The Office of Fair Trading (OFT) in the UK has just released a report warning 129 debt management companies they risk losing their license to operate.
The OFT in the UK serves a similar function as the FTC in the U.S. In the UK debt management companies can operate as for-profit companies and fees may be charged.
As you will see in the information below, provided by the UFT, the issues facing consumers in the UK may sound very familiar to those faced by consumers in the U.S. and exposed by the FTC.
For readers that may be unfamiliar, an IVA is an Individual Voluntary Arrangement put together typically by an accountant and is a formal and binding plan to repay debt without bankruptcy.
It’s interesting to note that the OFT is looking for the two trade associations that cover the debt management industry to step-up and raise the standards of their members. That’s exactly what the FTC was looking for the debt settlement trade associations to do when it was closely looking at the debt settlement industry.
Issues uncovered in the industry wide examination uncovered enough problems that warnings were issued to either shape up or face being put out of business.
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From the Office of Fair Trading
The OFT has told 129 debt management firms that they face losing their consumer credit licences unless immediate action is taken to comply with its Debt Management Guidance.
The firms are required to provide independently audited evidence within three months that action has been taken to address identified concerns. If evidence is not provided, the OFT will instigate licensing action.
The formal warnings follow an OFT review of the debt management sector, published today, which found widespread problems.
Debt management companies, which sit alongside free government-funded and charitable services, are fee-charging firms that provide advice and solutions to consumers with debt problems. The services they offer can include arranging IVAs, setting up debt management plans, and negotiating settlements with creditors. Consumers contacting debt management companies tend to be over-indebted, vulnerable and desperate for help with managing their financial difficulties.
The key findings to emerge from the review, which included onsite compliance visits by Trading Standards Officers, a website sweep and a mystery shopping exercise, are that:
- misleading advertising is the most significant area of non-compliance, in particular failing to disclose a fee is retained by the business and misrepresenting debt management services as being free when they are not frontline advisers working for debt management companies are lacking in competence and are providing poor advice based on inadequate information
- there is low industry awareness of the Financial Ombudsman Service (FOS) rules for resolving consumer complaints.
Today’s OFT report sets out a detailed action plan to improve standards across the industry, focusing on robust enforcement action against licensees that fail, or refuse, to change advertising and/or behaviour.
The OFT also plans to update its Guidance to take explicit account of new and emerging unfair business practices, and will 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.
Ray Watson, Director of the OFT’s Consumer Credit Group, said:
‘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.
‘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.
‘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.’
Since April 2008 when the OFT obtained new powers under the Consumer Credit Act, it has taken 37 formal actions to impose requirements or refuse or revoke licences held or applied for by debt management businesses. Other OFT actions have included shutting down websites, and addressing issues such as companies masquerading as charities, systemic cold-calling and the mis-selling of IVAs. It has also worked with Trading Standards to take injunctive action to stop ‘debt sale’ scams.
From the Full Debt Management Compliance Review Report
Here are observations, statements and findings from the full 107 page report. – Source
- It is important that businesses and their owners and managers see consumer protection not as an arbitrary set of rules or conditions imposed by others, but rather as necessary standards set from within to ensure a culture of responsibility in an industry which deals with very vulnerable consumers.
- Misleading advertising is the most significant area of noncompliance, in particular misrepresenting debt management services as being free when they are not.
- Frontline advisers working for debt management companies generally lack sufficient competence and are providing consumers with poor advice based on inadequate information.
- The review found a significant lack of transparency for consumers seeking debt advice and debt solutions. Websites often do not make clear the commercial nature of the businesses and the fees they charge, making it difficult for consumers to distinguish between fee charging debt management businesses and charitable or free-to-client advice providers. In the worst cases there are firms using misleading or look-alike trading names explicitly purporting to be charitable or government organisations.
- Nearly all debt advisers surveyed during the mystery shopping exercise failed to give information on the full range of debt remedy solutions available.
- The review found significant and widespread examples of unfair and improper business practices. Firms are not giving the advice or offering the solution that is in the best interests of the consumer but instead that which is most profitable to them. In most cases, initial advice to pursue a particular solution was provided without a full and proper assessment of the consumer’s individual financial circumstances. In some cases, it appears that business models may be set up to take the maximum amount of money from a consumer regardless of their circumstances.
- The practice of front loading fees for setting up debt remedy solutions is widespread amongst the fee-charging sector (nearly 75 per cent of businesses inspected operate this model for debt management plans). This practice involves a debt management company recouping all or most of its costs using the initial consumer payments, thereby minimising its own risks whilst not immediately dealing fully with the consumer difficulties. [Sounds like the advanced fee debt settlement approach.]
- Further fees and charges are sometimes later added when a consumer is later ‘flipped’ onto an alternative debt solution – for example moving from a debt management plan to an IVA – there are cases when this may be appropriate due to a change in circumstances but it is also clear that some businesses may be deliberately seeking to recycle customers and extract maximum profit. [Sounds similar to consumers that may now be flipped from debt settlement to bankruptcy and charged additional fees in the U.S.]
