Debt Management Guidance Compliance Review: Mystery Shopping

Transcription

1 Debt Management Guidance Compliance Review: Mystery Shopping March 2010 OFT1265

2 Crown copyright (2010) This publication (excluding the OFT logo) may be reproduced free of charge in any format or medium provided that it is reproduced accurately and not used in a misleading context. The material must be acknowledged as crown copyright and the title of the publication specified.

3 CONTENTS 1 Executive Summary Objectives and Methodology Findings and Analysis The Mystery Shop Experience. 42 Annexes A. Explanations of debt repayment 47 B. The Questionnaire. 55 C. Scenario... 80

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5 1 EXECUTIVE SUMMARY 1.1 In March 2010, FDS International (FDS) was commissioned by the Office of Fair Trading (OFT) to carry out a mystery shopping study of commercial and free to client providers of debt management services in the UK. The study is part of the OFT's wider compliance review of its Debt Management Guidance (DMG). The brief given to the shoppers was to make telephone calls from a sample list of debt management providers, or from call backs initiated on websites, posing as a typical consumer seeking advice and information about the company's debt management services on behalf of their 'sister'. The mystery shoppers were not required to enter into a debt management arrangement. 1.2 The key objective of the study was to test the quality of debt advice by measuring the level and accuracy of information given to the shopper during the initial telephone contact. FDS carried out a total of 216 telephone mystery shops (to 172 individual providers of debt management services) between 4 and 17 March Some entities were subject to multiple mystery shops. Trade association member businesses made up a quarter of all entities shopped and 38 per cent of the total number of shops conducted. Four mystery shops were conducted to free-to-client organisations and, given this small sample shopped, this report does not distinguish between commercial and freeto-client entities. 1.3 All shoppers used the same basic scenario with a few variables such as a postcode differentiator and different levels of disposable income, further details of which are provided at Appendix A. Signposting consumers i) Impartial information about debt management solutions 1.4 Of the 216 shops carried out, none of the advisers signposted mystery shoppers to The Insolvency Service's booklet 'In Debt? Dealing with your. OFT1265 1

6 creditors' 1 which provides consumers with impartial information on the relative merits of all available debt remedy solutions. ii) Availability of free to client debt advice 1.4 The majority of advisers (92 per cent) failed to inform shoppers that free to client debt advice was available from organisations such as the Citizens Advice Bureau (CAB) without being asked. Just over threequarters (78 per cent) of those advisers who did not initially provide this information did so once it was asked for, however, a proportion of these advisers (19 per cent) attempted to discredit or misrepresent services offered by free to client charitable organisations and/or competitors. Typical comments included those implying that the Consumer Credit Counselling Service (CCCS) is not on the side of the debtor, that the CAB is inundated with calls and that its advisers lacked expertise. Level of information provided iii) Information about full range of available debt management options 1.5 Overall, there was a wide variation in the level of information given to shoppers with 94 per cent of advisers failing to provide shoppers with details of the full range of available debt repayment options. Even after being asked what options were available, the majority of advisers (57 per cent) referenced just two and a quarter three options (25 per cent). Advisers were most likely to mention (though not necessarily focus on) Debt Management Plans (DMPs) (93 per cent of all advisers including both voluntary mentions and those given after being asked) and/or Individual Voluntary Arrangements (IVAs) (83 per cent of advisers presented with an English or Welsh postcode including both voluntary mentions and those given after being asked). 1.6 Where the shopper had given a Scottish postcode, only 22 per cent of advisers mentioned that Protected Trust Deeds (PTDs) 2 were a possible option. Information about other debt management options which are only available to consumers living in Scotland such as Debt Arrangement Schemes (DAS) and Sequestration were provided by only two per cent 1 The Insolvency Service publication for consumers in England and Wales 'In Debt? Dealing with your Creditors' 09/1078 June PTDs, Debt Agreement Scheme and Sequestion are only available for residents of Scotland OFT1265 2

7 of advisers for DASs and four per cent of advisers for sequestration, even after shoppers had asked for other possible options. 1.7 Only 19 per cent of advisers voluntarily explained to shoppers that bankruptcy was another option, rising to 26 per cent of advisers after asking. Debt consolidation loans were rarely mentioned. 1.8 Among the 202 advisers who referenced at least one debt management option, over half (51 per cent) focussed on DMPs and/or IVAs when explaining the range of solutions that were available to the consumer in respect of the scenario presented. Slightly fewer advisers (45 per cent) did not focus on any particular debt repayment option. Of the 91 advisers who did not focus on a particular option, 82 per cent explained all the options they referenced to varying degrees. iv) Pros and cons of individual debt repayment options 1.9 The level of information provided to shoppers about the advantages and disadvantages of individual debt solutions was extremely patchy. There was a tendency for advisers to focus on the 'advantages.' Among the 202 advisers who referenced at least one debt option, 78 per cent volunteered an 'advantage' as compared to 47 per cent who volunteered a disadvantage. On being asked for the 'advantages' and 'disadvantages' to each option the proportion of advisers who offer 'advantages' (including those given voluntarily) increases to 93 per cent as compared to 82 per cent in respect of 'disadvantages.' Furthermore, advice given to shoppers about DMPs not only focused on their benefits but was also found to be misleading When discussing IVAs and PTDs approximately half of all advisers (55 per cent and 43 per cent respectively) gave a guarantee that a percentage of debt would be written off and (43 per cent and 29 per cent) said that interest would be frozen. Similar claims were made in relation to bankruptcy, although a much smaller percentage of advisers (25 per cent) gave a guarantee that a percentage of all debts will be written off with this figure reducing to 16 per cent in relation to claims that the debtor will be debt free at the end of the process Shoppers reported a similar experience when discussing DMPs with nearly half (49 per cent) of advisers focusing on the advantages by. OFT1265 3

