Debt management businesses Standard Note: SN/HA/6275 Last updated: 27 March 2012 Author: Lorraine Conway Section Home Affairs Section People who are in severe financial difficulties may seek advice from a debt management business. Some are aggrieved to discover that the advice they have been given has been inappropriate, given their particular circumstances, and they have unexpectedly incurred fees that they cannot afford to pay. The current legal position is that traders who wish to operate in the debt management sector must hold an appropriate consumer credit licence. The Consumer Credit Act 1974 places a duty on the Office of Fair Trading (OFT) to ensure that consumer credit licences are only given to and retained by those who are fit to hold them. On 22 March 2012, the OFT published revised guidance on the standards it expects from businesses offering debt management advice or credit repair services to consumers. The guidance builds on enforcement action taken by the OFT following a compliance review of the sector in 2010, which identified widespread concerns, in particular, problems with advertising and marketing practices and the quality of advice given. The purpose of this note is to provide an overview of the background too, and the main features of, the revised OFT guidance. Contents 1 Introduction 2 2 The current legal position 2 3 OFT review of the sector 2010 4 4 New guidance on standards 5 This information is provided to Members of Parliament in support of their parliamentary duties and is not intended to address the specific circumstances of any particular individual. It should not be relied upon as being up to date; the law or policies may have changed since it was last updated; and it should not be relied upon as legal or professional advice or as a substitute for it. A suitably qualified professional should be consulted if specific advice or information is required. This information is provided subject to our general terms and conditions which are available online or may be provided on request in hard copy. Authors are available to discuss the content of this briefing with Members and their staff, but not with the general public.
1 Introduction Consumers in serious financial difficulty often seek immediate debt advice in desperation. Some of these consumers will be particularly vulnerable. Debt advice (offering practical solutions) is available free of charge from a number of government and charitable organisations, such as Citizens Advice. In the UK, there is also a large and growing market for debt management services. For 2010, the OFT has estimated the total cost to consumers in fees paid for debt management services to be in the region of 250 million. 1 The OFT has acknowledged that the private commercial sector has the potential to play an important role in helping consumers deal with complex and stressful debt problems. 2 However, the OFT is also aware of the potential risk to vulnerable consumers: [...] the potential for large amounts of profit to be generated by the commercial sector creates a risk of abuse. The choices that consumers make to tackle their debt problems can have serious consequences both in terms of immediate financial cost, and long-term knock-on consequences on availability and cost of future credit. Furthermore, when problems do arise, for example where consumers are mis-sold an IVA (Individual Voluntary Arrangement) or a debt management plan, there can be a significant long term financial and stressful impact which is difficult to resolve. 3 The OFT has reiterated on a number of occasions that regardless of what type of advisor a consumer turns to, it is important that they receive the advice and solution most suitable to their particular circumstances. 4 2 The current legal position The Consumer Credit Act 1974 (the CCA 1974) established a licensing system to protect the interests of consumers. The Act requires businesses that offer goods or services on credit or lend money or are involved in activities relating to credit or hire to be licensed by the OFT. Traders who operate in the debt management sector must also hold a consumer credit licence. The OFT has a duty under Section 1 of the CCA 1974 to monitor the activities being carried on by licensees, to ensure that consumer credit licences are only given to and retained by those who are fit to hold them. In assessing the fitness of applicants and licensees to hold a licence, the OFT is required to take into account the following: the competence of the trader to carry out a particular activity any offences committed, in particular any offence involving fraud or dishonesty or violence failure to comply with relevant consumer credit legislation within the UK and European Economic Area (EEA) state discrimination undertaken within their business, or business practices appearing to the OFT to be deceitful or oppressive or otherwise unfair or improper (whether unlawful or not) In cases of dissatisfaction with a licensee's activities the OFT has a range of enforcement options available to it. Specifically, action could take the form of: 1 2 3 4 2
a notice that the OFT is minded to refuse or revoke the credit licence of those concerned, the imposition of requirements on licensees to secure compliance, or a financial penalty for breach of such a requirement or a warning letter It should be noted that when imposing requirements, the OFT will either issue a notice to the trader setting out the requirements which it is minded to impose and the reasons for the proposed requirements, and inviting representations to an independent OFT adjudicator, or may bypass this procedure if the trader itself proposes requirements which are acceptable to the OFT. It follows from this that all traders who provide debt management services are required under the Act to hold a consumer credit licence covering debt counselling, debt adjusting and credit repair as appropriate. The OFT does not directly regulate individual debt management plans, only the businesses who provide them. All licence-holders are required to observe the OFT's Debt Management Guidance which sets out the minimum standards expected. The OFT takes the view that a failure to adhere to the standards in the guidance could be considered to be engaging in business practices which are unfair or