- Well before the current economic downturn the OFT had identified debt management activities, including debt advice, as a high-risk area where vulnerable consumers can suffer detriment as a result of receiving poor quality debt advice or being subject to aggressive and misleading marketing and advertising.
- Debt management services are a classic ‘distress’ purchase; consumers contacting debt management companies tend to be overindebted, vulnerable and desperate for help with managing their financial difficulties. Consequently, consumers tend to make quick decisions about debt solutions and research from the Money Advice Trust has shown that consumers do not shop around for debt management services.
- Consumers making the decision to engage the services of a debt management company are potentially committing themselves to a debt solution which can affect their lives for years. The risks involved if things go wrong can be disastrous for consumers who can be left in a worse, rather than a better financial position, and in the worst cases can include the loss of the consumer’s home.
- Common breaches included:
- stating or implying all services provided were free or impartial
- a lack of balanced information about all debt remedy solutions
- no clear information about fees payable or, where this was provided, the information was not prominently displayed
- failure to provide warnings about the likely effect of debt solutions on credit ratings, and
- making claims to be able to guarantee a favourable outcome to the consumer including ‘interest frozen’, ‘write off debts’, ‘creditor action stopped’.
- The transparency of the front ended fee-based business model of IVAs and PTDs was particularly poor. None of the websites assessed contained details or estimates of the costs involved. Common tactics used to obscure this included implying creditors are liable for the costs or will readily agree to the fees.
- No websites provided a sufficiently prominent upfront warning to consumers of the risks of debt management plans. In particular, the potential negative effects of entering into any form of debt management arrangement was not explained. Whilst some sites did contain abbreviated warnings, there was a general lack of accurate information about the potential effects of each debt remedy solution on consumers’ credit ratings, their ability to obtain credit or about the details that credit reference agencies hold.
- We identified that there was a clear emphasis placed on the advantages of debt management services without equally explaining the relative disadvantages, with widespread omissions of the warnings and caveats the Guidance requires. In the vast majority of cases where these were given they were not accorded equal prominence or had been relegated to places a consumer is less likely to look such as the foot of the page, or buried in the sections covering terms and conditions and frequently asked questions (FAQs). Common breaches included bold upfront claims such as ‘write off debt’, ‘freeze interest’, ‘stop creditor action’ and ‘reduce your payments’.
- The review also revealed new or emerging unfair business practices in the debt management sector that are not currently covered by the current Guidance such as holding onto client funds in the hope of agreeing a full and final settlement with creditors. The OFT has been told that some fee charging debt management businesses are operating hybrid business models whereby consumers make monthly payments to the company who will then pay creditors as little as £1 per month whilst saving the balance to make full and final settlement offers in future. Sometimes this ‘service’ is combined with claims and/or debt management activities. The OFT considers this business model to be completely unacceptable and is investigating further.
- The OFT has received anecdotal evidence that inappropriate incentivisation of advisers/ sale targets is commonplace in the fee-charging sector. However this issue was not sufficiently probed during the visits for the OFT to reach a definitive view. In at least two instances, visiting officers identified that front end staff received commission or bonuses directly relative to the number of consumers they signed up to a specific debt solution, thereby indicating potential evidence of mis-selling.
- The key findings to emerge from our mystery shopping survey are:
- the majority of debt advisers failed to provide information about the full range of available debt repayment options, with most focusing on just two options
- most debt advisers tended to focus on the advantages of individual debt solutions and did not explain the disadvantages
- nearly half of all debt advisers misleadingly claimed or implied that they could guarantee outcomes favourable to the consumer when discussing DMPs. Claims included ‘interest frozen’ and ‘creditor contact stopped’
- no debt adviser provided a full explanation of the main features of each individual debt repayment option they discussed
- few debt advisers voluntarily provided details of the costs of debt repayment options discussed, and where this was provided information was not complete
- nearly half of all debt advisers failed to mention consumers’ cancellation rights, even after being asked
- most debt advisers were willing to give advice without making a full assessment of the debtor’s circumstances – over half gave advice without asking for details of disposable income levels first
- no debt adviser sign-posted consumers to the IS booklet ‘In Debt? Dealing with your creditors’, and
- the majority of debt advisers failed to volunteer that debt advice was freely available from charitable organisations, and when asked a significant proportion sought to discredit or misrepresent the services provided by such organisations.
- Very few advisers – four per cent in the case of DMPs and one per cent in the case of IVAs – voluntarily provided details of the fees that they charge. These figures increased dramatically following further prompting by the shopper (70 per cent for DMPs and 34 per cent for IVAs) but there were also a significant number of advisers who failed to provide these details at all. On a positive note, only a very small proportion of advisers actually implied that the arrangement of DMPs are free (one per cent), though this was higher for IVAs (11 per
- Very few advisers explained to the shopper how the fees are calculated. After prompting this figure rose to 55 per cent for DMPs, with a sizeable proportion still failing to give a breakdown. The result was much worse for IVAs which saw 79 per cent of advisers failing to provide this information.
- Only three per cent of advisers mentioned consumers’ cancellation rights without being asked. When prompted, this figure rose to 50 per cent. This leaves a significant proportion who, even after being asked, did not explain that the consumer had a right to cancel his/her contract within a specified period.
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