How to deal with debt Debt management companies: why to avoid them
Commercial debt management companies (DMCs) have a bad reputation. And rightly so in many cases. Here are 10 good reasons why you should avoid paying for debt advice from one of these firms.
1. Poor advice
When the OFT carried out an investigation into the debt-management market in 2010, it found that of 148 visits to debt management firms, just 12 complied with OFT guidance and the Consumer Credit Act, with frontline advisers ‘providing consumers with poor advice based on inadequate information’.
The OFT concluded that DMCs ‘are not offering the solution that is in the best interests of the consumer, but instead that which is most profitable to them’.
2. High fees and charges
Consumers’ fees for commercial debt management services exceed £250m a year. Monthly debt management plan (DMP) fees are typically about 17% of the repayment, though many DMCs impose a minimum monthly fee of about £30, so the percentage paid by those making small repayments is even higher.
About three quarters of DMCs front-load their fees. This means the company recoups most or all of its fees in the first months of the plan, with some imposing a minimum upfront fee of several hundreds of pounds. In most cases, creditors receive nothing for at least the first two months, pushing the debtor further into arrears.
Around eight in 10 people entering into an IVA have already been through at least one other debt solution. Having already received front-loaded fees for a debt-management plan, flipping a customer into an IVA could help a debt company maximise its profits.
5. Poor advice from banks
The Financial Ombudsman Service (FOS) has received complaints from consumers struggling with debt whose bank has suggested they call a commercial DMC. Which? thinks this practice is unethical and that banks should only be pointing customers towards free alternatives, such as the debt charity StepChange.
6. Unregulated service
Debt management companies must hold a consumer credit license, issued by the Office of Fair Trading (OFT). However, the debt-management market is currently unregulated.
7. Price comparison sites
Some price comparison websites, including Moneysupermarket.com, highlight commercial ‘partner’ DMCs rather than free alternatives. Which? believes debt solutions are an inappropriate product to feature on a price comparison site.
8. Commission-led sales
Many DMCs pay financial advisers hundreds of pounds for leads. The OFT also received anecdotal evidence of inappropriate incentivisation of DMC staff. If staff are rewarded for the number of consumers they sign up to a particular debt solution, the risk of mis-selling is significant.
Some DMCs are part of a group that offers other services, such as loans, PPI and bank charge mis-selling claims and utility-cost reduction. Details of unsuccessful applicants for a loan, for example, may be passed to the debt management arm, while DMP customers are cross-sold other services, such as a current account with a monthly fee. There is no need to take out these accounts – most major banks offer a free basic bank account with no credit facility.
10. Risk to your repayments
Many DMCs have gone bust in recent years. In its 2010 review, the OFT found evidence that some DMCs were either failing to pass on payments to creditors within five working days or not keeping customers’ money in a separate client account. The collapse of the DMC could lead to the consumer’s money being lost.