Debt Management Firms Take Advantage of Clients

A report shows that many debtors are being taken advantage of while in a very vulnerable state.

A report shows that many debtors are being taken advantage of while in a very vulnerable state.

The Office of Fair Trading (OFT) has determined that select debt management firms use sales, and not helpful information, as motivation. The OFT has ordered almost 130 firms to straighten up their business practices or else lose their license.

A troubling report surfaced regarding the state of the sector highlighting problems worthy of a misleading automobile fix it shop. The problems include advertising which is misleading and poor advice to people with debt problems.

It is a popular practice for people in financial difficulty to go to debt management companies seeking advice.

The two biggest ways they attempt to help their clients is with either a debt management plan or an IVS, Individual Voluntary Arrangement.

It was found that 75 per cent of the firms charge their fees up front. The OFT remarked on this practice, saying that it limits the risks involved with their clients, while not dealing immediately with their problems.

The report remarked on the goal of some firms, saying: “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.

“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.”

This often leads people seeking help to leave their office needing even more help.

The sector is seeing much success gaining clients through the internet and they have the revenue to prove it. A total of 250 million pounds will be collected by the end of this year.

The sector should be held to higher standards, according to the OFT. Some issues which should become priorities include:

-Advertising to misguide clients that services are free

-Poor advice given to clients

-Little awareness that being taken advantage of has legal consequences

-Appearing as something they are not, like charities or government

A part of the shameless activity of some of the locations includes sending their clients through a different debt plan immediately after a debt plan didn’t work for them.

The Financial Ombudsman has received almost 400 complaints in the last 12 months, three times the number received in previous years.

The standard practice for companies in this sector is to negotiate with debtors on behalf of their clients in an attempt to reduce debt. One estimate places the number of debt management companies in the UK at 300 to 400.

Only about 10 of those companies are members of the Debt Managers Standards Association (Demsa). The OFT said that Demsa and another trade organization, Debt Resolution Forum could do quite a bit more to elevate standards, and that improvements had already been made.

Michael Land, chairman of Demsa, commented on members of the sector saying: “There is no question there are lots of cowboys in the industry.”

The Debt Resolution Forum has several more members; 46 actually.

According to Andrew Smith of Debt Resolution Forum, about 11 per cent of UK households have a debt problem.

Smith commented on debt’s ability to have staying power, saying: “Debt is a problem that is not going to go away, and it is really important that the industry that is there to help people actually does have confidence from consumers.

“By Spring next year, that should be the case for everybody.”

The OFT’s Ray Watson remarked on the debt problem, saying: “People who are heavily indebted, desperate and vulnerable need advice which makes their problems better not worse and should not be exploited.

“Debt management firms must be clear about their charges and the options available to consumers. The level of non-compliance we found across the industry is unacceptable.”

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