New Ontario Law Will Create Frankenstein Category of Debt Settlement Service Provider
February 10th, 2015 by Mark Silverthorn
Ontario Government Releases a New Debt Settlement Law for 2015
“The Ontario Government has given life to a new creature, a hybrid category of debt settlement provider—one legally entitled to offer debt settlement services and to provide third party collection services. This creation, which will in the same breath act in the best interests of both creditors and debtors, is destined to leave a trail of toxic conflicts of interest and unhappy consumers. We are witnessing the emergence of a new Frankenstein category of debt settlement provider!”
Mark Silverthorn, author, and former collection lawyer and collection industry insider
Debt settlement providers include individuals or firms who, on behalf of a consumer, negotiate settlements with the consumer’s creditors, or the creditor’s authorized representative–usually a collection agency–where the creditor accepts a one-time lump sum payment for less than one hundred percent of the outstanding balance as settlement in full. Over the past five years it would have been difficult for an Ontario resident to go on the internet or listen to the radio without being exposed to an ad for a debt settlement provider. At one point in time, one such debt settlement firm, Cambridge Life Solutions, was heavily marketing its services on both radio and television to Ontario residents.
In January of 2015 it became public knowledge that the law regulating debt settlement services in Ontario would change dramatically on July 1, 2015, under the Ontario Collection and Debt Settlement Services Act and its Regulations. Any further references in this report to “the Act” are to this law. In February of 2015, in preparation for July 1, 2015, and the new regulatory regime for debt settlement service providers, a number of firms are re-evaluating the mix of services that they currently offer to the public. These firms include some of the following:
- Existing firms providing traditional debt settlement services to Ontario residents
- Small Ontario-based collection agencies
- Small Ontario-based law firms that do not currently offer traditional debt settlement services
- Ontario-based firms of Licensed Insolvency Trustees
Furthermore, a number of firms—including some small collection agencies and law firms carrying on business in Ontario, and some Ontario-based Licensed Insolvency Trustees—are currently exploring the prospect of offering some type of debt settlement services after July 1, 2015.
I will address this topic in more detail in the last section of this report titled “Who Will Be Providing Debt Settlement Services in Ontario in the Future?”
In this report I am going to address the following four issues:
- The Ontario Government’s failure to adequately enforce existing laws regulating the providers of debt settlement services to Ontario residents
- The need for reforms to the law in Ontario concerning the regulation of debt settlement services
- The key provisions in the new law regulating debt settlement service providers
- Who will provide debt settlement services in Ontario in the future?
The Ontario Government has failed to enforce the existing law regulating debt settlement service providers
The new law regulating debt settlement firms in Ontario comes into effect on July 1, 2015, and it will have a dramatic impact on the provision of debt settlement services. What many people forget, however, is that the Ontario Government has had laws on the books for many years regulating firms providing debt settlement services and the Ontario Government has not distinguished itself enforcing these laws.
Under the Ontario Collection Agencies Act, now known as the Collection and Debt Settlement Services Act, any firm negotiating settlements with creditors, or their authorized agents, on behalf of an Ontario resident, had to hold a valid Ontario collection agency license and comply with many of the regulatory requirements that apply to a collection agency including a surety bond requirement, licensing of branch offices, as well as licensing some of their employees as “collectors”.
“Today, more than fifty percent of the firms offering debt settlement services to Ontario residents do not satisfy Ontario’s licensing requirements, and, therefore, are operating illegally in Ontario as an unlicensed “collection agency”, and in some cases the Ontario Government is aware of the existence of these firms and for whatever reason, no action of any consequence has been taken against these firms.”
Nima Taheri, CEO, Markham, Ontario-based Compliance First Financial
In many instances these unlicensed providers of debt settlement services have been reported to the Ontario Government and, to the best of my knowledge, little or no action has been taken against these illegal providers of debt settlement services. These unlicensed debt settlement service providers are not limited to U.S.-based debt settlement firms. One employee at a debt settlement firm advised me that he has reported several mortgage brokers to the Ontario Government for operating as unlicensed debt settlement service providers and the Ontario Government has taken no action in response to the complaint. Nima Taheri, CEO of Compliance First Financial, a debt settlement firm based in Markham, Ontario reports that members of senior management from a number of licensed debt settlement firms have provided the Ontario Government with lists of names of firms providing debt settlement services illegally in Ontario and no action would appear to have been taken against the firms contravening the law.