8 implying that interest accrued on debts was guaranteed to be frozen by creditors and 42 per cent that all contact from creditors will stop. Both statements are misleading Turning to the level of information provided to shoppers about the 'disadvantages' of each option, just over half (59 per cent) of all advisers informed shoppers, even after being asked for possible disadvantages, about the negative effect on the debtor's credit rating if they were to enter into an IVA. The figure was slightly lower (43 per cent) for PTDs and lower again (32 per cent) for bankruptcy (after asking) Just over a quarter (27 per cent) of all advisers explained to shoppers that debtors may be required to release equity in their home if they entered into an IVA with an even smaller percentage (14 per cent) providing the same information in relation to PTDs (after asking). Just over a third of advisers (34 per cent after asking) advised shoppers that assets could be taken as part of a bankruptcy agreement When discussing DMPs half of all advisers advised shoppers about the negative impact that entering into such an arrangement could have on their credit file. However, only 20 per cent of advisers explained to shoppers that opting for a DMP would increase the likelihood of the debt being paid off over a longer period of time. Quality and consistency of advice i) Whether a full and clear explanation of each debt repayment option was given? 1.15 None of the advisers gave shoppers a full explanation of the main features of each individual debt repayment option they discussed. When discussing DMPs or IVAs only two per cent of advisers provided shoppers with a full explanation. 3 However, approximately half of all advisers managed a partial explanation of either DMPs (52 per cent) or IVAs (49 per cent) with only 39 per cent of advisers providing a partial explanation of the bankruptcy process. 3 See annex A for details. OFT1265 4

9 1.16 Explanations provided by advisers were also assessed for clarity. Most shoppers rated the information they received from advisers as fairly clear rather than very clear. The results for clarity in respect of DMPs, IVAs and bankruptcy were 70 per cent, 66 per cent, and 49 per cent respectively. A significant proportion of advisers provided explanations that were considered unclear. The distribution of these results is as follows: DMPs - 31 per cent; IVAs - 34 per cent; and bankruptcy 51 per cent. ii) Income and expenditure 1.17 The level of information sought from the shopper by the debt management provider about their 'sister's' (the debtor's) income and expenditure levels prior to offering advice varied. It needs to be noted that shoppers were instructed to withhold certain details such as a full postcode or address (to avoid credit checking and recording of scenario details), and to push the advisers to help them gather advice on the understanding that a further call would take place in which more information would be provided Almost two-thirds of advisers (64 per cent) were willing to give advice without being aware of the debtor's disposable income (which was available in the scenario information). Only three (six per cent) debt management companies were unwilling to give detailed advice without more detailed information about the debtor's circumstances, indicating a general willingness to provide advice based on a few key details relating to the debtor's circumstances The majority of advisers (89 per cent) asked shoppers for details of the total amount of debt incurred. Most advisers (69 per cent) asked for clarification of the type of debts that had been incurred and whether the debtor owned their own home (65 per cent) Fewer advisers (36 per cent) asked for clarification of the debtor's disposable income levels, employment status (35 per cent) and/or the value of their property (32 per cent).. OFT1265 5

10 Transparency of fees and services i) Fees 1.20 Few advisers provided the costs of any of the debt repayment option voluntarily, and where information was provided it was patchy. The majority (91 per cent) of the 202 advisers who discussed at least one option gave some information about fees and/or services for at least one option discussed (including that fees would be provided at a later date or that information could not be given as the adviser did not have enough information about the debt). This leaves almost one in 10 (nine per cent) who did not offer any information about fees and services for the options they referenced Almost three-quarters (74 per cent) of advisers who referenced DMPs provided information on fees (voluntarily and on asking), but fewer advisers gave this information in relation to other repayment options: IVAs (34 per cent); and, Bankruptcy (29 per cent) Very few volunteered information relating to all the options they discussed about how much the service would cost (seven per cent), detailed breakdowns of how their fees are calculated (one per cent) or what the fees covered (less than one per cent) without being asked. When asked, more than half of advisers (55 per cent) provided information as to how the debt management company calculated the fee in respect of DMPs. Fewer than one in five did so in respect of IVAs (18 per cent) and/or bankruptcy (16 per cent) There were also some incidences when advisers implied the service provided by their company was free, notably among those who discussed IVAs (11 per cent). However, it is worth noting that four mystery shops were carried out with free-to-client entities. ii) Comparison between advertised and actual services 1.24 Two thirds (66 per cent) of all the debt management providers shopped carried at least one misleading statement or claim on the homepage of their websites. On many occasions these were reinforced by the adviser during the mystery shop. For example, a quarter of homepages (25 per cent) made the claim that the provider could freeze interest and this was OFT1265 6

