In January of this year, the province enacted the Ontario Collection and Debt Settlement Services Act. The impact on the Ontario debt settlement industry is much like that experienced by Earth millions of years ago after being struck by a gigantic meteor: the extinction of entire species.
While the act’s key provisions don’t come into effect until July 1, 2015, it has already generated a stampede of activity. A disparate group, including some lawyers, are exploring whether or not to provide debt settlement services under the new regulatory regime. Existing debt settlement firms face extinction and the new regulatory regime has created a new biosphere that’s very conducive to Ontario sole practitioners and boutique law firms as well as small Ontario-based collection agencies.
Under the act, unless it falls within an exemption, a debt settlement service provider must not only possess a valid Ontario collection agency licence but it must also comply with the onerous regulatory regime applicable to collection agencies in the province. This requirement is a substantial barrier to entry because it imposes significant costs, including the necessity of having a permanent office located in Ontario, a trust account, a surety bond, and financial disclosure obligations.
Lawyers and licensed bankruptcy trustees, however, are exempt from the Ontario Collection and Debt Settlement Services Act, including any licensing obligations, compliance with the applicable regulatory regime, as well as the punitive new restrictions on fees that come into effect on July 1. The specific language creating the exemption for lawyers under the act reads as follows: “2(1)(1) This Act does not apply to a barrister or solicitor in the regular practice of his or her profession or to his or her employees.”
One of the key provisions of the new act is the draconian limitation on fees charged by firms negotiating lump-sum settlements on behalf of clients. It caps these fees at 10 per cent of the amount of an outstanding account at the time the debt settlement contract is signed. Furthermore, debt settlement firms subject to the act cannot earn a penny in fees until settlement monies are actually paid to a creditor. That may be 17 months after a debt settlement contract is signed or possibly never.
These new limitations on fees will lead to the virtual extinction of existing debt settlement firms in Ontario. Imagine running your law firm in circumstances where the amount of fees you could earn on the average file are very modest and you could not bill 100 per cent of your clients a penny in fees for six to 17 months after opening a file and potentially never be able to do so.
After July 1, an Ontario-based law firm offering debt settlement services will have a huge competitive advantage over a debt settlement provider licensed as a collection agency under the act. Consequently, a number of existing Ontario-based debt settlement firms are currently negotiating with Ontario law firms to become their in-house debt settlement department. This realignment would permit a debt settlement provider to be exempt from the act and the draconian limits on fees.
Lawyers, however, are not going to have the post-July 1 debt settlement biosphere all to themselves. Licensed bankruptcy trustees are also exempt from the act, but I do not envision them negotiating a significant number of lump-sum settlements on behalf of consumers. I anticipate that large credit grantors — particularly the major chartered banks and credit card companies — would take a hard line on approving consumer proposals from any trustee with a reputation for doing a substantial amount of debt settlement work.
It also appears that at some point in the near future, non-profit credit-counselling agencies will become exempt from the act. However, I do not anticipate that non-profit credit-counselling agencies are going to negotiate a significant amount of lump-sum settlements when doing so would be biting the hand that feeds them.
The impending extinction of traditional debt settlement firms will likely encourage some, but not all, small collection agencies to enter the Ontario debt settlement biosphere. Collection agencies are not exempt from the act nor from the harsh restrictions on fees. Collection agencies currently licensed in Ontario, however, satisfy all of the relevant licensing requirements under the act that apply to those providing debt settlement services to Ontario residents.
There are several key reasons why a small Ontario-based collection agency might operate a very profitable debt settlement department as a secondary line of business to its primary focus on providing third-party collection services to creditors. An existing collection agency in Ontario could offer debt settlement services without incurring a penny in additional overhead. Their existing premises — with sophisticated telephone and collection software — are ideal for debt settlement work and their senior management has invaluable contacts among creditors and other collection agencies as well as an insider’s knowledge of potential settlements.
One of the most troubling aspects of the act, however, is it permits the holder of an Ontario collection agency licence to provide not only third-party collection services but also debt settlement services. It is inevitable that this new hybrid debt settlement creature roaming across Ontario providing these two incompatible services will encounter conflicts of interest that, as a practical matter, will more often than not result in the consumer getting the short end of the stick.
Mark Silverthorn is a retired lawyer and the author of The Wolf At The Door: What To Do When Collection Agencies Come Calling,
published by McClelland & Stewart. He is also the founder of Comprehensive Debt Solutions Inc., a firm providing practical advice to consumers with unsecured consumer debt problems. Its web site is comprehensivedebtsolutions.ca.
