enlighten me as to the debate as I assume that there is one!
Sincerely
An intrigued debtor!
Response:
Yes their is indeed a debate about this issue!
Essentially, it boils down to this:
The 'Free' Camp.....
There are in existance a small number of credit counselling organisations in the UK that receive their funding mostly via payments from creditors (very similar in practice to the American model of Credit Counseling)
These payments or 'donations by creditors' are referred to as 'Fair Share' Contributions and are based on a percentage of the debt payment that is recovered by the debt counselling organisations and sent on to each creditor as part of a debt management plan (DMP)
So for example, if a payment of £100 is sent each month by the debt counselling organisation to a particular credit card company a 'fair share' payment of 12% for example might be made by the credit card company to the debt counselling organisation for their part in the recovery of that debt.
In this case that would equate to £12 each month that would be paid by the credit card company in relation to the recovery of the outstanding balance that is owed to them. Hence if the total amount sent to the debt counselling organisation is £500 per month then the amount that that organisation would recieve from creditors would be £60 each month assuming that they all contribute fair share. Very lucrative!
Presently, this method of credit counselling typically means that the consumer is not being charged a fee for the provision of this service as the fees for the service are paid for by the contributing credit card companies and banks etc.
As individuals using the service are not charged any fees this model of debt management clearly appeals to many people who are in need of debt advice and intervention.
The critisisms of this model of debt counselling assert that if these organisations are paid for by the credit card companies and banks etc then how independent can they truly claim to be?
It is clear that financial institutions have a vested self-interest in retaining control over their debt recovery process and that this method it is argued is simply an extention of their debt collecting strategy.
In the USA this model has been very heavily critisised.
Indeed the 'Fair Share' funding model has been used as a prime tool to support this argument as creditors over the years have continually reduced the percentage of fair share funds that they pay to these companies.
Creditors have also attached 'collection performance' measures to fair share payments i.e; the more efficient the credit counselling agencies are at recovering debt from individuals using the service the higher the likelyhood that the organisation will continue to recieve fair share payments by the creditors.
This has led to some major developments in the USA:
1. Credit Counselling Organisations now charge consumers monthly fees for the debt management service they provide in order to substitute the greatly reduced fair share payments they receive from creditors (even after many years of critisising those organisations that had chosen to remain independent from creditor funding and charge clients directly for the provision of an independent debt management service)
2. For the US Government FTC Department (Federal Trade Commission) to start investigating and questioning the charitable status of the industry (referred to as Non-Profit in the USA). In many cases revoking the charitable status of a number of credit counselling organisations asserting that they are for all intents and purposes 'Debt Collecting Agencies' that pre-dominently serve the interests of the major credit card companies.
3. For some credit counselling organisations to deal only with debts were they know that they will receive a fair share payment from the creditor of that particular debt i.e, an individual may have 10 credit debts but the credit counselling organisation may only agree to deal with 7 of them if they know that the other 3 creditors will not pay a fair share contribution. (The more professional organisations will still deal with all of an individuals unsecured creditors though)
4. Monthly payment amounts being pre-specified by credit card companies. It is now the case that qualification for a debt management plan in the USA is directly linked to whether or not a debtor can afford to make pre-determined percentage of outstanding debt payments to each creditor as part of a debt management plan. Hence if an individual that has approached a credit counselling agency for debt help cannot afford to make the minimum percentage payments dictated by the creditors to the credit counselling agencies then they will not be allowed to enroll onto a debt management plan by the credit counselling agency.
So hence critics of this model of credit counselling say that if the experience of credit counselling in the USA is anything to go by then their is plenty to be concerned about.
The 'Fee' Camp
The vast majority of debt management organisations in the UK assert their independence by stating that they are independent because they are not funded by the credit industry. Here it is put forward that the only way a debt counselling organisation can actually profess to be truly independent and acting in the interest of the client is if there is no room for a 'Conflict Of Interest' and the that the client is the only 'Master' that is served.
Most of the larger fee charging debt management agencies in the UK charge the client a monthly fee based, (again), on a percentage of debt recovered basis i.e. as with the £100 example above - if £100 funds are received by the debt management company as part of an individuals debt management plan then the company will retain £12 out of the £100 as a fee and disburse the remaining £88 to the credit card company on behalf of the debtor.
The major critisism of this model of debt management is that there would be more money going towards the individuals creditors and paying down the associated debts quicker if the individual was not paying for a debt managment service themselves directly. Indeed, on a black and white like-for-like basis, this is demonstrably factual also.
This strength of this argument is diluted however if it is viewed within the context of 'vested self-interest' by either a 'Creditor Funded' or 'Client Funded' debt management organisation that is commercially rewarded from a 'percentage collected' payment model.
Here it is also demonstrably the case that be they 'fee' or 'free', organisations that are rewarded on a percentage basis (no matter how much the camps may say otherwise) do have a clear vested interest in obtaining the highest possible monthly payment from an individual on a debt management plan as the more money they recieve from a client the more funding the particular organisation will receive.
Ultimately then if a situation arises where individuals are being persuaded into paying more than they can really afford to into a DMP on a monthly basis then the concern should be focused on the suitability of a business model that rewards organisations in this way regardless of where the funding comes from.