11 reinforced during the shop by 73 per cent of advisers representing the providers making this claim. iii) Level of pressure felt by the shopper 1.25 The majority (94 per cent) of shoppers did not feel pressurised into making a decision during the telephone calls. This may, however, have been as a consequence of making an enquiry on behalf of a third party To test whether providers were engaging in mis-selling, advisers were asked at the end of the call for a recommendation on the 'best' debt repayment option. Almost half the advisers (45 per cent) would not make a recommendation on the basis that they required more detailed information about the relevant individual and their debts which they explained could only be achieved via personal contact with the debtor However, just under half of the advisers spoken to (42 per cent) recommended a DMP on the basis of very limited information. Almost one in five advisers (17 per cent) recommended IVAs. Other debt repayment options were recommended to the shoppers by one per cent or less advisers. 4 Other information 1.28 Advisers rarely stated that funds were passed onto creditors within five working days of clearing (less than one per cent) Typically advisers only gave information about the duration of a debt repayment option in relation to IVAs and PTDs. In respect of IVAs, 87 per cent of those referencing this option gave the duration as five years. A similar proportion (86 per cent) gave the duration as three years in respect of PTDs Just three per cent of advisers mentioned consumers' cancellation rights without being asked. When asked half (50 per cent) of advisers mentioned them. This leaves a large proportion (47 per cent) who, even after being asked, did not mention the consumer's cancellation rights. 4 The total percentage adds to more than 100 per cent as some advisers gave more than one 'best' option.. OFT1265 7

12 Call backs 1.31 Generally there was no difference in the mystery shopping results when carried out after a debt management provider had responded to a contact form completed by the shopper on a website. In 10 out of 14 incidences (71 per cent) the adviser who spoke to the shopper was from the same company as that for which they completed the online contact form. OFT1265 8

13 2 OBJECTIVES AND METHODOLOGY Background and introduction 2.1 All who provide debt management services (including credit repair) are required under the Consumer Credit Act 1974 (the Act) to hold appropriate licences. This includes the licence categories of debt counselling, debt adjusting and/or credit information services (including credit repair). 2.2 The OFT has a duty under Section 25 of the Act to keep under review the fitness of all licensees operating across the debt management industry. 2.3 Section 4 of the Act gives the OFT authority to issue guidance to debt management companies. In December 2001 (updated September 2008) the OFT issued its Debt Management Guidance 5 (the Guidance) setting out the minimum standards expected of all licensees. 2.4 Key principles of the Guidance include the transparency of advertising, fees charged to consumers, acting in the best interests of the consumer and keeping the consumer informed. All licensees who provide debt management services are expected to adhere to the Guidance, including the free to client sector. 2.5 This mystery shopping exercise is part of the OFT's wider compliance review of its Guidance which was launched in November The aims of the review are:-to assess compliance levels across the industry and to identify the reasons for non-compliance. The OFT will use its findings to inform its future enforcement strategy and to prepare a revised version of its Guidance which it will formally consult on. 5 Debt Management Guidance - OFT1265 9

14 Research Objectives 2.6 The overarching aims of the mystery shop were to test: the quality of advice a typical consumer will receive over the telephone the information, or lack of it, provided by the debt management provider during the initial telephone contact stage the transparency of information provided by the debt management provider, such as fees and charges. 2.7 The main objective was to increase the OFT's understanding of a typical consumer's experience of dealing with a debt management provider, covering the following key areas: To assess whether callers are given impartial advice and information about the full range of debt management options available to them, including: - whether the debt management provider voluntarily signposts or advises the shopper about the availability of impartial information such as the Insolvency Services publication 'In Debt? Dealing with your creditors', and - whether the shopper is told about the availability of free to client debt advice from charitable organisations and/or refers the caller to organisations such as the Citizens Advice Bureau. To measure the level of information given to the caller about available options at the initial point of contact, whether it is provided voluntarily by the adviser or only in response to a request from the shopper: - whether the shopper is told about all or some of the debt remedy options available to them or steers them in the direction of a specific option, and - whether the shopper is told about the advantages and disadvantages of each debt repayment option. OFT

15 To assess the quality and consistency of advice given by the debt management provider to the shopper when recommending a debt management option: - whether the shopper is given full information (see above), and - whether the shopper is asked to provide full details of their sister's (the debtor's) income, expenditure, employment status and nature and size of debts. To gain an understanding of the typical experience of consumers who contact debt management providers for debt advice and information about their services: - what information is provided about the cost of the service, when it is provided in the sales process and whether it is provided voluntarily by the provider or only in response to a request from the caller - whether there are any discrepancies between what is promised in the advertisement and what is offered to the consumer at the initial point of contact, and - whether any pressure is placed on the consumer to force them into making a decision. Methodology 2.8 FDS's mystery shoppers made calls using a sample list of 207 commercial and free to client debt management providers supplied by the OFT. A total of 216 mystery shops were carried out (202 direct calls, 6 14 call backs 7 ). 2.9 Call back mystery shops were conducted with organisations that had an online contact facility on their web-site and often no telephone number. 6 Direct call is a mystery shop whereby the shopper called the company with the telephone number supplied. 7 Call backs are mystery shops achieved by a 'call back' procedure. Shoppers provided contact details on the debt management company's website and waited to be called back on a mobile number by an adviser. Once the provider called the mystery shopper, the mystery shop was carried out using the same scenario as the direct calls.. OFT

