The House of Lords will this week debate an amendment to the Financial Services Bill to ensure a ‘fair debt-write down’ is incorporated within Government’s plans for a Statutory Debt Repayment Plan.
The amendment, which has been tabled by former Green Party Leader Baroness Bennett and the Bishop of St Albans, seeks to make it a requirement for debts sold on the secondary market to be written down to a reasonable level, reflecting the fact that many of these will have been bought up for around 10p in the pound by debt purchasing and collection agencies.
According to previous reports in the Financial Times, around half of all debt currently being collected out by Debt Management Providers such as StepChange and Payplan has already been sold in this way. And a presentation by the Credit Services Association in 2019 indicates that debt purchasing firms bought up over £50 billion of household debt that year.
Commenting on the proposed amendment The Centre for Responsible Credit says that Debt Management Plan providers collect out the full face value of the debt, and do not attempt to negotiate any write-down. Nor have they attempted with Government to create funds to buy out and restructure the debt in order to pass on a partial write-off to debtors whilst the he Government’s proposed Statutory Debt Repayment Plan is intended to provide a ‘debt solution’ for people where insolvency procedures such as Debt Relief Orders are not suitable. However, the scheme as currently proposed would see people paying back their debts over a period of up to ten years with no prospect of any write-off. That would mean trapping people in poverty for up to a decade in order to repay debts in full simply to bolster the returns of debt purchasing firms.
The secondary debt market has a role to play in ensuring a continued supply of credit in the economy as it allows originating lenders to move non-performing loans off their balance sheets which in turn ensures they can create new loans in accordance with prudential requirements set by the Bank of England.
However, there is an obvious need to constrain the extent to which non-performing loans are off loaded and replaced by new lending to prevent future cycles of credit boom and bust. Fundamentally, this comes down to the price that is paid for debt by purchasing firms which is in turn determined by their expected collect out rate on non performing loan portfolios.
Insisting on a “fair debt write-down” for debts that have been sold on the secondary debt market and which are appearing in Statutory Debt Repayment Plans would be expected to reduce the collection rate – and therefore depress the price for non performing loans on the secondary debt market. However, the extent to which the price becomes depressed can be calibrated – for example by providing funds to support the write-down for Debt Repayment Plan providers.
In this way, a “debt buyout” becomes possible – with the price paid for debt possible to provide for both a reasonable return to the debt purchasing firms and also ensure a significant write-down for the debtor. We expect that even after providing a reasonable rate of return for the firms, a write off of between 60% and 70% of the face value of the debt should be possible.