improper (whether lawful or not) under section 25(2A)(e) of the CCA 1974 and can be considered as evidence leading to formal OFT action. The OFT has described the approach it takes in monitoring the behaviour of debt management business as follows: We employ a risk-based approach to monitoring businesses' behaviour, such that those carrying on high risk licensable activities are placed under greater levels of scrutiny than those considered low risk. Debt management is prioritised as a high-risk activity by the OFT because of the risk of real, significant and long-term harm to vulnerable consumers when poor advice is given and inappropriate solutions are adopted. New powers came into force in April 2008 enabling the OFT to take a proactive and intrusive regulatory approach, and this has allowed us to undertake a programme of enforcement action to tackle the worst abuses identified in the sector. This action took place against a background of rising complaints and a rapid growth in new entrants into the fee charging debt management sector, operating mainly from internet-based websites. We have already taken licensing enforcement action and shut down websites, addressing issues such as companies masquerading as charities, systemic coldcalling, and the mis-selling of IVAs. In total, between April 2008 and June 2010, the OFT undertook 37 formal actions to accept undertakings, impose requirements or refuse or revoke licences held or applied for. We have also worked alongside local authority Trading Standards Services (LATSS) to take injunctive action under the Consumer Protection from Unfair Trading Regulations 2008 to tackle debt sale scams. 5 In addition to powers under the CCA 1974, it should be noted that the OFT also has enforcement powers under other consumer protection legislation including the Enterprise Act 2002 and the Consumer Protection from Unfair Trading Regulations 2008 which it may use against licensees (including debt management businesses) where appropriate. 5 3
3 OFT review of the sector 2010 OFT Debt Management Guidance, which sets out the standards for this industry, was first published in 2001 and was subsequently updated in 2008. The OFT decided to conduct a compliance review of the sector in 2010. This review identified widespread concerns, including problems with advertising and marketing practices and the quality of advice given. The OFT identified three areas in which there were particularly significant problems within the industry. These were: 1. Transparency the review found a significant lack of transparency for consumers seeking debt advice and debt solutions: Websites often do not make clear the commercial nature of the businesses and the fees they charge, making it difficult for consumers to distinguish between fee charging debt management businesses and charitable or free-to-client advice providers. In the worst cases there are firms using misleading or look-alike trading names explicitly purporting to be charitable or government organisations. [...] Where information about fees and charges or the commercial nature of the business is provided this is generally found to be accorded a much lower prominence than statements such as 'free advice'. 6 2. Fairness the review found significant and widespread examples of unfair and improper business practices: 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. In most cases, initial advice to pursue a particular solution was provided without a full and proper assessment of the consumer's individual financial circumstances. In general the quality of the information and initial advice provided to consumers is often very poor, raising concerns about the competence and training of frontline staff. 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. The practice of front loading fees for setting up debt remedy solutions is widespread amongst the fee-charging sector (nearly 75 per cent of businesses inspected operate this model for debt management plans). This practice involves a debt management company recouping all or most of its costs using the initial consumer payments, thereby minimising its own risks whilst not immediately dealing fully with the consumer difficulties. 1. Redress the OFT found that none of the websites assessed had upfront information about the Financial Ombudsman Service's role in handling complaints and requiring redress. Following the compliance review, the OFT issued 129 warnings to debt management businesses who they believed were in breach of acceptable standards. Since then, 87 6 4
businesses have existed the market, either voluntarily or as a result of enforcement action, and a further 67 warning letters have been issued by the OFT. 4 New guidance on standards On 22 March 2012, the OFT published revised guidance on the standards it expects from all businesses offering debt management advice or credit repair services to consumers. 7 The Debt management (and credit repair services) guidance expands on previous versions, providing examples of unfair or improper practices which, if engaged in, could render a business unfit to hold a consumer credit licence and operate in the market. Examples of unfair practices include: Sending consumers unsolicited marketing text messages, email or voicemails. Providing inappropriate financial incentives to staff giving debt advice, which may encourage them to promote unsuitable debt management products for personal gain. Making false or misleading claims regarding the status of the business, for example operating websites which look like the website of a debt advice charity or a government body. Businesses are also expected to refer consumers to not-for-profit advice organisations for further help, in certain circumstances, and to have effective measures in place to identify and deal with particularly vulnerable clients, such as those with mental capacity issues. According to the OFT, an overall theme of the guidance is for businesses to be transparent so that consumers have all the information necessary to make informed decisions about the most appropriate debt solutions for them given their financial circumstances. 8 7 8 Debt management (and credit repair services) guidance, Office of Fair Trading, OFT366rev, March 2012, http://www.oft.gov.uk/shared_oft/business_leaflets/credit_licences/oft366rev.pdf 5