16 Mystery shoppers completed the online contact form, including a designated mobile phone number. When an adviser from the debt management provider made contact with the shopper, the shopper replicated the same approach as for all other shops. A total of 42 organisations were identified initially for call back mystery shops, 25 by the OFT and a further 17 by FDS. Only 14 out of 42 organisations called the mystery shoppers back A Number of criteria were also used for determining mystery shopping call quotas including: use of products to measure splits to test region-specific information as options for managing debt differ in Scotland compared to England and Wales; and different disposal income levels were allocated to test the quality of advice. Details of quotas are at table 1 below. Table 1: Final sample of mystery shops: Type and scenario information Total calls 216 Of which: Type of call Direct Call Call back Shopper post code England/ Wales Scotland Disposable income 50 p.m. 100 p.m. 200 p.m. 300 p.m Another factor likely to affect options available and advice given is whether or not an individual has equity in their property. Again, a current property value was allocated to each piece of sample that was in line with that for a one bedroom flat in the postcode area. The 'debtor' in the scenario was said to have lived at this address for eight years which implied that there would be equity on the property. OFT

17 Mystery shops 2.12 Mystery shops were carried out by a small team of shoppers from the FDS Newcastle office between then 4 and 17 March All were fully briefed and given written, detailed briefing instructions on how to conduct the shops Shoppers were provided with a scenario developed by the OFT and FDS. In addition, each mystery shopper had a call guide and instructions that included suggested questions and hints to help them obtain all the information required without appearing to be an expert on managing debt. This is included as Appendix C Prior to making each call, a screen shot of the debt management provider's website homepage was taken. At the end of the shop, information appearing on the homepage was compared with that given over the phone Calls were made by the shoppers using a standard scenario in which they sought information on behalf of the 'debtor.' 2.16 Call backs followed the same broad process, except that shoppers completed the 'contact' form on the website and then awaited a call back. Mobile phones were made exclusively available for the call backs Immediately having made the mystery shop, those making the call were required to complete the questionnaire, which can be found in Appendix B. Scenario 2.18 Mystery shoppers followed the same scenario when making their calls, the only variation being region and amount of disposable income. The shoppers all phoned the debt management provider and sought information on behalf of their 'sister' who had secured and unsecured debts totalling 24,000. Full details of the scenario used is included in Annex C.. OFT

18 3 FINDINGS AND ANALYSIS Signposting consumers i) Impartial information about debt management solutions 3.1 Of the 216 debt management providers shopped none of the advisers signposted the shoppers to The Insolvency Service's booklet 'In Debt? Dealing with your creditors' which provides consumers with impartial information on the relative merits of all available debt remedy solutions. 8 In two (one per cent) mystery shops, advisers suggested shoppers refer to their organisation's website for further information. ii) Availability of free to client debt advice 3.2 The majority of advisers (92 per cent) failed to inform shoppers that free to client advice was available from organisations such as the Citizens Advice Bureau (CAB) without being asked. Of the total surveyed, only 8 per cent volunteered this information to shoppers. Whilst 70 per cent of advisers provided this information when prompted 22 per cent did not provide any information. 3.3 A proportion of these advisers (19 per cent) also attempted to discredit or misrepresent services offered by free to client charitable organisations and/or competitors. Typical comments included those implying that the Consumer Credit Counselling Service (CCCS) was not on the side of the debtor, that the CAB was inundated with calls and that its advisers lacked expertise. 3.4 Of the 169 advisers, some after being asked, who said that information was available from a free to client advice organisation, the majority (66 per cent) mentioned the CAB. More than two in five (46 per cent) named CCCS and nearly one in five (19 per cent) Payplan. Although they had said that free to client advice was available seven per cent of advisers did not name any of the organisations offering this service. 8 The Insolvency Service publication for consumers in England and Wales 'In Debt? Dealing with your Creditors' 09/1078 June 2009 OFT

19 Chart 2: Q21a: Did the debt management company highlight that advice is available from free advice organisations such as Citizens Advice? Numbers in brackets show the number of incidences per cent Base: All: 216 Chart 3: Q21b: What was the name of the free advice organisation? Numbers in brackets show the number of incidences, multiple responses possible so will total to more than 100 per cent % CAB 66 (111) CCCS 46 (77) Payplan 19 (32) National Debt helpline 7 (12) Charities non specific 2 (4) Insolvency service 2 (3) Did not give a name 7 (12) Base: 169 advisers who said advice is available from free advice organisations. OFT

20 iii) Level of information provided 3.5 Overall, very few advisers gave shoppers information about all the debt repayment options available; two per cent volunteered this information and a further one per cent mentioned all the available options after being asked. More than half of all advisers (57 per cent) gave mystery shoppers two debt repayment options after being asked and a quarter (25 per cent) gave three. None of the advisers who were quoted a Scottish postcode mentioned all five debt repayments available to those in Scotland. Table 4: Number of repayment options given to mystery shoppers by debt management providers Numbers in brackets show the number of incidences Voluntarily Adviser gave 1 repayment option 16% (34) 8% (17) Adviser gave 2 repayment options 39% (85) 57% (124) Adviser gave 3 repayment options 16% (35) 25% (54) Adviser gave 4 repayment options 2% (4) 3% (7) Adviser only gave options outside the standard (i.e. remortgage) Less than 1% (1) 0% (None) Adviser did not give any repayment options 26% (57) 6% (14) Base (All) OFT

