It was with considerable interest that Credit Counselling Canada read the Office of the Superintendent of Bankruptcy (OSB) report entitled “Review of Licensed Insolvency Trustee business practices in relation to administration of consumer insolvencies”. As a stakeholder in the insolvency system, we have submitted comments/suggestions as part of the consultation process of the report. Here is a summary of our suggestions.
While we are appreciative of the thoroughness of the investigation into the practices of licensed insolvency trustees (LIT) and third party consultants (debt consultants), we are particularly concerned about the identified risks to the insolvency system and the effect on consumers. Although some stakeholders might be shocked at the outcomes cited in the report, we have been concerned about these growing problems for some time.
Our concerns focus on the protection of consumers.
As cited in the report, these activities “can negatively impact the financial interests of both creditors and debtors in an insolvency filing”. We noted the excessive fees paid by debtors along with the general lack of awareness of fees charged by debt consultants, creditors and LITs. The ‘double dipping’ in the instance of mandatory counselling fees is outrageous. The sale of additional products for credit rebuilding is astounding since much cheaper ways are available to re-establish credit. These practices are blatant exploitation of vulnerable consumers.
Steps concerning ‘risk based supervision’ need to be strengthened.
The report cites the next steps are to ‘strengthen elements of the existing regulatory framework’ including amendments to the Directives, the OSB forms and compliance. Credit Counselling Canada commends these necessary steps but we feel that these do not go far enough, and steps concerning ‘risk based supervision’ need to be strengthened. Without sufficient penalties for these violations the activities will continue. An insignificant punishment is not enough to have LITs who contravene the standards discontinue these practices, particularly when there is associated revenue.
We suggest harsh financial penalties and suspension of licenses for non-compliant operators, as seen in numerous industries. This means a new enforcement mechanism similar to other regulators since the current system seems ineffective. We have seen similar situations of strong enforcement with the Financial Consumer Agency of Canada impacting lenders who are not in compliance. This will only help strengthen the reputation of the insolvency system. We understand the limitations on the OSB with the risk based supervision approach, but the OSB needs an appropriate enforcement mandate to put into effect penalties for transgressions.
Transparency must be an essential component of the insolvency system.
Providing consumers access to information, which the report cites as the fourth step, is not sufficient. Being in a financial crisis is stressful. Very few financially troubled consumers will take the time to research their options. They believe they are taking a step in the right direction by reaching out for help from a professional. Seeking a “quick fix”, consumers often do not take the time to process information provided to them. We recommend that mandatory written, plain language communication be supplied by the OSB to ensure that details of consumer proposals and bankruptcy are provided to all debtors.
The OSB should provide leadership in having the government examine the legislation to require the licensing of third party debt consultants.
One way of approaching this is through the Consumer Measures Committee. Legislation for other related financial products, such as debt settlement and payday loans, has improved protection for consumers. Credit Counselling Canada has offered to assist in this endeavour by providing the perspective of the consumer on a stakeholder committee with the OSB and consumer ministries. We also support the importance of appropriate licensing and training of debt consultants.
One of the significant roles of Credit Counselling Canada and its members is the focus on the consumer.
No one represents the debtor under bankruptcy legislation. We feel that it is essential to provide additional options at the initial stages for a debtor. With only two tools, consumer proposals and bankruptcy, we feel LITs are limited in their solutions to debtors. Credit counsellors provide unbiased information to debtors which include these two options along with a detailed investigation of other potential options such as consolidation loans, re-mortgaging, co-signers, sale of property and improved money management with effective coaching. This stage of consultation would provide a distinct opportunity to look at all the options in rehabilitating a debtor’s financial position.
Credit Counselling Canada appreciates the opportunity to provide feedback to the OSB. We hope our suggestions are taken under advisement to implement changes to better protect Canadian consumers.