Debt managers face OFT clampdown

ALMOST 130 debt management firms have been warned by the Office of Fair Trading (OFT) that they face losing their consumer credit licences unless they act immediately to comply with its Debt Management Guidance.

The OFT said many firms offering debt management advice used misleading advertising; their advisers often lacked competence and gave poor advice; and there was poor awareness of rules on resolving complaints.

One of the biggest complaints was that many individuals who contacted debt management companies were not made aware, until some time into their discussions, that it was not a free service and that they would be charged a fairly substantial fee.

The advertising for many of these firms promises to reduce or remove all debts an individual has, but fails to point out there will be a fee involved. The advertising is also inaccurate - many firms advertise in Scotland that someone can take out an Individual Voluntary Arrangement (IVA) when, in fact, these only exists in England and Wales. The comparable system in Scotland is a Protected Trust Deed (PTD).

Claims that all debts can be written off are almost always false.

The problem is that people resorting to debt management companies are often desperate and cling to any hope of escape from their debt. This is natural, but such vulnerability makes them prey to unscrupulous firms who earn large fees for poor advice or limited service.

Indeed many people using debt management companies found that their problems actually got worse rather than better and they had paid for a service which left them more indebted.

Those in debt need appropriate advice for their individual circumstances and so should initially approach the mainstream advisers such as Citizens Advice Scotland or Money Advice Scotland who can, at least, point them in the right direction to gain appropriate information.

Too many debt management companies are simply selling the products they gain the greatest commission from. They are not providing appropriate advice which best helps an individual but are selling something which best helps themselves.

The OFT's report is a welcome move to improve the advice given to the growing numbers of people who find themselves in severe financial difficulties and to help them resolve their individual situation.

The vital thing to understand is that it's not debt advice that is bad - but that there is so much bad debt advice about.

l Bryan Jackson is a corporate recovery partner with accountants and business advisers PKF.