The Office of Fair Trading (OFT) today announced a series of measures in response to the super-complaint submitted by Citizens Advice at the beginning of March, relating to the marketing and charging practices operated by businesses offering credit brokerage and debt services.
The OFT has announced it will be publishing two new pieces of guidance on the standards it expects of credit brokers, and on debt management. The new credit brokerage guidance, published today for consultation, sets out:
- that consumers may have a right to a refund of the upfront fee, under general contract law, where no introduction to a lender is made, and
- that the OFT expects brokers, six months after introducing a consumer to a lender, to advise any consumer who has not entered into a relevant agreement of their statutory right to a refund of the upfront fee.
The OFT also intends to publish revised debt management guidance later in June 2011, designed to tackle a range of bad practices it has identified.The OFT will also ask the Government to consider whether new legislation is needed to address problems in the sub-prime unsecured credit brokerage market, including a possible ban on upfront fees.
Which? wants a complete ban on cold calling by debt firms and credit brokers and a requirement to make customers aware of free alternatives at the first contact stage. Which? executive director, Richard Lloyd says:
‘Debt management firms and credit brokers know that the people most likely to respond to cold calling are often the most desperate and vulnerable. This is why it should be banned.
‘When firms first speak to prospective customers they should be required to tell them about the free alternatives, such as the Consumer Credit Counselling Service and National Debtline, so they can make an informed choice.’
The announcement comes in response to a super-complaint by Citizens Advice which asked the OFT to look at two business practices:
- Firms cold-calling consumers by telephone and text to promote consumer credit products and ancillary services, including debt management;
- Firms taking upfront fees for credit services, often by persuading consumers to give them their banking details, sometimes taking unauthorised deductions.
Citizens Advice says 840 million cold calls were made by debt management firms in 2009, while loan fee scams affect at least 110,000 people a year and cost the UK public £190 million annually.They also warned that these numbers are likely to rise further, with recent estimates putting up to six million households either in arrears with bills or credit commitments.
The OFT’s reaction to the super-complaint comes hot on the heels of its warning to 129 firms in September last year following a compliance review, which resulted in 35 debt management firms surrendering their licenses this January.
What’s the problem with credit brokers and debt management companies?
According to a report published to coincide with the super-complaint by Citizens Advice, tens of thousands of people are being tricked out of large sums of money by rogue loan finder and debt management firms, which are taking advantage of the difficult economic climate.
Firms are phoning or texting consumers out of the blue offering to help them find a loan. People are then charged a hefty fee for a loan that often fails to materialise, and cannot get their money back. In many cases, they are persuaded to part with bank account details only to find money is withdrawn from their account without their consent.
To make matters worse, individuals’ details are often then passed on to other companies who bombard them with more texts and cold calls offering loans, debt management or claims management services. Citizens Advice evidence suggests that cold calling targets people unable to get mainstream credit because of a poor credit history, low income or current financial difficulties.
Which? borrowing and debt advice
If you’re struggling with debt, read the Which? How to deal with debt guide, which includes 10 reasons you should never use a commercial debt management company.
Which? members can also ring the Which? Money Helpline with any finance-related queries. Find the phone number in your latest magazine.
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