Debt management companies warned
Debt management firms warned of closure by Office of Fair Trading
More than 100 companies could lose their licence unless they comply with OFT rules after the watchdog discovered misleading advertising and poor advice were common.
You have heard the line before – wrap up all your debts in one cheaper loan. The debt management company has to make money, so it is usual to charge a fee.
The Office of Fair Trading has guidelines, and more than 100 debt management companies face losing their licence to operate in the UK unless they take immediate action to comply.
Following a review of the debt management sector, released 28 September 2010, the OFT has issued formal warnings to 129 debt management firms, requiring them to comply with its Debt Management Guidance within three months or face licensing action.
The OFT found widespread problems after visits by trading standards officers, who also conducted a “website sweep” and a mystery shopping exercise. Misleading advertising is the most significant area of rule-breaking, in particular failing to disclose that fees are payable and claiming services are free when they are not.
Frontline advisers working for debt management companies were found to be lacking in competence and providing poor advice based on inadequate information. The OFT also found there is low industry awareness of the Financial Ombudsman Service rules for resolving consumer complaints.
Debt management companies are fee-charging firms that provide advice and solutions to over-indebted, vulnerable consumers, and should not be confused with free debt-advice charities such as the Consumer Credit Counselling Service, Money Advice Trust or Citizens Advice Bureaux. The services they offer can include arranging IVAs, negotiating settlements with creditors, and setting up debt management plans – but the latter can often cost more than consumers’ existing debts.
Since April 2008, when the OFT began policing debt management companies under the Consumer Credit Act, it has taken licensing action against 37 firms, either refusing or revoking licenses or imposing requirements on them.
Following today’s review, the OFT has published an action plan to improve standards across the industry, with enforcement to be taken against licensees that fail or refuse to change their advertising and/or behaviour within three months. The OFT also plans to update its guidance to take into account new and unfair business practices it discovered during the course of the review.
These include not giving the advice or offering the solution that is in the best interests of the consumer, but instead giving advice that is most profitable for them. Initial advice to pursue a particular solution was often provided without a full and proper assessment of the consumer’s individual financial circumstances. In general the OFT said the quality of the information and initial advice provided to consumers is often “very poor, raising concerns about the competence and training of frontline staff”.
The OFT will also work with the two main trade bodies, the Debt Managers Standards Association (Demsa) and the Debt Resolution Forum (DRF) to “support their initiatives to introduce higher standards into the industry”. The OFT estimates there are around 300-400 active debt management companies at work in the UK, but only 56 are members of the two trade associations.
Ray Watson, director of the OFT’s Consumer Credit Group, is reported to have said: “The level of non-compliance we found across the industry is unacceptable. If any of the 129 firms identified do not improve their standards substantially they will be the subject of licensing action by the OFT.
“People who are heavily indebted, desperate and vulnerable need advice which makes their problem better not worse and should not be exploited. Debt management firms must be clear about their charges and the options available to customers.”
Andrew Smith, spokesman for the DRF, said: “Consumer debt is no longer something that comes and goes with a recession and people don’t take into account that their circumstances can change, while the charitable sector can only meet about 50% of the demand and has to prepare for less funding in future. With that in mind, it is important that debt management companies continue to offer a good service.”
Joanna Elson, chief executive of the Money Advice Trust, said that all licensed debt management companies should be obliged to inform customers of free, independent alternatives. “We have long called for better protection from the fee-charging debt management industry for people in debt. We are concerned that many people turn to fee-charging debt management companies from a position of forced ignorance. Many are unaware of free independent debt advice provided by agencies such as National Debtline or Citizens Advice, since charities don’t have the advertising budget of the fee-chargers.
“Dealing with unmanageable debt is a difficult problem that leaves many people vulnerable. It is vital that people who take the brave step of trying to repay their debts and get on top of their finances are protected. It benefits all of us to work towards a financially healthy UK public.”
The full findings can be seen on the OFT website.
You can find a more detailed report at http://www.guardian.co.uk/money/2010/sep/28/debt-management-companies-warned-closure-oft