21 3.5 Shoppers noted what debt repayment options were given to them by advisers during the mystery shop. In incidences where there was no voluntary reference to any option, or where the shopper had not been given all the available options, shoppers asked advisers whether there were any other ways their 'sister' could pay back her debts. 3.6 As can be seen in Table 5 below, advisers within the debt management providers shopped were most likely to provide shoppers, both voluntarily and after being asked, with information about DMPs (93 per cent) and or IVAs (83 per cent of those advisers presented with an English or Welsh postcode). 3.7 Interestingly, 61 per cent of all advisers where a Scottish postcode was employed also mentioned IVAs even though it could be reasonably assumed consumers with a Scottish postcode would not be eligible for IVAs. 9 Protected Trust Deeds (PTDs) were correctly referenced voluntarily by 22 per cent of all advisers where a Scottish postcode was given and incorrectly referenced voluntarily by one per cent where an English or Welsh postcode was given. Few advisers voluntarily mentioned the availability of any other debt repayment options. 9 Consumers residing within Scotland are not eligible for IVAs.. OFT

22 Table 5. Q1: Did the information include a reference to the following debt repayment options? Multiple responses possible so will total to more than 100 per cent, numbers in brackets show the number of incidences Voluntary England/ Scotland mentions Wales after after asking asking Debt management plans 68% 93% 93% 92% (147) (200) (155) (45) IVAs 53% 78% 83% 61% (115) (169) (139) (30) Bankruptcy 19% 26% 34% 2% (42) (57) (56) (1) PTDs 4% 6% 2% 22% (9) (14) (3) (11) Debt consolidation loan 4% (8) 5% (11) 5% (9) 4% (2) Sequestration 1% (3) 1% (3) 1% (1) 4% (2) Debt arrangement scheme Less than 1% (1) Less than 1% (1) None 2% (1) Other 2% (4) 3% (6) 4% (6) None None given 26% (57) 6% (14) 7% (11) 6% (3) Base (All) The results show that differentiators such as postcode or disposable income had very little bearing on the type of debt repayment options that were recommended to shoppers. OFT

23 3.9 Fourteen advisers (six per cent of all shops) did not reference any options even when asked. These advisers required more information and/or wanted to speak to the debtor before they were prepared to do so. The information required included permission for the caller to speak on behalf of the debtor, full address, contact number and/or full name of debtor Chart 6 below shows that just under half of advisers (48 per cent) focussed on DMPs; with around one in five (17 per cent) focusing on IVAs. Just under half (45 per cent) of advisers did not focus on any particular option or options. Chart 6: Q6: Did the debt management company recommend or focus on certain debt repayment options more than others? Multiple responses possible so will total to more than 100 per cent, numbers in brackets show the number of incidences % Debt management plans 48 (97) IVAs 17 (35) PTDs 1 (2) Bankruptcy 1 (2) No particular option 45 (91) Base: All discussing debt repayment options, excludes 14 advisers for whom this is not applicable as no options were discussed during the course of the conversation (202). OFT

24 iv) Pros and cons of individual debt repayment options 3.11 During the calls to debt management providers, shoppers noted whether advisers discussed the 'advantages' and/or 'disadvantages' of each debt option referenced. When these were not mentioned voluntarily by advisers, shoppers asked what the advantages/disadvantages were for each option previously mentioned. 10 It is worth noting that the advantages and disadvantages given by advisers during the mystery shop do not necessarily reflect the actual advantages and disadvantages of each option. In the case of DMPs the advantages given were often misleading The level of information provided to shoppers about the advantages and disadvantages of individual debt options was patchy. There is a tendency for advisers to focus on advantages rather than disadvantages. Among the 202 advisers who referenced at least one debt option, 78 per cent volunteered an advantage compared to 47 per cent who volunteered a disadvantage. On being asked for the advantages and disadvantages to each option, the proportion of advisers who offered advantages (including those given voluntarily) increased to 93 per cent compared to 82 per cent in respect of disadvantages. Tables 7 and 8 show the proportions of advisers mentioning specified advantages and disadvantages to shoppers. Pros 3.13 Within the 200 conversations advisers had with shoppers in which DMPs were referenced and the advantages discussed, around a half misleadingly 'implied that interest is guaranteed to be frozen' (49 per cent voluntarily and prompted). Slightly fewer advisers misleadingly 'implied that all contact from creditors will stop' (42 per cent voluntary and asked for mentions). Around a third misleadingly 'implied that creditors are guaranteed to accept the DMP proposal,' with the proportion mentioning this increasing to almost a third (32 per cent voluntarily and prompted). Around a third of advisers did not volunteer information about the advantages of a DMP (31 per cent), this fell to one in five advisers (17 per cent) after the shopper requested such information. 10 As only one adviser discussed the advantages/disadvantages of DAS and sequestration these results are not included in this report. OFT

25 3.14 In relation to IVAs and PTDs, 11 advisers who referenced each option respectively, were most likely to make the following claims: 'guaranteed that a percentage of all debts will be written off' (IVAs: 55 per cent and PTDs: 43 per cent) 'that interest is guaranteed to be frozen' (IVAs: 43 per cent and PTDs: 29 per cent) Approximately, two in five advisers (IVAs: 37 per cent and, PTDs: 43 per cent) did not volunteer any advantages. Following a prompt by shoppers this dropped to one in five (19 per cent) advisers in respect of IVAs and two-thirds (36 per cent) in respect of PTDs During the 57 shops in which bankruptcy was referenced and the advantages discussed, a quarter (25 per cent voluntary/prompted) guaranteed that a percentage of all debts will be written off.' In 16 per cent (voluntary and asked for mentions) of these shops, advisers 'guaranteed that the debtor will be debt free at the end'. Less than 10 per cent made claims about other advantages. The majority (67 per cent before being asked, 61 per cent after) did not mention any advantages in relation to bankruptcy. This may be because, although it was referenced, it was, anecdotally, not considered a serious option by advisers. 11 The base for PTDS is very small and therefore caution needs to be taken when considering these results.. OFT

