Why the OFT should name and shame bad debt advice firms
This week, 129 debt advice firms out of an estimated 450 in the UK were identified as falling short of the Office of Fair Trading's Debt Management Guidelines – in other words, they are in need of dramatically improving their performance. So why then, is the OFT gracing them with a whole three months to get their act together?
In my opinion, they should be given three days to turn themselves around and, if they don't comply, have their licences to trade cancelled with immediate effect and be named and shamed at the same time.
After all, if the OFT has clear evidence that an individual or firm has misled an already desperate, over-indebted consumer then surely immediate action is the only kind to take?
The only possible reason for the lengthy grace period must be to protect those customers for whom it's too late and are already embroiled with these firms.
What's the story?
Debt management companies are fee-charging firms that provide advice and solutions to consumers with debt problems. They operate alongside government-funded and charitable services, which are free.
The rot in this unregulated industry was discovered by Trading Standards Officers that the OFT instructed to visit firms and conduct mystery shopping exercises. It also carried out a thorough 'sweep' of all websites relating to debt management firms.
Three key areas of concern were identified as a result:
1. Misleading advertising implying services were free when they were not
2. Frontline advisers offering poor advice
3. No clear complaints procedure
Tricks of the trade
Some tricks of the trade were unearthed too. For example, the OFT found evidence of some firms 'recycling' their customers through different debt options to generate more fees.
Take an Individual Voluntary Arrangement (IVA), where a customer pays back a manageable chunk of debt over five years and the remaining debt is written off.
This arrangement will generate fees itself but a worrying trend has developed whereby some firms will put the customer onto a debt management plan while they prepare the IVA, thus generating double the fees for their coffers.
Some would say this makes good sense as it looks after the consumer on a number of levels but others argue (and I am one of them) that the biggest incentive lies with the firm – not its customer.
Another disturbing practice that was exposed by the OFT was the deliberate imitation of free debt charity websites.
For example, by use of similar content or misleading web addresses such as using the words; 'Government, debt and help' in the web address when, actually, the firm in question is purely a commercial.
Commission led practices
I have been concerned for a number of years about the type of debt advice that consumers are receiving because, like the banks, the paid-for part of the industry tends operate on a commission basis.
The OFT estimates that fees for commercial debt advice firms will reach a staggering £250m by end of 2010.
This commission-led culture can lead to some vulnerable and desperate people being steered towards a fee-generator option instead of a less profitable solution for the firms, such as bankruptcy.
So what can you do about it?
When scouring the Internet for a debt advice company, look at individual websites for the following:
1. Is there a contact telephone number available as well as an address?
2. Can you see a reference to its consumer credit licence details?
3. Is the firm registered with the Information Commissioner for data protection? Remember, it's your data you are putting in the enquiry form on the website.
4. Does it have a complaints procedure and clear terms and conditions?
5. Does it mention that most debt options will affect your credit rating and could affect future borrowing?
These firms will often claim they are not giving debt advice; they are only a lead generator and therefore do not need to provide these details.
The OFT is divided on this issue but, in that is still an unregulated industry, it's very much a case of consumer beware.
Can the debt charities cope?
While it is always possible to obtain debt services for free from debt advice charities, whether or not you choose to rests on the same argument as choosing to pay for private education and health care. People do – simply because they want an improved level of service.
The free Citizen's Advice Bureau for example, records around 9,000 NEW debt cases every working day and has a current appointment waiting list of up to 10 weeks – far too long for people already on the edge and about to lose their homes.
That said however, debt ADVICE (the part before you arrive at the actual service) should always be free, whether it's obtained from a charity or commercial firm.
Companies and individuals that have been exposed as giving the wrong advice are playing on debtors' desperation and lack of awareness surrounding their real options.
And some individuals, after taking so-called 'professional' advice still have no hope of ever repaying the debts in their lifetime! This bad advice can cost people their livelihoods, relationships and thousands of pounds in unnecessary fees.
I hear today that there are calls to regulate the car washing industry, unbelievable when we can't even regulate the debt management industry!
An alternative to bankruptcy, an Individual Voluntary Agreement is a legal agreement drawn up between the debtor, all creditors to whom money is owed (banks, credit cards etc) and a licensed insolvency practitioner who then administers the arrangement. Unlike a debt management plan (DMP), which is a more casual arrangement, an IVA is a legal process by which your unsecured creditors cannot then pursue you for payment of your debts outside the agreement. To qualify for an IVA, you must be a private individual (not a company), your debts must exceed £15,000 and you must have a regular income. If you are a homeowner with equity in the property, you may have to remortgage and use the equity to clear some of the debt before you enter into an IVA.
Debt management plan
Not to be confused with a consolidation loan or bankruptcy, a DMP is a service offered by a specialist debt management company that will negotiate with your creditors to change the terms of how they get their money back. The debt company will renegotiate your debt repayment terms and then deal directly with your creditors on your behalf, and you then pay the debt management company, which passes the money to your creditors minus its initial and subsequent monthly fee. This can be as high as 20%, which means you’ll pay down your debts slower than you thought.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.