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Debt management complaints down by 70 per cent

OFT announces findings of review

PN 152/03    27 November 2003

Complaints about debt management companies have dropped substantially since the OFT published guidance for the industry in December 2001, according to an OFT review.
Download Debt management guidance compliance review (pdf 234 kb)

The review was launched in September 2002 to assess compliance with minimum standards for the industry set out in OFT guidance (see note 3). The review shows that the guidance was generally well received by the industry with extensive compliance. However although complaints have dropped there are still some potential breaches, particularly regarding advertising, such as:

• failure to make clear that lower monthly payments will usually lead to an increase in the size of the sum to be repaid, increase the repayment period and affect consumers' credit ratings
• misleading claims such as 'debts can be written off' or 'interest stopped' when companies cannot guarantee such outcomes with creditors
• warnings (e.g. about increase in loan period) not being given sufficient prominence.

The review also identified some new problems such as lack of clarity in advertisements regarding the nature of services being offered.

Under the Consumer Credit Act, firms require a consumer credit licence from the OFT if they wish to offer debt management services. The industry has been warned that breaches of the OFT guidance could result in licences being revoked. Most companies that have been approached by the OFT regarding breaches or problem trading practices have responded positively. Investigations are currently under way regarding those licensees that have been identified as potentially unfit to hold a licence.

John Vickers, OFT Chairman, said:

'Consumers considering using a debt management company are usually in serious financial difficulty, so it is essential that debt management companies act in their best interests.
 
'Following the OFT guidance business compliance is up and consumer complaints are down which is good news for consumers. However, more needs doing and we will continue to watch the industry carefully.'

Advice to Consumers: Know What You're Signing Up To

In addition to enforcement action against firms, the OFT advises consumers before they sign up with a debt management company to:

• consider free impartial alternatives such as Citizens Advice Bureaux or Consumer Credit Counselling Service (download OFT pocket guide In debt? Help yourself out! (pdf 28 kb) for more information)
•  check the contract clearly explains the nature and cost of the debt management service being offered
• make sure details of the total cost to the consumer, amount to be repaid and duration of the contract are provided
• all the possible consequences of entering a debt management plan have been explained, e.g. the consumer's credit rating could be affected and creditors may not accept proposals to freeze interest or reduce payment amounts
• the debt management company assesses your financial circumstances including verifying income and regular outgoings
• the circumstances in which you may withdraw from the contract and receive a refund are in the terms and conditions of the contract
• clarify any claims made in advertising which are unclear

NOTES

1. Under the Enterprise Act 2002, the OFT is prevented from identifying companies where it is considering or in the process of licensing enforcement action. The OFT can only confirm whether 'minded to revoke' notices have been issued or credit licences have been revoked.

2. The Debt Management Compliance Review was launched on 26 September 2002 (see OFT press release 61/02 for further details).

3. The OFT guidance was published on 4 December 2001 (see OFT press release 48/01 for further details). Download 'Debt management guidance' (pdf 52 kb)

4. The guidance includes the following requirements:

• consumers must be given adequate information before entering into an agreement. Contracts should specify the nature of the services provided, total cost to the consumer, amount to be repaid and duration of the contract. Contract terms should be fair, legible and in plain language
• a realistic assessment of the customer's financial circumstances must be made before advice is given, including verification of income and regular outgoings and any advice must be in the best interests of consumers
• debt management companies must inform clients of the outcome of negotiations with creditors, as well as any developments with creditors such as the issue of default notices or the threat of legal action
• advertisements and marketing must be accurate, clear and not misleading. Any reference to 'savings' on repayments must make it equally clear that debt rescheduling will usually lead to an increase in the size of the sum to be repaid and potentially affect the consumer's credit record
• no cold calling by personal visit
• payments from consumers should normally be passed on to creditors within five working days of receipt of cleared funds.

5. Under Section 25(2)(d) of the Consumer Credit Act 1974 the OFT must, when determining whether or not a licensee is fit to hold a licence to carry on a business covered by the Act, consider evidence that the licensee has engaged in business practices appearing to be deceitful or oppressive or otherwise unfair or improper (whether unlawful or not). Decisions to revoke a consumer credit licence are made by an adjudicating officer for and on behalf of the OFT. Before a licence is revoked the adjudicating officer issues a 'minded to revoke' notice to the licensee. The licensee is then given the opportunity to make representations before a final determination is made. In the event that the determination is adverse, the licensee has the right to appeal against the determination to the Secretary of State for Trade and Industry.

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