So what do I think then?
My personal viewpoint is that the whole debate about 'fee' or 'free' is out of date and completely misses the point. It is also used as a tool by some creditors to deflect attention away from their own role in contributing to the level of consumer debt in the UK today.
The common-sense bottomline is that there is a role for both creditor funded and fee charging organisations however the focus of interested parties should gravitate much more towards the quality and impartiality of debt advice organisations as oppose to squabbling about funding issues.
I do not believe that a percentage based debt counselling model is appropriate for either a creditor funded or fee charging organisation and this has been played out in the USA with entirely too many bad examples to end that debate.
However I am not against creditor contributions although I do believe that contributions should not be tied to the recovery of debts in respect of each individual consumer enrolled on a debt management plan.
Rather it would be far more transparent if creditor funding was paid into a 'blind' fund used in conjunction with 'fixed' contributions by clients into their own DMP to allow the debt counselling organisation to be truly independent and to avoid any conflicts of interest.
I would also like to see debt counselling organisations dealing with debts other than unsecured credit debts.
At Myvesta, both in the US and the UK we have always offered our help and intervention from a viewpoint of 'lets fix the problem' regardless of what type of debts are involved.
Hence our range of money management programmes have been set up to deal with all types of debts or monthly bills be it credit card debts, council tax arrears or regular monthly mortgage payments etc.
This is a very different approach to pretty much all of the larger debt counselling organisations be they 'charitable' or otherwise.
These organisations will typically only deal with unsecured debts on an ongoing basis. Unfortunately, for many individuals this only deals with half of the problem if they are left to their own devices when it comes to dealing with more important priority debts etc.
Saying this though I think that like Myvesta, some of the debt counselling firms do offer a quality service and they are to be commended for the work that they do given the volume of clients that they deal with.
I suppose the proof is in the pudding and the challenge for the creditor funded organisations may well be what 'tune' they 'whistle' when/if fair share contributions start to be reduced by creditors as has been the case in the USA (afterall - they are largely the same creditors with the same profit agenda)? Only time will tell I suppose!
_________________
Kind regards
Sean
http://www.myvesta.org.uk
----------------------
Myvesta UK - A Not-For-Profit Financial Assistance Organisation - "We Can Help!"
----------------------
Forum Question:
I have just spoken with a 'free' debt charity regarding my substantial commitment. Whilst the lady on the telephone was perfectly pleasant it struck me that she became very uncomfortable when I challenged the announced independence of this organisation. Yes they can help me and I am of course grateful but I do question just how 'charitable' this organisation proclaims to be.
I see that this organisation also claims to be 'Not-For-Profit' and maybe this is true. Can any of the advisors enlighten me as to the debate as I assume that there is one!
Sincerely
An intrigued debtor!
Response:
Yes their is indeed a debate about this issue!
Essentially, it boils down to this:
The 'Free' Camp.....
There are in existance a small number of credit counselling organisations in the UK that receive their funding mostly via payments from creditors (very similar in practice to the American model of Credit Counseling)
These payments or 'donations by creditors' are referred to as 'Fair Share' Contributions and are based on a percentage of the debt payment that is recovered by the debt counselling organisations and sent on to each creditor as part of a debt management plan (DMP)
So for example, if a payment of £100 is sent each month by the debt counselling organisation to a particular credit card company a 'fair share' payment of 12% for example might be made by the credit card company to the debt counselling organisation for their part in the recovery of that debt.
In this case that would equate to £12 each month that would be paid by the credit card company in relation to the recovery of the outstanding balance that is owed to them. Hence if the total amount sent to the debt counselling organisation is £500 per month then the amount that that organisation would recieve from creditors would be £60 each month assuming that they all contribute fair share. Very lucrative!
Presently, this method of credit counselling typically means that the consumer is not being charged a fee for the provision of this service as the fees for the service are paid for by the contributing credit card companies and banks etc.
As individuals using the service are not charged any fees this model of debt management clearly appeals to many people who are in need of debt advice and intervention.
The critisisms of this model of debt counselling assert that if these organisations are paid for by the credit card companies and banks etc then how independent can they truly claim to be?
It is clear that financial institutions have a vested self-interest in retaining control over their debt recovery process and that this method it is argued is simply an extention of their debt collecting strategy.
In the USA this model has been very heavily critisised.
Indeed the 'Fair Share' funding model has been used as a prime tool to support this argument as creditors over the years have continually reduced the percentage of fair share funds that they pay to these companies.
Creditors have also attached 'collection performance' measures to fair share payments i.e; the more efficient the credit counselling agencies are at recovering debt from individuals using the service the higher the likelyhood that the organisation will continue to recieve fair share payments by the creditors.
This has led to some major developments in the USA:
1. Credit Counselling Organisations now charge consumers monthly fees for the debt management service they provide in order to substitute the greatly reduced fair share payments they receive from creditors (even after many years of critisising those organisations that had chosen to remain independent from creditor funding and charge clients directly for the provision of an independent debt management service)
2. For the US Government FTC Department (Federal Trade Commission) to start investigating and questioning the charitable status of the industry (referred to as Non-Profit in the USA). In many cases revoking the charitable status of a number of credit counselling organisations asserting that they are for all intents and purposes 'Debt Collecting Agencies' that pre-dominently serve the interests of the major credit card companies.
