NCR Proposed Fee Guideline – After Care Fees
We have a deeper look into the behaviour that could be driven by the NCR’s proposed reduction in income for Debt Counsellors by “nerf“ing the after care fees which Debt Counsellors receive. We also consider when these fees can actually be charged according to the current wording of the Fee Guideline. it may not be what you thought.
How Things Work Now
Currently a monthly after care fee is charged for ongoing service by the Debt Counsellor. it is somewhat like a membership fee or a club fee or an account fee or a retainer paid to an attorney. it is a monthly fee which the consumer pays rather than sporadic payments to cover specific functions by the Debt Counsellor. As you can imagine while trying to work out a payment plan over many years it would be hard to factor in occasional fees that are charged every now and then in varying amounts from time to time. Especially is this the case since debt review matters go to court and a court order is granted pointing to payment amounts and time periods.
The NCR would like to see Debt Counsellors go over the consumer’s situation every year to make sure that they are still able to pay what was agreed. This is commonly called an annual review. It is not a requirement of the National Credit Act and does not tie in well with the current court order process. Though there is some sort of childish hope among credit providers that over time consumers may be able to pay more, most will undoubtedly realise that, actually over time, as inflation runs away and costs go up, consumers have less available every year and have to cut back more and more while increases in income are scarce. Hopefully the economy will turn around at a future point in time and this trend could be reversed but for now, this has not been the case for the last decade. As a result of the current set up and bad budgeting, consumers can eventually be forced out of debt review since they can’t make ends meet at home and still cover the court ordered amount. Good Debt Counsellors avoid this by comprehensively budgeting at the start of the process.
‘Debt Counsellors have had to cut staff salaries (or hire less skilled staff) and their own income to cover the increased cost of doing business’
At present, Debt Counsellors have had to cut staff salaries (or hire less skilled staff) and their own income to cover the increased cost of doing business. They want to try to stay active and help their existing clients (even if having to do other work as well to make ends meet). At the moment it is said that Debt Counsellors earn less than R90 an hour which is very low for a professional dealing with finance and legal matters. Most hoped to see a small increase in after care fees or at least the fee remain at 5% without dropping after 24 months to 3% which has really hurt debt counselling firms in the face of the huge workload that comes as time passes. Especially when consumers start to look to leave the process has the workload increased exponentially. In the past, due to the lowering of after care fees, there has been less concern about retaining clients and an unhealthy focus on client acquisition for the initial fee. Low after care income has also driven poor after care service to consumers.
The Phantom Annual Review
How do you cover the costs of an annual review (which is essentially the entire debt review process all over again every single year)? It involves (1) getting info from the consumer (2) getting updated info from the Credit Providers (3) going over payment history (4) helping with budgeting and changes (5) potentially negotiating with credit providers over changed payments (6) in theory, at least, going back to court to adjust the payment agreement and all those legal fees. Since doing a full annual review takes a lot of time and thus expense the funds have to come from somewhere. At present, the current fee structure for this process covers around half of the restructuring fee (approximately). This is one of the reasons why this process is seldom done well by Debt Counsellors since they normally ring fence those funds to handle payment queries, client interactions and assisting with balance difference calculations and fights.
The Proposed Fee Guideline
4. After care fee
(a) Form 17.2(c) process
(b) Review of consumer’s financial situation;
(c) Attending to payment queries;
(d) Clearance certificate process, including securing the paid up letters;
(e) Withdrawal by consumer (Form 17.W process); and
(f) Updating of DHS on progress
The fee would be 5% of the Distributable amount, capped at R450 for a period of 12 months, thereafter reduced to 3% of the distributable amount, capped at R450 for the remaining period. However, these fees can only be charged and payable after the restructuring process and subject to the rendering of after care services.
Pushing up the cap will help make Debt Counsellor’s businesses keep their income consistent with how it is at the moment…as long as Debt Counsellors focus only on helping richer debtors and ignore the poor consumers who are in trouble. This seems contrary to the purpose of the Act though which is, seemingly, to help all SA credit users, not just the higher income consumers.
There is a proviso in the by when should it be paid column of the fee guideline which says that the 5% or 3% fee can be charged ‘subject to rendering of after care services‘. On the surface that may read as being chargeable, as long as the company is still helping the consumer…. but the wording may actually mean that this charge could only be levied in a month where the Debt Counsellor has sent a form 17.2, reviewed the consumers financial situation, handled a payment query, issued a clearance certificate, withdrawn the consumer or updated the NCR’s DHS website (the list of items (a) through (f)). If there is a quiet month during the process (without any of those actions) would technically mean that the Debt Counsellor has not rendered such a service and is not entitled to the fee that month. Since fees are often worked into the court order to help determine by when the debt will be paid or how. It would then be impossible to look into the future and guess which months the list of items in the ‘services‘ column would be rendered. This would seem an unlikely intention of the NCR but some clarity might be needed to show that the fee is a monthly fee paid for ongoing services related to the debt review.