Reforms to Ontario’s existing debt settlement regulatory regime were required
There have been numerous critics of the debt settlement industry in Canada. Many of the criticisms of the industry are valid. Some debt settlement firms use questionable marketing practices and some do not adequately service their clients. Some of the criticisms of the debt settlement industry, however, are partially motivated by self-interest from those competing for revenues with debt settlement firms. What people often forget, however, is that in many instances, a consumer can on their own, negotiate a very generous settlement with a creditor by making a lump sum payment for substantially less than one hundred percent of the current outstanding balance.
The Key Provisions of Ontario’s New Debt Settlement Regulatory Regime
- The Act will regulate some firms negotiating settlements involving installment payments as well as lump sum payments
One of the interesting aspects to the new Act is not only what activity is regulated but also whose activities are regulated. The Act regulates not only what we would normally think of as traditional debt settlement services but also services that we would normally associate with that of credit counselling agencies.
Firstly, the Act regulates the conduct of anyone, other than those specifically exempted from the Act, who resolves outstanding debts on behalf of another by way of installment payments. If a debtor is going to resolve a debt by way of installment payments then typically the creditor will insist on repayment of 100 percent of the outstanding balance. Traditionally, the only organizations which have represented consumers repaying one hundred percent of their outstanding debt has been credit counselling agencies. There are two kinds of credit counselling agencies, non-profit credit counselling agencies and for-profit credit counselling agencies. It would appear that at some future date non-profit credit counselling agencies will become exempt from the Act. This means that, as a practical matter, at some future date the only entities that could potentially be affected by the provisions of the Act concerning installment payments are for-profit credit counselling agencies.
The Act also regulates the activities of anyone, except those entities exempt from the Act, who negotiate a one-time lump sum settlement on behalf of another. This is what has traditionally been described as “debt settlement”. Any firm which has been or, in the future, will be engaged in providing what we characterize as “debt settlement services” will be subject to the new Act. There are, however, a number of important exemptions under the Act. The following entities are exempt from the Act:
- Lawyers engaged in the private practice of law
- Licensed Insolvency Trustees
- Non-profit credit counselling agencies (are expected to obtain an exemption at some future date)
These exemptions are incredibly important because there is a possibility that as early as 2017 that a substantial percentage of all the debt settlement work done in Ontario—potentially the majority of the work–will be done by entities who are exempt from the Act.
- Fees for traditional debt settlement service providers are dramatically reduced
Under the Act any firm providing debt settlement services, where the debtor makes a series of installment payments, can charge an amount equal to 15 percent of each payment, plus a one-time “set-up” fee of $50 per outstanding account. The remainder of this section deals with the situation where the debt settlement provider is negotiating settlements where the debtor makes a one-time lump sum settlement to resolve an outstanding account.
In Ontario, where an Ontario resident enters into a debt settlement agreement on or after July 1, 2015, then the maximum fee that the debt settlement provider can legally charge is ten percent of the amount of the debt. This means that firms offering traditional debt settlement services will earn less fees from clients on any debt settlement contracts signed on or after July 1, 2015, and therefore they will be less profitable businesses.
A simple example will help illustrate the fees under the new regulatory regime
Joan Smith has one outstanding credit card debt with an outstanding balance of $10,000. She signs a debt settlement agreement with a debt settlement firm on July 1, 2015. The maximum fee that the debt settlement firm can charge Joan Smith is $1,000, or 10 percent of her $10,000 debt.
It is important to note that, prior to July 1, 2015, firms providing debt settlement services in Ontario were using different fee models for their services. The less common fee model is the contingency fee model. Under this fee model, a debt settlement firm only earns a fee—equal to a percentage of the client’s savings under a settlement, if and when, an outstanding account is actually settled and a lump sum payment is made to the creditor. The more common fee model is the percentage of total enrolled debt fee model. Under this fee model, a debt settlement firm charges a client fees equal to a fixed percentage—typically 15 percent—of the total debt the consumer includes in the debt settlement agreement, plus a $50 monthly service fee payable from the date a debt settlement contract is signed until such time that the debt settlement contract ends. In our example with Joan Smith, if she signed a contract for debt settlement service with a debt settlement services provider—and the fees charged were 15 percent of the enrolled $10,000 debt–and she accumulated settlement funds over a period of 18 months, then she would have paid a total of $2,400 in fees.