3. For some credit counselling organisations to deal only with debts were they know that they will receive a fair share payment from the creditor of that particular debt i.e, an individual may have 10 credit debts but the credit counselling organisation may only agree to deal with 7 of them if they know that the other 3 creditors will not pay a fair share contribution. (The more professional organisations will still deal with all of an individuals unsecured creditors though)
4. Monthly payment amounts being pre-specified by credit card companies. It is now the case that qualification for a debt management plan in the USA is directly linked to whether or not a debtor can afford to make pre-determined percentage of outstanding debt payments to each creditor as part of a debt management plan. Hence if an individual that has approached a credit counselling agency for debt help cannot afford to make the minimum percentage payments dictated by the creditors to the credit counselling agencies then they will not be allowed to enroll onto a debt management plan by the credit counselling agency.
So hence critics of this model of credit counselling say that if the experience of credit counselling in the USA is anything to go by then their is plenty to be concerned about.
The 'Fee' Camp
The vast majority of debt management organisations in the UK assert their independence by stating that they are independent because they are not funded by the credit industry. Here it is put forward that the only way a debt counselling organisation can actually profess to be truly independent and acting in the interest of the client is if there is no room for a 'Conflict Of Interest' and the that the client is the only 'Master' that is served.
Most of the larger fee charging debt management agencies in the UK charge the client a monthly fee based, (again), on a percentage of debt recovered basis i.e. as with the £100 example above - if £100 funds are received by the debt management company as part of an individuals debt management plan then the company will retain £12 out of the £100 as a fee and disburse the remaining £88 to the credit card company on behalf of the debtor.
The major critisism of this model of debt management is that there would be more money going towards the individuals creditors and paying down the associated debts quicker if the individual was not paying for a debt managment service themselves directly. Indeed, on a black and white like-for-like basis, this is demonstrably factual also.
This strength of this argument is diluted however if it is viewed within the context of 'vested self-interest' by either a 'Creditor Funded' or 'Client Funded' debt management organisation that is commercially rewarded from a 'percentage collected' payment model.
Here it is also demonstrably the case that be they 'fee' or 'free', organisations that are rewarded on a percentage basis (no matter how much the camps may say otherwise) do have a clear vested interest in obtaining the highest possible monthly payment from an individual on a debt management plan as the more money they recieve from a client the more funding the particular organisation will receive.
Ultimately then if a situation arises where individuals are being persuaded into paying more than they can really afford to into a DMP on a monthly basis then the concern should be focused on the suitability of a business model that rewards organisations in this way regardless of where the funding comes from.
So what do I think then?
My personal viewpoint is that the whole debate about 'fee' or 'free' is out of date and completely misses the point. It is also used as a tool by some creditors to deflect attention away from their own role in contributing to the level of consumer debt in the UK today.
The common-sense bottomline is that there is a role for both creditor funded and fee charging organisations however the focus of interested parties should gravitate much more towards the quality and impartiality of debt advice organisations as oppose to squabbling about funding issues.
I do not believe that a percentage based debt counselling model is appropriate for either a creditor funded or fee charging organisation and this has been played out in the USA with entirely too many bad examples to end that debate.
However I am not against creditor contributions although I do believe that contributions should not be tied to the recovery of debts in respect of each individual consumer enrolled on a debt management plan.
Rather it would be far more transparent if creditor funding was paid into a 'blind' fund used in conjunction with 'fixed' contributions by clients into their own DMP to allow the debt counselling organisation to be truly independent and to avoid any conflicts of interest.
I would also like to see debt counselling organisations dealing with debts other than unsecured credit debts.
At Myvesta, both in the US and the UK we have always offered our help and intervention from a viewpoint of 'lets fix the problem' regardless of what type of debts are involved.
Hence our range of money management programmes have been set up to deal with all types of debts or monthly bills be it credit card debts, council tax arrears or regular monthly mortgage payments etc.
This is a very different approach to pretty much all of the larger debt counselling organisations be they 'charitable' or otherwise.
These organisations will typically only deal with unsecured debts on an ongoing basis. Unfortunately, for many individuals this only deals with half of the problem if they are left to their own devices when it comes to dealing with more important priority debts etc.
Saying this though I think that like Myvesta, some of the debt counselling firms do offer a quality service and they are to be commended for the work that they do given the volume of clients that they deal with.
I suppose the proof is in the pudding and the challenge for the creditor funded organisations may well be what 'tune' they 'whistle' when/if fair share contributions start to be reduced by creditors as has been the case in the USA (afterall - they are largely the same creditors with the same profit agenda)? Only time will tell I suppose!
_________________
Kind regards
Sean
http://www.myvesta.org.uk
----------------------
Myvesta UK - A Not-For-Profit Financial Assistance Organisation - "We Can Help!"
----------------------
posted by Your Friends @ Myvesta.org.uk at
1/12/2006 09:34:00 pm
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