26 Table 7: Advantages volunteered/ after asking (combined result including responses given voluntarily and asked for) Numbers in brackets show the number of incidences Debt management plan Individual Voluntary Agreement Protected Trust Deed Bankruptcy Implied that creditors are guaranteed to accept the debt repayment option proposal 23% (45) 32% (63) 11% (19) 15% (26) 7% (1) 14% (2) 0% After asking 2% (1) Implied that interest is guaranteed to be frozen 36% (71) 49% (98) 22% (37) 43% (73) 21% (3) 29% (4) 0% 0% Guaranteed that a percentage of unsecured debts will be written off 3% (5) 3% (6) 7% (12) 8% (14) 7% (1) 14% (2) 5% (3) 5% (3) Guaranteed that a percentage of ALL debts will be written off 2% (3) 4% (7) 46% (78) 55% (93) 36% (5) 43% (6) 21% (12) 25% (14) Guaranteed that the 'debtor' will be debt free at the end of the debt repayment option 5% (10) 8% (16) 25% (42) 31% (52) 36% (5) 43% (6) 14% (8) 16% (9) Implied that there is no risk to the credit rating 1% (1) 9% (18) 0% 6% (10) 0% 7% (1) 2% (1) 2% (1) Implied that all contact from creditors will stop 27% (54) 42% (83) 17% (29) 33% (55) 0% 21% (3) 4% (2) 7% (4) OFT

27 Cont... Debt management plan Individual Voluntary Agreement Protected Trust Deed Bankruptcy Implied that it is not entered on a public register 0% 0% 2% (3) 6% (10) 0% 0% 0% 0% Flexible/informal agreement/ no fixed term/can be cancelled any time 16% (21) 23% (45) 0% 0% 0% 0% Not applicable Affordable payments 18% (35) 19% (37) 2% (3) 2% (4) 0% 0% Not applicable No advantages given Before asking 31% (62) 17% (33) Before asking 37% (63) 19% (32) Before asking 43% (6) 36% (5) Before asking 67% (38) 61% (35) Base * 57 Base: All shops where debt repayment option was discussed, excludes shops where the call was not completed as the company required more details of the shopper. * Caution small base 3.16 Four of the 11 advisers who discussed debt consolidation loans voluntarily mentioned that there were advantages attached to this debt repayment option. However, no one advantage received more than one mention. Combining results for voluntary mentions with those given after asking shows that 18 per cent mentioned each of the following; 'implied that interest would be frozen', 'implied that there is no risk to credit rating' and/or 'implied that all contact from creditors will stop'. Over half of the 11 advisers (55 per cent) did not give any advantages to taking out a debt consolidation loan.. OFT

28 Cons 3.17 The majority (65 per cent) of the 200 advisers who discussed or were asked about the disadvantages of DMPs, did not volunteer any information about any possible disadvantages linked to this repayment option. This dropped to 28 per cent after advisers were asked about the disadvantages attached to this option. Anecdotal evidence from shoppers is that advisers would on occasion say something along the lines of 'there are no disadvantages to this as your sister will be free of debt'. Half (50 per cent voluntary and asked for mentions) said that the debtor would incur a 'negative effect on their credit rating' if they were to take up this option to repay their debts. One in five (20 per cent voluntarily and prompted) gave the 'likelihood of the debt being paid for a longer period of time' with a DMP than with other options as a disadvantage Similarly in respect to the advisers who discussed the pros and cons of IVAs (169 advisers) or PTDs (14), over half did not voluntarily tell shoppers about any disadvantages; IVAs: 56 per cent and, PTDs 57 per cent. 'The negative effect on credit rating' was the disadvantage mentioned most frequently in relation to IVAs and PTDs, (IVAS: 59 per cent, PTDs: 43 per cent voluntary and asked for mentions).) Fewer advisers told shoppers that this option may require the debtor to release the equity in their home (IVAs: 27 per cent, PTDs: 14 per cent voluntary and asked for mentions). Around one in five informed the shoppers in respect of IVAs that 'if the debt solution fails, the debtor may be declared bankrupt', slightly fewer mentioned this in respect of PTDs (IVAs: 19 per cent, PTDs: 14 per cent). About one in five advisers did not inform shoppers of any disadvantages, even after being asked (IVAs: 22 per cent, PTDs: 21 per cent) Among the 57 advisers with whom the pros and cons of bankruptcy were discussed, 44 per cent did not voluntarily mention any disadvantages for this option. Even after being asked, around a third (35 per cent) did not offer any disadvantages. Just over a third (34 per cent voluntary and asked for mentions) mentioned that: 'assets can be taken as part of the agreement'. 'The negative effect on credit rating' was given as a disadvantage by 32 per cent (voluntarily and prompted). The proportion of advisers that mentioned that a bankruptcy 'is entered on the public OFT

29 register' was significantly lower (nine per cent). No other disadvantage in respect to bankruptcy was mentioned by more than one adviser.. OFT

