Indebted clients lose £7.3m as First Step probe continues

ADMINISTRATORS handling a collapsed Stockport debt management firm do not expect its 3,500-4,000 clients to recover any of the £7.3m they paid to the company believing they were settling their debts.

Begbies Traynor in Manchester was appointed to First Step Finance and its sister companies Debt Help & Advice and Primary Business Solutions in early June.

Administrators are investigating the missing money alongside “various government departments”, and say some has gone in director loans, transactions to related companies, and in one case into a property development in Montenegro, a small European country wedged between Serbia and Albania.

According to a creditors’ report the company did not keep client money in a separate account, as would be expected. There is now just £10,800 in the firm’s bank account.

Begbies’ report quotes former director director Darren Newton claiming that all client money was paid into the office account “with an intended sweep into the client account”. When he joined he was told this arrangement was due to a historical problem with the firm’s bank and its accountants had approved it. Debt management firms should keep client money separate and they usually take a cut of any debt reduction they negotiate with creditors, then charge a fee for administering repayments.

In an interview with administrators, Mr Newton said: “When I joined the company there seemed to be inadequate reporting and controls on the client account… I suppose more damning than all of that was that there seemed to be a shortfall in the client account. As the immediate shortfall was before my time I am unaware as to the reasons behind it. However, I can say that I could find no evidence of reporting, reconciling or compliance.”

In his account Mr Newton said he “attempted to dig further” and found a “significant amount was in the director’s loan account which I believe was cleared with a declared dividend of £500,000”. Referring to the “shareholder/director”, who was Christine Whitehurst, he said she recognised this situation could not continue but instead of cutting costs and reducing the liability she launched two new businesses, a pay day loan firm called Pick-a-pay-day and another debt management business, The Debt Professionals. Both failed, increasing the firm’s financial deficit “significantly”.

In the report administrator Paul Stanley writes: “We have discovered that client funds, paid into what clients believed to be a separate client account, were not in fact held as indicated and were paid by clients into the company’s office account. These funds appear to have been spent in financing the day-to-day running of the business investments and in numerous, significant loan accounts to directors and associated companies. Our investigation into the shortfall in client monies continues alongside various government departments, however, at this stage recovery of any funds into the administration is considered very unlikely.”

The First Step Finance businesses stopped trading abruptly in May with the loss of 80 jobs and the Financial Conduct Authority, which regulates the sector, warned customers to stop making payments. Begbies agreed a £5,000 deal to sell the client list to another Stockport debt manager, Hobart Revenue Management Limited, trading as Platinum Management, which is owned by Syed Ali and Jason McClean. The situation at First Step follows last year’s failure of Sale-based Smooth Financial which collapsed having lost around £800,000 of client money. Administrators in that case said the money had been used to keep the business going.

In October Mr Newton was said to be acquiring the First Step client base through Debt Help & Advice because the former regulator, the Office of Fair Trading, had identified “serious concerns about the transparency and integrity of its practices”. The deal was agreed by the FCA but never went ahead and all clients remained on First Step’s books.

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