Blog: Is a Debt Collection Agency the same as a Debt Management Company?
Peter Wallwork is CEO of the Credit Services Association (CSA), the UK trade body for the debt collection sector.
Following the recent collapse of Debt Management Company (DMC), Compass Debt Counsellors, there has been widespread criticism of the fee-charging ‘debt settlement’ model which sees customers’ repayments being held in a ‘savings pot’ in order to agree a one-off settlement figure for the debt, rather than being paid to creditors gradually. This meant that when the company went into administration, customers’ balances were still outstanding and their supposedly ‘held’ payments lost. There are now calls by Debt Camel and others for this high risk, unethical practice to be banned by the Financial Conduct Authority (FCA).
Do all Debt Management Companies use the ‘debt settlement’ model?
No. A DMC is any organisation that represents an individual in ‘managing’ his/her debt. They can be free or fee-charging, charities or businesses, and will typically negotiate with lenders (creditors) for affordable repayment solutions, either by reducing the total owed or agreeing sustainable monthly repayments for their customers. They should offer a range of solutions and recommend the most beneficial to the customer. They may negotiate a Debt Management Plan (DMP), a fixed agreement to help customers to reduce and ultimately eliminate their debt. For those firms that charge a fee, the costs can be high and have to be met by the customer, thereby prolonging the time it takes to pay off what’s owed. The ‘free’ DMC sector is generally funded through charitable contributions by the creditor, so that any monies paid by the customer go exclusively toward repaying their debt.
What’s the difference between a Debt Management Company and a Debt Collection Agency?
A Debt Collection Agency (DCA) is an organisation that collects debts on behalf of a third-party client (typically banks, building societies, credit card companies, mail order companies, utilities, mobile phone companies etc.). They operate for a fee or for a percentage of the total amount collected, which they receive from the creditor, not the customer.
The DCA contacts the customer to inform them of the amount due and to either set up an affordable repayment plan or determine that the customer is unable to repay the debt. If the customer requires help and advice with repaying the debt, the DCA may signpost them to free debt advice and they may go to a fee-charging DMC of their own accord. In this instance, the DCA will receive proposals from the free debt advice organisation or DMC and work with them on behalf of the customer to agree a settlement figure or a suitable Debt Management Plan.
As the UK trade body for the debt collection sector, the Credit Services Association (CSA) represents Debt Collection Agencies - not Debt Management Companies. CSA member companies who have customers that were using Compass Debt Counsellors are now working with those customers on a case by case basis to ensure that their loss is minimised.
What should customers who need debt advice do?
Both we and our member companies advise customers to seek free debt advice from a not-for-profit debt advice body such as StepChange or Citizens Advice rather than a fee-charging DMC. This is in line with what regulator the FCA advises. There is widespread availability of free debt advice and the ‘help with your finances’ section of our website lists the key organisations. Fee-charging debt advice is still a legitimate practice and is regulated by the FCA but, given the concerns about the security of customer funds, DMCs using the ‘debt settlement’ model should be avoided.
You can read more ‘myths and facts’ about debt collection in the resources section of our website.