30 Table 8: Disadvantages volunteered/after asking (combined result including responses given voluntarily and asked for) Numbers in brackets show the number of incidences Debt management plans Individual voluntary arrangement Protected Deed Trust Bankruptcy The negative effect on credit rating Implied that there is no effect on credit rating Likelihood of an increase in the total amount of debt Likelihood of the debt being paid for a longer period of time Creditors can still take enforcement action as the plan is not legally binding 20% (40) 50% (100) 1% (1) 10% (20) 6% (11) 7% (13) 12% (24) 20% (39) 3% (6) 12% (12) 24% (41) 59% (99) 1% (2) 5% (9) 0% 43% (6) 0% 0% 16% (9) 32% (18) 0% 0% Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Not applicable Mentioned equity release If the debt solution fails you may be declared bankrupt Not applicable Not applicable 14% (24) 27% (45) 11% (18) 19% (32) 14% (2) 14% (2) 0% 14% (2) Not applicable Not applicable OFT

31 Cont Debt management plans Individual voluntary arrangement Protected Deed Trust Bankruptcy It is entered on a public register The plan has to be agreed by 75 % (IVAs) or the majority of creditors by value (PTDs) for the proposal to be agreed No disadvantages given Not applicable 2% (3) 2% (4) Not applicable 7% (12) 12% (20) 65% (130) 28% (56) 56% (95) 22% (37) 0% 0% 0% 0% 57% (8) 21% (3) Base % (4) 9% (5) Not applicable 44% (25) 35% (20) Base: All shops where debt repayment option was discussed, excludes shops where the call was not completed as the company required more details of the shopper Among the 11 mystery shops in which the pros and cons of debt consolidation loans were discussed, 91 per cent (10) did not mention any disadvantages voluntarily. Only one adviser (nine per cent) volunteered that 'assets may be taken as part of the agreement'. Even once asked what disadvantages there may be, advisers gave just two more disadvantages in relation to debt consolidation loans - 'may need to release equity' (nine per cent, one adviser) and 'the negative effect on credit rating' (nine per cent, one adviser). The majority (82 per cent, nine advisers) of those referencing debt consolidation loans did not offer any disadvantages even when asked.. OFT

32 Quality and consistency of advice i) Whether a full and clear explanation of each debt repayment option was given? 3.21 Shoppers rated the explanations given for completeness and clarity. To do this mystery shoppers compared these explanations against the written descriptions of each option provided by the OFT. 12 They were rated as follows: explained fully all major and smaller points covered partially explained all major and some minor points covered slight explanation most major points not covered no explanation none of the points covered Incidences of full explanations given by advisers were low and did not occur in respect of any debt management options other than DMPs and IVAs. However, the majority of advisers gave some explanation of at least one of the options they discussed (97 per cent). None of the advisers gave shoppers a full explanation of the main features of every individual debt repayment option they discussed with a shopper Similar results are seen in relation to the completeness of explanations in relation to DMPs and IVAs. These were the only options for which any advisers gave a full explanation, however the incidence was low (DMPs: two per cent and, IVAs two per cent) Shoppers were less likely to receive any explanation or more than a slight explanation in respect of bankruptcy, PTDs and debt consolidation loans. It may be that slight explanations were given as these options were not considered to be serious contenders by the advisers. 12 See annex A for details OFT

33 Chart 9: Q3: Were each of the debt repayment options fully explained? Numbers in brackets show the number of incidences per cent Debt management plan (200) 5 (3) Not explained at all Partially explained 41 (81) Slight explanation Explained fully 52 (104) 2 (5) IVAs (169) 8 (14) 40 (68) 49 (83) 2 (4) Bankruptcy (57) 26 (15) 39 (22) 35 (20) PTDs (14*) 7 (1) 57 (8) 36 (5) Debt consolidation loan (11*) 9 64 (7) 27 (3) Base: All who discussed individual debt repayment options *Caution small base Please note: Numbers do not always sum to 100 per cent due to rounding 3.25 Shoppers also rated the clarity of the explanations given to them for each debt repayment option mentioned. A clear explanation was defined as: not rushed not filled with jargon not made up of acronyms easy to understand not ambiguous Usually explanations were rated as clear; however, they were generally considered fairly clear rather than very clear (DMPs: 70 per cent clear, IVAs: 66 per cent, bankruptcy 49 per cent). A significant proportion of. OFT

34 explanations were not considered to be clear (DMPs: 31 per cent, IVAs: 34 per cent, and bankruptcy 51 per cent) The base sizes for other options (DAS, PTDs, sequestration, debt consolidation loan) were very small but results indicated a similar trend. Chart 10: Q2: Were each of the debt repayment options explained clearly? Numbers in brackets show the number of incidences Not at all clearly per Fairly clearly cent Debt management plan (200) 5 (10) 26 (51) Not very clearly Very clearly 63 (126) 6 (13) IVAs (169) 6 (10) 28 (48) 60 (102) 5 (9) Bankruptcy (57) 21 (12) 30 (17) 44 (25) 5 (3) PTDs (14*) 50 (7) 50 (7) Debt consolidation loan (11*) 18 (2) 36 (4) 36 (4) 9 (1) Base: All who discussed individual debt repayment options *Caution small base Please note: Numbers do not always sum to 100 per cent due to rounding ii) Income and expenditure 3.28 The level of information sought from the shopper by the debt management provider about their income and expenditure levels prior to offering advice varied. It needs to be noted that shoppers were instructed to withhold certain details such as a full postcode or address, and to push the advisers to help them gather advice on the understanding that a further call would take place. However, almost two-thirds of advisers (64 per cent) were willing to give advice without being aware of the debtor's disposable OFT