In contrast, what if Joan Smith had signed a debt settlement contract with a debt settlement firm that provided debt settlement services at a 25 percent contingency fee—the debt settlement firm would charge a fee equal to 25 percent of the monies a consumer saved when a settlement actually took place? If the debt settlement provider negotiated a settlement of Joan Smith’s $10,000 credit card debt for $2,500 then the debt settlement provider would earn a contingency fee equal to $1,875 or 25 percent of the client’s $7,500 in savings.
From the consumer’s perspective, the contingency fee model is much more attractive provided the contingency fee charged by the debt settlement provider is not excessive. Under the contingency fee model the consumer does not pay a penny to the debt settlement firm unless a settlement is actually paid out. Unfortunately, a significant percentage of individuals who sign a contract with a debt settlement provider are unable to successfully settle their debts—typically because of an inability to raise the necessary settlement funds or because creditors whose debts are included in the debt settlement agreement sue them.
According to Boaz Avni, President of the Toronto-based debt settlement firm, Canada Debt Settlements, the new law effective July 1, 2015, will have a more dramatic financial impact for firms that have historically been charging fees as a percentage of total enrolled debt compared with those firms that have only charged a client a contingency fee if, and when, a settlement is actually paid out.
- Restrictions as to when a traditional debt settlement provider is entitled to earn fees
On July 1, 2015, those debt settlement service providers—typically for-profit credit counselling agencies—arranging settlements comprised of a series of installment payments—will be entitled to earn their $50 “set-up” fee for each outstanding account at any time, and they will be entitled to earn an amount equal to 15 percent of a debtor’s monthly contribution under their Debt Management Plan at the time an installment payment is made. The remainder of this section is going to address at what point in time does a firm negotiating lump sum settlements become entitled to earn its fees.
As of July 1, 2015, when an Ontario resident signs a contract for debt settlement services then, any debt settlement service provider—except those exempt from the Act– is not entitled to charge a penny in fees until such time that a settlement has actually been paid out. This provision is going to make it very difficult for any firm to be financially viable providing debt settlement services to Ontario residents unless it has substantial revenue streams from other sources. Later in this report I will canvass the topic of how some small Ontario-based collection agencies might find it quite profitable to add debt settlement services as a sideline to their primary business of providing collection services.
The fact that the new law in Ontario not only caps the fees that traditional debt settlement service providers can charge but also defers when those fees can be earned will make it very difficult for a debt settlement provider to be financially viable unless it is exempt from the Ontario Collection and Debt Settlement Services Act or the provision of debt settlement services is only a secondary source of revenues for the firm.
- Providers of debt settlement services must comply with onerous licensing regime
The Act does exempt lawyers engaged in the practice of law and Licensed Insolvency Trustees from any and all provisions of the Act. Therefore, any law firm or Licensed Insolvency Trustees wishing to offer debt settlement services are not subject to any of the restrictions contained in the Act or the Regulations. Any lawyer or Licensed Insolvency Trustee, however, who does provide debt settlement services to an Ontario resident must comply with any of the relevant rules of professional conduct that apply to a lawyer licensed to practice law in Ontario or to a Licensed Insolvency Trustee. As noted earlier, it is likely that non-profit credit counselling agencies will become exempt under the Act at some future date.
Any firm which is not exempt from the Act seeking to legally provide debt settlement services to Ontario residents must comply with the costly and onerous licensing and regulatory requirements imposed on the holder of an Ontario collection agency license. These requirements include the following:
- Examination requirement
- Must maintain a permanent place of business within the province open to the public during business hours
- Surety bond requirement
- Trust account requirement
- Financial disclosure requirements
- Record-keeping requirements
- Licensing requirements for “collection agencies”, “branch offices”, and individual “collectors”
These requirements act as a substantial barrier to entry to any firm that wishes to provide debt settlement services to Ontario residents.
As a practical matter this provision will discourage debt settlement firms operating in other jurisdictions from providing debt settlement services in Ontario. It will also discourage individuals living in Ontario who would like to provide debt settlement services while working from home from providing debt settlement services to Ontario residents.
