Customers short-changed by fee-charging debt-management industry
Press release issued: 29 July 2009
Companies that charge individuals fees to manage their debt have grown more than threefold in the last 10 years, according to an independent review of the fee-charging debt-management industry conducted by Sharon Collard of the University's Personal Finance Research Centre on behalf of the Money Advice Trust.
Companies that charge individuals fees to manage their debt have grown more than threefold in the last 10 years; customers and creditors have mixed experiences of the sector; and the Office of Fair Trading (OFT) should require these companies to be more open about the fact that they charge for all services beyond initial contact. These are the three main conclusions of an independent review of the fee-charging debt-management industry published this week by the Money Advice Trust (MAT).
The other key findings of the report, carried out by Sharon Collard from the University’s Personal Finance Research Centre, are that:
- The number of fee-charging companies has risen from fewer than 40 in 1999 to more than 150 in 2009
- Between 300,000 and 375,000 people are on a commercially provided debt-management plan (DMP) – between two and three times as many as those with free-to-client providers such as the Consumer Credit Counselling Service (CCCS) or Payplan
- Companies that charge fees claim that DMPs are projected to run for 60-120 months on average; in reality, the duration is 36 months or under.
Examples of poor practice highlighted by the report include customers not being informed about fee charges and alternative free services early enough, leading some to believe they were in a worse financial position than before. Creditors expressed concern about being paid late (or not at all) by the fee-charging company, the high levels of fees and charges, and the considerable variation in the standard of financial statements received.
The report recommends that the OFT’s debt-management guidance should require fee-charging companies to be explicit about the charges for their services, and that the MAT should extend its promotion of the Common Financial Statement further into the commercial debt-management sector to improve the quality of financial statements supplied by the sector.
It also recommends that trade bodies representing the fee-charging sector should move towards greater convergence of individual quality frameworks; that creditors and the government should ensure customers are made aware of free debt-management services; and that debt-management initiatives should be designed and maintained with the needs of the consumer as a central focus.
Speaking about the findings, Sharon Collard’s the report’s author said:
‘While some of the customers we interviewed had been able to successfully clear their consumer debts by means of a commercially provided DMP, others were in a worse financial position as a result of their contact with a fee-charging debt-management company. It was notable that most of the people in a worse position had used a company that was not affiliated to any of the industry codes of practice.’
Joanna Elson, chief executive of the Money Advice Trust added:
‘Free, independent, debt advice offers a holistic service to those in debt, seeking to ensure clients receive the best advice for their situation. Fee-charging debt-management companies may also aspire to give best advice, but their motivation and business model – in aiming to sell products – are different.
'Consumers can of course choose to pay for debt advice – and this research shows that between two and three times as many are on fee-charging debt-management plans as those from the free sector – but this should be an informed decision. That’s why we recommend that the OFT ensures that customers are clear about fee levels and cost structures – including upfront fees – before they enter into an agreement with a fee-charger.’