35 income (which was available). Three (six per cent) were unwilling to give detailed advice without more detailed information about the debtor's circumstances The most common type of information requested by the largest proportion of advisers was the level of debt (89 per cent). Seven in 10 advisers asked for information about the types of debts (69 per cent). Slightly fewer asked whether the debtor owned their own home (65 per cent) The proportion of advisers asking for other information dropped to around a third. In 36 per cent of shops, advisers asked shoppers about the level of disposable income available; in 35 per cent they asked for the debtor's employment status and in 32 per cent the value of debtor's property. Chart 11: Q28: What information and/or financial details did the debt management company require before it would provide any advice? Multiple responses possible so will total to more than 100 per cent, numbers in brackets show number of incidences Base: All: 216. OFT

36 Transparency of fees and services i) Fees 3.31 Few advisers provided the costs of any of the debt repayment options voluntarily, and where information was provided it was variable. The majority (91 per cent) of the 202 advisers who discussed at least one option gave some information about fees and/or services for at least one option discussed (including that fees would be provided at a later date or that information could not be given as the adviser did not have enough information about the debt). This left almost one in 10 (nine per cent) who did not offer any information about fees and services of the options they referenced The majority (74 per cent voluntary and asked for) of advisers providing information about DMPs did provide fees and costs once mystery shoppers requested them. Lower proportions of advisers provided this information in relation to other repayment options; IVAs (35 per cent), PTDs (29 per cent), bankruptcy (38 per cent), debt consolidation loans (nine per cent) Some advisers were unable to give information about their fees because they had insufficient information about the debt. In a significant proportion of calls, mystery shoppers were unable to elicit any information about fees, particularly in relation to bankruptcy (45 per cent), PTDs (36 per cent) and IVAs (31 per cent) There were some incidences when advisers implied the service provided by their company was free, notably among advisers who discussed IVAs (11 per cent). However, it is worth noting that four mystery shops were carried out with free-to-client organisations. OFT

37 Table 12: Q15: How much will the service cost? Numbers in brackets show the number of incidences DMP IVAs Bankruptcy PTDs Debt consolidation Fees and costs provided unprompted 4% (9) 1% (2) 9% (5) None None Fees and costs provided prompted 70% (140) 34% (57) 29% (16) 29% (4) 9% (1) No information about fees 15% (29) 31% (53) 45% (25) 36% (5) 73% (8) No information about fees as lack of information about debt 9% (17) 20% (33) 9% (5) 14% (2) None Implied service is free 1% (2) 11% (18) 2% (1) 7% (1) None Fees would be provided at a later date 2% (3) 4% (6) 9% (5) 14% (2) 18% (2) Base * 11* Base: All discussing debt option *Caution very low base Please note: Numbers do not always sum to 100 per cent due to rounding. OFT

38 3.35 Again, very few advisers volunteered detailed breakdowns of how fees are calculated. When asked, more than half of advisers (55 per cent) provided information as to how the debt management company calculates the fee in respect of DMPs. Fewer than one in five did so in respect of IVAs (18 per cent) and/or bankruptcy (16 per cent). Table 13: Q16. How are fees calculated? Numbers in brackets show the number of incidences DMP IVAs Bankruptcy PTDs Debt consolidation loan Provided a detailed breakdown of how the fees are calculated unprompted (for example, an upfront fee 7% (13) 2% (4) 4% (2) None None payable and percentage deducted each month) Provided a detailed breakdown of how the fees are calculated after being prompted (for example, an upfront fee 55% (110) 18% (31) 16% (9) 21% (3) 9% (1) payable and percentage deducted each month) Failed to give a detailed breakdown of how the fees are calculated 39% (77) 79% (134) 81% (46) 79% (11) 91% (10) Base * 11* Base: All discussing option *Caution very low base Please note: Numbers do not always sum to 100 per cent due to rounding OFT

39 3.36 Fee charging debt management providers charge for their service either by charging an upfront/nominee fee, an administrative/supervisory fee or a combination of the two. In respect of DMPs the largest proportion of providers said they charged through administrative/supervisory fees (43 per cent). Almost three in 10 said they charged through a combination of upfront/nominee and administrative/supervisory fees. A tiny percentage said they only charged through upfront/nominee fees (one per cent). Almost three in 10 (29 per cent) would not say In respect of IVAs, the majority of debt management companies (64 per cent) did not clarify how the company charged for its service. Around three in 10 (29 per cent) charged for IVAs by applying administrative/supervisory fees. A few (three per cent) charged an upfront/nominee fee or a combination of upfront/nominee and administrative/supervisory fees Eight in 10 (81 per cent) debt management companies did not say how they charged for their service in relation to bankruptcy. A little over one in 10 (14 per cent) charged an upfront/nominee fee for this service. Table 14: Q18: What does the debt management company charge for its service? Numbers in brackets show the number of incidences DMP IVAs Bankruptcy PTDs Debt consolidation loan Upfront/nominee only 1% (3) Administrative/ supervisory only Both upfront/nominee and administrative/ supervisory 43% (86) 27% (54) Would not say 29% (57) 3% (5) 29% (49) 4% (6) 64% (109) 14% (8) 7% (1) None 5% 29% 9% (3) (4) (1) None None None 81% (46) 64% (9) 91% (10) Base * 11* Base: All discussing option *Caution very low base Please note: Numbers do not always sum to 100 per cent due to rounding. OFT