- Restrictions regarding misleading and predatory marketing practices
The new law that comes into effect on July 1, 2015, contains a host of measures designed to reduce or prevent predatory and misleading marketing practices by debt settlement service providers subject to the Act.
- Creation of debt settlement client bill of rights
One of the most positive aspects of the new Act is that it creates a series of provisions which I will collectively refer to as a debt settlement client bill of rights.
- Self-help remedies for debt settlement contract clients
The new law in Ontario that comes into effect on July 1, 2015, does contain a number of self-help remedies that will enable a person to obtain relief in court where a firm offering debt settlement services has violated the Act.
- Ontario collection agency license holder can provide both debt settlement and collection services
At least one aspect of the new Ontario law, however, is clearly not in the public interest! One of the most worrisome aspects of the new law is that any firm licensed as a collection agency in Ontario—a requirement for both collection agencies and debt settlement service providers—will be legally entitled to provide both collection agency services and debt settlement services! This is going to create a new type of hybrid firm, one which provides not only collection agency services but also debt settlement services in Ontario. It is inevitable that these new hybrid service providers, working on both sides of the creditor-debtor fence–will face awkward conflicts of interest. Consequently, one could say that the Ontario Government has created a new Frankenstein category of debt settlement service provider!
It is interesting to compare the situation in Ontario with the law in other provinces. While researching this report I spoke with Darren Thomas, the senior civil servant in Alberta responsible for regulating collection agencies and he advised me that Alberta law prohibits a firm from offering both debt settlement services and third party collection services.
Who Will be Providing Debt Settlement Services in Ontario in the Future?
- Which entities will be legally entitled to provide debt settlement services?
As noted earlier in this report, there are two different activities which are regulated under the Act
- Those negotiating settlements with creditors where the debtor is making a series of installment payments
- Those negotiating settlements with creditors where the debtor is making a one-time lump sum payment
The following chart summarizes those entities that will be legally entitled to provide debt settlement services after July 1, 2015, either as the holder of a collection agency license issued under the Ontario Collection and Debt Settlement Services Act, or as an entity exempt from the Act.
- What will the debt settlement industry look like in 2017?
I anticipate ten potentially significant developments in the Ontario debt settlement industry between July 1, 2015, and January 1, 2017:
- There will be few, if any, for-profit credit counselling agencies operating in Ontario
At some future date it is expected that those credit counselling agencies which have non-profit status will become exempt from the onerous regulatory regime imposed under the Act. I foresee that for-profit credit counselling agencies will find compliance with the onerous regulatory regime imposed under the Act to be punitive. Consequently, I predict that there will be few, if any, for-profit credit counselling agencies operating in Ontario by 2017.
- There will be few, if any, firms licensed as a collection agency under the Act, negotiating lump sum settlements where this activity is the firm’s primary business
The new Act and Regulation 74 enacted pursuant to it create major headaches for traditional debt settlement service providers negotiating lump sum settlements with creditors on behalf of clients. One of the key problems relates to fees. Fees are not only capped at an amount equal to 10 percent of the dollar value of a debt at the date a contract is signed but also the debt settlement provider cannot earn any fees until such time that a settlement is actually paid out.
Within a few months of July 1, 2015, it might be difficult to find more than a handful of firms licensed as an Ontario collection agency whose sole source of revenues is negotiating lump sum settlements with creditors on behalf of debtors.
- Some existing debt settlement firms might offer third party collection services
It would also appear that some existing Ontario-based debt settlement firms are contemplating expanding the services that they currently offer to include third party collections. While researching this report I spoke with Nima Taheri, CEO, of Markham, Ontario-based Compliance First Financial Corp., a debt settlement firm that works primarily with mortgage brokers. Nima has confirmed this, “A number of Ontario debt settlement firms are actively investigating the possibility of offering collection services at some point in 2015.”
- Some small law firms in Ontario will begin offering debt settlement services
It would seem almost inevitable that some law firms in Ontario will begin offering some form of traditional debt settlement services to Ontario residents in 2015. A law firm operating in Ontario, exempt under the Act, not only can charge higher fees for providing traditional debt settlement services but also it will be legally entitled to earn fees earlier compared with a debt settlement firm which is licensed as a collection agency under the Act.
