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Debt management clean-up ordered

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.

Michael Land, chairman of DEMSA said:

“DEMSA and its members fully support the OFT’s drive towards higher standards in the debt management sector.

“DEMSA members have long been committed to raising standards, indeed DEMSA is the only trade body in the sector to have received approval of its Code under the OFT’s Consumer Codes Approval Scheme.

“We will continue to work closely with the OFT to lead the drive towards higher standards and we are encouraged that the OFT has acknowledged the key role for DEMSA in doing so.”