'Exploitative' debt firms face wrath of watchdog

The consumer watchdog is shutting down 35 debt management companies after an investigation found they were exploiting vulnerable debtors and using misleading advertising.

Another 15 debt management companies (DMCs), which help people tackle their debts in exchange for a fee, could lose their licence as the Office of Fair Trading (OFT) continues to investigate the sector.

The action comes after a probe launched by the OFT late last year found that many firms are focused more on boosting their profits than helping debtors. Many were guilty of misleading advertising that wrongly implied their services were free.

The OFT said some companies failed to make it clear to consumers that the money they paid would first be taken to cover the DMC's charges before being used to pay off the underlying debt. A number of firms have even used misleading brand names to create a perception of being a charity or a government agency.

Incompetent advisers and poor complaints handling were among the other issues raised by the OFT, which said it was reviewing evidence supplied by another 79 firms in the sector.

Ray Watson, director of consumer credit at the OFT, said: "We are determined to improve standards in this sector, as the failings identified by our review are unacceptable. Companies providing debt management services should be in no doubt that we will act against bad practice and ensure consumers are protected."

Almost 350 complaints have been made to the Financial Ombudsman Service about debt management companies since last April, a 25 per cent increase from the same period in the previous financial year. Six in 10 complaints about the companies are upheld in favour of the consumer.

John Hall, Scottish council member for insolvency trade body R3, said: "The OFT has rightly acted against debt management firms which are offering misleading and poor quality advice to debtors. Individuals should be able to take a decision about which solution is best for them based on impartial and full advice; and in an environment that allows them to weigh up the full range of options before making a decision."

Paying for debt advice should rarely be necessary, given the free services provided by groups including Citizens Advice and the Consumer Credit Counselling Service (CCCS).

Delroy Corinaldi at the CCCS said: "Not only does it not make sense for someone already struggling financially to have to pay for debt advice when they can receive it free from a debt charity, but the advice and service that charities such as CCCS, Citizens Advice and National Debtline give to those struggling with debt problems is expert, independent and always in the interest of the consumer."