The main issue here is the reduction in after care fees (particularly month 13 through 24) which fees help sustain small Debt Counselling practices who do not take on many clients at the same time. Businesses which are already under strain now face an approximate 15% drop in ongoing income (factoring in restructuring fees and various clients at varying stages of the process) and a 40% drop purely on after care fees in the first 24 months (which often corresponds to how long consumers need or stay under debt review).
Let’s use an imaginary small company and simply make up some figures to illustrate the challenge faced when after care fees drop:
A boutique Debt Counselling business has a single Debt Counsellor owner and a receptionist and a single support/administrative staff member. They use outsourced accountants and licensed bookkeeping software (captured by the receptionist). They cover rental, telephone costs, lights, water, Computers, software and other IT and office consumables, as well as, a tiny advertising budget. The Debt Counsellor is able to assist 100 “average clients without expanding his staff any further.
The firm has monthly operating costs of R 15 000 covering rent, electricity, phone and internet bills along with computers (including upgrades, & maintenance), software and accounting services (including annual services).
Staff costs are R6000 plus whatever is left over for the Debt Counsellor.
Many small Debt Counselling practices say good bye to two clients a month (who finish up the process or no longer need it) while taking on 2 clients a month – this results in client numbers remaining pretty constant. As a result, there can be a small cash boost of around R5000 (on average) from restructuring fees every month. Obviously, some months are better some are worse. The number is also dependant on what the Debt Counsellor can realistically manage to handle in the way of client numbers.
The ‘average‘ * clients each pay R2500 monthly toward their debt and a small after care fee of R125 (at 5% during the first 12 months) comes out of that amount to the Debt Counselling firm.
100 X R125 = R12 500
At this point, the business needs to take on more clients all the time to break even. It does so as long as the Debt Counsellor does not take a salary. Once he does the business starts to run at a loss.
To cope many Debt Counsellors have moved into the cheapest offices they can find or into a home office. They have dropped a staff member in an effort to bring down running costs to match their income.
When it Drops Businesses Die
When the after care fees drop to 3% that income is reduced to R75 per ‘average’ debt review client.
100 x R75 = R7500
That is a 40% drop in income to sustain the small business when the amount drops to 3% after care. With running costs at R15 000, the business immediately begins to bleed money and there is no money for the Debt Counsellor or even the staff.
‘Dropping the after care fee sooner (12 months sooner) will undoubtedly push many smaller firms out of business’
Even if the Debt Counsellor decides to go it alone and operate from a home office and outsource all IT and accounting needs, they then have R7500 a month to sustain their business at 3%. If they could somehow handle 200 clients a month (which most cannot do) they would be looking at R15 000 to cover all their costs for the business and still pay themselves some income.
Over time there have been a number of new Debt Counsellors who have tried to start businesses in the industry. Allegorically 9 out of 10 fail within the first 6 months. They don’t even get to the point where they have 100 clients never mind pass 12 months (or currently 24 months) before the drop in revenue. If all the smaller debt counselling firms take on clients and then have to sell their book or simply leave the industry this can give consumers a very poor view of the industry and the help they are legally entitled to receive.
Some would say that the key is to then take on more clients to get the restructuring fee more often to boost income. However, there are only so many hours in a day and so many resources a Debt Counsellor has. Continued growth simply means continued expansion of over heads and costs. Also, many Debt Counsellors have found that they struggle to find new clients since they have no budget for advertising and no dedicated sales staff.
So, the solution may appear to lie in taking on clients with a higher distribution amount to repay each month. Once again: an incentive to ignore poorer consumers with small debt amounts.
Dropping the after care fee sooner (12 months sooner) will undoubtedly push many smaller firms out of business and also drive poor behaviour by firms who will tend to focus on getting clients into the process over educating and caring for them once in the process. Larger firms face similar challenges but at a much larger scale with a variety of other factors helping and hurting their sustainability. For example, some large firms spend many hundreds of thousands of Rand (or even over a million) in advertising every month to try keep up client acquisition numbers.
Perhaps rather call the after care fee a monthly service retainer fee which covers, in part, after care services.
If an entire review of the consumer’s debt and situation is called for annually then make financial allowance for it (and the resultant legal fees to adjust the court order) or allow different firms to figure out the best way to deal with this. Should there be annually reduced payments (percentage based) worked into proposals to cover inflation? Credit Providers would not like to see that.
Clarify that the after care fee will be paid monthly (whether one of those services is rendered or not) or add a ‘general services’ to the list of services column.
Raise the after care fee to make practices sustainable to ensure clients get service throughout the lifespan of their debt review (eg to 7%) or at least, keep the after care fee at 5% throughout. Give consumers peace of mind knowing they can deal with smaller firms who can be sustainable and will be in business in 5 years time.
* consumers of many different profiles enter debt review all the time. Some pay more and some less. Some have more accounts and others less. For the purpose of these articles, we are using as our average: a consumer who has around 10 credit accounts and eventually pays R2500 toward their debt once their debt repayments have been restructured. This is a pretty common profile among debt counselling firm’s clients.