After July 1, 2015, any law firm offering traditional debt settlement services will have a huge competitive advantage over any debt settlement firm licensed as a collection agency under the Ontario Collection and Debt Settlement Services Act.
- Some existing debt settlement firms will change their business model and offer their services as part of a law firm and not as being licensed as a collection agency under the Act
I anticipate that some firms that have been operating as traditional debt settlement firms in Ontario for the past several years will stop soliciting new clients, but instead begin soliciting new clients while working as the in-house debt settlement department at an Ontario-based law firm. This change will enable the debt settlement service provider not only to avoid the costly and onerous regulatory regime under the Act but also to charge higher fees for very similar services.
- Some small collection agencies operating in Ontario will offer debt settlement services as a line of business secondary to their primary business of being a collection agency
It would appear that a number of Ontario-based collection agencies—particularly smaller agencies—are considering offering debt settlement services in addition to their primary business of third party collections. Blair DeMarco-Wettlaufer, the Managing Partner of Kingston Data and Credit, a collection agency with offices in Cambridge, Brantford, and Pointe-Claire, Quebec, confirms this.
From a cost and regulatory perspective, there are significant barriers to entry to being a debt settlement service provider in Ontario because it is necessary to satisfy the province’s highly structured licensing requirements for collection agencies—a permanent place of business, a trust account, and the requirement not to charge a fee until a settlement is actually paid. An Ontario-based collection agency that wants to offer debt settlement services has virtually no additional overhead costs by adding this business line to its existing suite of services, with a pre-existing call centre to negotiate on the consumer’s behalf, experience managing trust monies, as well as being pre-equipped with many creditor contacts and relationships.
Blair DeMarco-Wettlaufter, Managing Partner of Kingston Data and Credit
- Some Ontario-based Licensed Insolvency Trustees might negotiate lump sum settlements on behalf of Ontario residents
It is possible that, after July 1, 2015, some Ontario-based Licensed Insolvency Trustees might negotiate lump sum settlements with creditors on behalf of consumers. This scenario might arise where a consumer is not eligible for a consumer proposal or personal bankruptcy because they are not insolvent under federal bankruptcy law—something that it quite common where consumers have significant equity in their home. I do not anticipate Licensed Insolvency Trustees to be a major player negotiating lump sum settlements because to do so would risk alienating large creditors and harming their consumer proposal work.
- Some non-profit credit counselling firms might negotiate lump sum payments with the consumer’s creditors as settlement in full of an outstanding account
At some future date non-profit credit counselling agencies will become exempt from the onerous regulatory regime under the Act. It is possible that in the future one or more non-profit credit counselling agencies in Ontario might negotiate lump sum payments with creditors on behalf of their clients. It remains to be seen to what extent non-profit credit counselling agencies will negotiate lump sum payments with creditors after July 1, 2015. At the present time I do not envision credit counselling agencies becoming major players negotiating lump sum settlements with creditors on behalf of consumers for a variety of reasons.
- Consumers will take advantage of self-help remedies through Ontario’s courts against firms that violate consumer protections afforded under the Act
The new Act and Regulation 74 provide a number of self-help remedies which will enable consumers who have been the victim of illegal behavior by “debt settlement providers” to seek redress through the court system. The existence of these self-help remedies should make it easier for consumers to go to court to get satisfaction from firms providing debt settlement services in contravention of the Ontario Collection and Debt Settlement Services Act. I also anticipate that it will be much more difficult for a firm to illegally provide debt settlement services to Ontario residents after July 1, 2015, because of the potential glare of bad publicity.
- Emergence of firms offering coaching for debt settlement Do-It-Yourselfers
I also anticipate that after July 1, 2015, there will be a demand among Ontario residents for debt consulting services provided by individuals with significant experience in the collection industry or the debt settlement industry. Ontario might see the emergence of new debt consulting firms which offer coaching and advice for the lump sum settlement do-it-yourselfer. Unlike traditional debt settlement providers, these debt consulting firms will not negotiate settlements with creditors on behalf of consumers—their activities will be limited to providing advice and encouragement to those consumers wishing to settle their own debts with their creditors on their own.
For more information about eliminating your debt you might want to contact your local Licensed Insolvency Trustee.