Mismanaged debt firms cost consumers £1,000s

19 October 2011, 15:43   By Julia Kukiewicz

THE Office of Fair Trading (OFT) issued its strongest warning yet against mismanaged debt collection firms today.

credit card bills
Credit: shisu_ka/Shutterstock.com

Third parties engaged to recover debts were warned that there are now specific rules in the OFT's Debt Collection Guidance which prohibit the use of aggressive and inappropriate methods of debt collection.

The fact that the OFT had to release such specific guidance is itself a cause for concern, however. Especially as mismanaged debt management firms continue to threaten the most vulnerable consumers.

Such firms are meant to relieve the pressure of creditors pursuing an individual or household for cash.

Once registered, financial advisers can negotiate a fixed repayment plan with lenders on the debtor's behalf, often using a fixed system such as an Individual Voluntary Arrangement (IVA) or consolidation loans.

But a BBC report in May this year uncovered a number of debt management companies cheating their indebted clients out of thousands of pounds by failing to pass on money paid into debt repayment plans to lenders.

That left the debts unpaid and consumers in increasingly dire circumstances. Some said they feared losing their homes.

In September, Citizen's Advice said that it was also extremely concerned about the management sector. The charity said that it had dealt with 3,000 cases in which debt management firms had harmed vulnerable customers last year.

All in all, it's clear that Britons with unmanageable debts are currently walking a tightrope: on the one side, their lenders and the third parties they employ to recover debts; on the other, the debt management firms which promise to offer relief from those lenders and third parties.

On recent evidence, it's hard to say which one is more frightening.

Aggressive practices

"In the present economic climate, with many people, including those who may be particularly vulnerable, in financial difficulties, it is crucial they are treated fairly by companies recovering their debts," said David Fisher, the OFT's Director of Consumer Credit of today's new guidelines.

Unfair treatment seems a hallmark of many debt collection agencies, judging by the OFT's own research.

The regulator said it had uncovered cases in which debt collectors had used social networking sites such as Facebook and Twitter and left messages about unpaid debts with family members and neighbours in order to expose debts to public scrutiny in hopes of shaming those in serious debt into paying.

Attempts to collect debts were often made in inappropriate circumstances, the OFT said. Debt collection agents have even tried to collect debts while debtors were interred in hospital.

In addition, the OFT noted that debt collectors were still imitating or saying that they're connected to a Government or council agency, using misleadingly legal language including Latin phrases and threatening to repossess assets which, in truth, they have no right to repossess.

Among credit card providers, American Express and MBNA have both come under fire for failing customers who have fallen into unmanageable debt.

In November 2010, American Express was found and warned by the OFT for using the controversial 'charging orders' that put the homes of those with credit card debts at risk.

MBNA was recently criticised in a court case which wrote off over £20,000 of card debt.

Summing up, the judge said that MBNA's debt collection tactics amounted to torture.

"Debtors should not be subjected to aggressive practices, inappropriate coercion or conduct which is deceitful, oppressive, unfair or improper," the OFT guidelines state.

However, it may be some time before enforcement makes that rule a reality.

In the mean time, consumers fleeing aggressive debt collectors are often running straight into the arms of debt management firms which don't even seem able to manage themselves.

Mismanaged debt firms

In October last year, the OFT warned 129 debt firms that they'd be shut down unless they made serious improvements.

The body said that after compliance visits to companies by Trading Standards Officers, a website sweep and a mystery shopping exercise many firms were found to be offering misleading advertising and advice.

Many companies failed to make clear that they charged a fee for their service or falsely advertised the service as wholly free.

Advisers for some companies were also found to be incompetent and, in particular, awareness of the Financial Ombudsman Service (FOS) was found to be low.

Just 38% of debt management firms said they had referred a consumer's complaint on to the FOS.

Ray Watson, Director of the OFT's Consumer Credit Group, said at the time that, "people who are heavily indebted, desperate and vulnerable need advice which makes their problem better not worse and should not be exploited. Debt management firms must be clear."

The FOS itself has previously raised concerns about debt management and claims management firms.

Two thirds of the PPI cases that were bought to the FOS's attention in the year up to May 2010 were from claims management firms but all the cases classed as "frivolous and vexatious" came to the body this way (more on this issue here).

In addition, as we noted above, a recent BBC report found that some debt management firms were simply failing to pass on the money which was supposed to be going to lenders.

In one case uncovered by the BBC, a couple had been forced to go to court: first for the unpaid debt which resulted in a County Court Judgement and then for their mortgage which could result in them losing their home.

As of this month, 61 debt management businesses have had their licence revoked or have surrendered their licence as a result of poor practice.

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