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Debt Management Plans – an unregulated minefield

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Personal debt is a major issue of the modern age. Bankruptcy law comes from a different era. Legislation has struggled to translate into solutions that are both fair to creditors and allow some relief for overburdened individuals.

The informal route for an individual is to offer his creditors staged payments often over years. A whole industry has sprung up to cater for this and most of us are bombarded with the associated marketing tools for example automatic calls offering promises of sorting out our financial worries.

The Office of Fair Trading (OFT) recently published the findings of its review of the debt management industry and their plans to address the concerns that were raised. Whilst the OFT has previously published debt management guidance, the industry is largely unregulated and the OFT review has come after concerns of individuals in debt being exploited.

The OFT has indicated that 129 debt management firms, more than half in existence in the country, have failed to adhere to the guidance and the OFT has threatened to withdraw their consumer credit licences unless immediate action is taken to meet current standards.

Complaints of current practice by Debt Management firms

One of the most common complaints is related to misleading advertising, with numerous firms failing to disclose the fee and many being wrongly described as free. The OFT found that many companies make it impossible to discover their fee and, in some cases, companies use misleading or look-a-like names to give the impression they are government or charitable organisations.

According to the OFT, debt management fees are expected to reach a total of £250 million by the end of the year. One major Debt Management Firm, for example, was quoted as charging a set-up fee of two monthly payments, an administration fee of £70.00, and a monthly management fee equivalent to 17.6 per cent of each payment made to them, up to a maximum of £100.00.

However, the problems with regards to fees have been but one issue and there have been widespread complaints of front-line advisers giving poor advice based on inadequate information. For example, during the course of the OFT’s “mystery shopper” exercise it was found that 64 per cent of advisers gave advice without asking about the debtor’s disposable income.

One such example of poor advice involved a debtor who went to a debt management company for advice and agreed to enter an Individual Voluntary Arrangements (IVA). After reviewing the personal budget the company had set for him, it had taken no account of supporting his children and he could not afford to live off what they had said. On top of this, the company’s fee equated to the first six months of his repayments.

The OFT’s review has also found that there has been widespread non-compliance with the Financial Ombudsman Service (FOS) rules for dealing with complaints. Just 38% of firms said they had referred a customer’s complaint to the FOS.

The OFT proposals

These findings have led the OFT to formulate an action plan to address the shortcomings which include updating debt management guidance to give greater clarity on expected competence levels and advertising standards.

The OFT also wants to work with the two main trade bodies to support initiatives making the industry more responsible, for example, by developing accredited training programmes and to continue with pro-active monitoring of standards, including on-site visits and monitoring of misleading information.

However, with Britain’s personal debt currently standing at approximately £1.7 trillion, debt management companies state that they do fulfil a need, particularly because free-to-use services are currently inundated given today’s financial climate.

Our view

The law relating to personal insolvency has grown piecemeal.

Bankruptcy whilst much less onerous than before is still seen as a stigma.

IVAs have undergone a transformation into a generally commodity driven procedure that without clear professional advice can lead to a Debtor being badly advised and creditors not getting a decent deal. Whilst much has been promised in the way of small or fast track IVAs the real drivers have been the Banks and other institutions who have pooled resource and use specialist advisors to negotiate industry standard terms.

Debt Relief Orders were introduced for smaller cases but arguably the debt and asset levels are such that they do not help many faced with real debt problems.

Against this background debt management does offer one solution that can benefit debtor and creditor alike and cannot be discounted simply because advisors are unregulated.

That said it might be with guidance a debtor can come to arrangements with creditors that do away with a formal plan benefitting all parties. Beware however that there are legal loopholes that need to be covered both ways. So for a debtor he needs to make sure he has a binding agreement with this creditors that cannot be re-opened whereas a creditor may want to ensure that he has a full understanding of what he is being offered and whether he feels it is fair.

We would always recommend you seek proper advice. We would be pleased to give initial advice be you a debtor or a creditor faced with an issue and you can contact any member of the team who have in depth knowledge of this area.

For more information please contact Richard Fergusson.  Richard can be contacted on 0113 399 3485 or on

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