OFT cracks down on debt management sharks

Many vulnerable people have lost out due to unsavoury debt management firms. Thankfully the authorities are trying to clean up this murky market.

With so many people experiencing financial difficulties, debt management has become big business. Where there are people to exploit, there are always queues of unscrupulous individuals waiting to pounce, and the debt management industry is no exception.

Thankfully the authorities are taking action to rein in those firms who are taking advantage of people who are struggling financially. This month, in response to a Super Complaint submitted by the Citizens Advice Bureau, the Office of Fair Trading published a consultation on revised guidelines for dealing with errant debt management companies.

The dark side of debt management

While there are plenty of legitimate companies and charities around who offer good debt management advice, there are also those who are out to profit from other people’s misfortune.

Rogue operators exploit those in debt and have been accused of giving incorrect and inappropriate advice. Debt advice must be tailored for individual clients, but some companies are taking a ‘blanket’ approach and putting clients onto repayment plans that are unsuitable for them, or encouraging them to go bankrupt when it is not the right option for that client.

For the pleasure of this ‘advice’ they will also charge you a disproportionately large fee.

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There have been occasional reports that money handed over by clients to debt management companies, which they believed was going towards paying back their creditors, has simply been pocketed by the company or absorbed in the client’s fees. This type of blatant theft is an obvious rip-off, but there are plenty of subtler ways for these companies to target vulnerable customers.

Many advertise their services as being ‘free’ in order to lure in customers, but these claims can often be misleading and once signed up people find themselves paying a plethora of hidden costs.

These ‘costs’, which can run into the thousands, are added to the customer’s overall debt, meaning that they end up taking a lot longer to pay off debts than they would have done if going it alone. Other tactics used to attract customers and getting them to part with yet more cash is to mislead them into thinking that their services will give them some sort of protection from creditors, which is simply not the case.

Where should you go?

There is absolutely no need to pay for debt management advice. There are many charities and organisations who can help you free of charge.

A reliable source of free debt advice can be found at Citizens Advice. You can get advice over the phone or in person and you can also access a wealth of information for yourself on their online information portal, AdviceGuide. Via the Money Management section you can sort out your budget, and prepare your own financial statement that will allow you to see exactly where your money is going, where you could make savings, and how much you can realistically put towards your debts.

If you feel you have gone beyond the point where budgeting will help you manage your debt, Citizens Advice can talk you through other arrangements and discuss whether they might be a useful option for you. They can help you negotiate with your creditors, or discuss the pros and cons of more permanent solutions such as Debt Relief Orders, Individual Voluntary Arrangements or bankruptcy. They can then give you whatever assistance you need to follow the course of action best suited to you. They can’t wave a magic wand and make your debt disappear, but they can set you on the correct path to sorting out your financial problems yourself.

What is being done?

The Office of Fair Trading launched an in-depth investigation into the debt management sector and published its findings in a report in September 2010. Since its publication it has issued warnings to 129 debt management companies, resulting in 43 businesses surrendering their licences. It has also taken enforcement action against 11 other companies and revoked their Consumer Credit licences.

The current report suggests revised and clear guidance as to what is expected from debt management companies, and what the penalties will be for non-compliance. At this stage it is still just a consultation, so it will be some time before any of this is formally implemented.

Companies must be completely up-front about the services they offer and the fees they intend to charge.
They must make sure that their advice is clear and is relevant to the individual customer, and the risks and consequences of any action must be explained

Some companies have also been accused of using misleading names, to imply that they are backed by the government or are a charity. Names including the word ‘helpline’, such as the Bankruptcy Helpline or the Insolvency Helpline, are thought by the Office of Fair Trading to suggest that the company is free or government run and they are cracking down on such practices.

If you are concerned about the practices of a debt management company, you can fill in an OFT complaint form. Although they will not help you with your individual complaint they will use the evidence collected to decide whether the company complained about is complying with guidance.

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