The Office of Fair Trading has told 129 debt management firms that they face losing their consumer credit licences unless they take immediate action to comply with its Debt Management Guidance. The firms will have to provide independently audited evidence that action has been taken to address identified concerns within three months. If not, the OFT will take action against them.
These formal warnings follow a review of the debt management sector which found widespread problems. Debt management companies are fee-charging firms that provide solutions to people with debt problems. The services they offer can include arranging Individual Voluntary Arrangements (IVAs), setting up debt management plans, and negotiating settlements with creditors.
The OFT found that consumers contacting debt management companies tended to be over-indebted, vulnerable and desperate for help. When Trading Standards Officers conducted a website sweep and a mystery shopping exercise, they found many of the companies had misleading advertising, in particular misrepresenting their services as being free when they were not.
Ray Watson, Director of the OFT’s Consumer Credit Group, said people who were heavily indebted needed “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. The level of non-compliance we found across the industry is unacceptable.”
He added. “If any of the 129 firms identified do not improve their standards substantially they will be the subject of licensing action. We are also looking to the two main industry bodies to lead the way in raising standards and to meet their commitments to make the industry more professional and responsible.”
The news has been welcomed by the Money Advice Trust. Its chief executive, Joanna Elson OBE, said she was “pleased to see the OFT taking action on this issue. We have long called for better protection from the fee charging debt management industry for people in debt.
“Research we commissioned last year into fee-chargers found that whilst some clients had been able to repay debts through them, there was also clear evidence of foul play, with many individuals complaining about the way they had been treated by fee charging debt management companies and some people in a worse position than when they had approached the fee charger.”
She explained that many consumers were 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. “That’s why we believe that all licensed debt management companies should be obliged to inform customers of free, independent alternatives,” she said.
The OFT was given tough new powers two years ago under the Consumer Credit Act. Since then, it has taken 37 formal actions to impose requirements or refuse or revoke licences held or applied for by debt management businesses. It has also shut down websites and dealt with issues such as companies masquerading as charities, systemic cold-calling and the mis-selling of IVAs.