Need for statutory regulation of debt management sector

The debt management sector should be regulated as a matter of urgency to protect vulnerable consumers suffering at the hands of unscrupulous providers, according to the Institute of Money Advisers, AdviceUK and Payplan – a leading provider of free Debt Management Plans (DMP). The call comes on the day the Office of Fair Trading (OFT) publishes a major new report uncovering widespread evidence of bad practice by fee-charging debt management companies.

Regulation of Debt Management

The OFT’s Debt Management Guidance Compliance Review, which assessed a large number of firms in the debt management market, identified a litany of malpractice. It said that 129 firms were non-compliant with Debt Management Guidance, with which operators must abide as a condition of licence. Other key areas of non-compliance included:

  • excessive fees being charged by companies for their services with consumers often handing over the equivalent of multiple monthly payments to set up DMPs, leaving consumers even more over-indebted if arrangements fail as a result of not keeping up payments;
  • misleading advertising on websites – in particular, a lack of transparency around fees charged and debt management services misrepresented as free – the most significant area of non-compliance, and;
  • front line advisers lacking competence and providing consumers with inadequate information and poor advice.

The debt management sector:

A debt management plan is a structured arrangement between a person in debt and their creditors. The consumer makes a monthly payment to their DMP provider, which is then distributed to the person’s creditors by the debt management company on a pro-rata basis. Owing to the absence of effective regulation, however, it is easy for unscrupulous operators to offer debt management plans to consumers – and despite the existence of free alternatives such as those offered by Payplan, many people are unaware of their existence. Fee-charging DMP providers levy up-front and monthly fees on the consumer, unlike free plans which charge a much smaller fee to creditors – costing the consumer nothing.

The cost of the fee-charging sector to consumers:

The OFT cites research showing that consumers are forecast to be hit with a bill of over £250 million in 2010 from fee-charging DMP providers, despite the existence of free alternatives. It is also estimated that by the end of 2010 as many as 562,000 fee-charging plans will be in operation in the UK.

Next steps for the Government:

The Government is currently formulating its response to a consultation led by the Ministry of Justice on the regulation of the debt management sector. The consultation was launched last year in light of the concerns of the previous administration about the operation of the sector.

John Fairhurst, Managing Director – Payplan, a free to consumer DMP provider, that is calling for Government action to safeguard consumers said:

“The OFT’s report represents yet another indictment of the way that many fee-charging companies operating in the debt management sector behave towards their own customers and the degree to which poor practice has now become endemic amongst such firms. The need for statutory regulation is now urgent and unavoidable.”

“The review conducted by the OFT into compliance by debt advisers and debt management companies’ websites provides further proof, if any were needed, that self-regulation of this sector has palpably failed. Something has gone seriously wrong when some companies are encouraging consumers to pay fees on their credit cards, leading to even greater indebtedness on their part. It is only through the introduction of statutory regulation that we can be sure that vulnerable consumers will be adequately protected from the worst excesses visited on them by some of these fee-charging debt management companies.”

John Fairhurst, Managing Director – Payplan

“AdviceUK welcomes the commitment by the OFT to strengthening its Guidance as a result of this review and is not surprised by it giving consideration to conducting a full market study in due course. However, with the equivalent of around 15,000 new plans being taken out every month in 2010, too many vulnerable consumers will be exposed to misleading information and inadequate advice in the meantime. The only way to protect all those individuals that come to AdviceUK for help is action in the here and now – and that can only be delivered by Government.”

Steve Johnson, Chief Executive – AdviceUK

“The conclusion drawn by the OFT that poor practice is endemic amongst fee-charging providers comes as little surprise, with activities like flipping consumers between different repayment options and then charging them multiple fees for doing so apparently commonplace. The sector has completely failed to grasp the many opportunities that have come its way to prove it can act responsibly – it should not be provided with any more: the time for Government intervention has now arrived.”
Steve Meakin, Chair – Institute of Money Advisers

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