OFT blasts debt firms that exploit vulnerable

More than 100 debt management firms face being forced out of the business as part of crackdown on the controversial sector, the Office of Fair Trading will reveal today. The watchdog has identified a string of failings by companies in the debt management business – which is expected to generate fee income of £250m by the end of the year.

These include employing incompetent staff who misadvise clients, misrepresenting services as free when they are not, and using misleading advertising. The OFT has told 129 debt management firms in total that they face losing their consumer credit licences unless immediate action is taken to comply with its Debt Management Guidance following its review of practices in the sector which included "mystery shopping" exercises, a sweep of websites and compliance visits by OFT staff.

The watchdog will also highlight its concerns that vulnerable people who are heavily indebted and often in desperate need of help are being exploited by the firms, which operate in competition with genuinely free services from charities and the Government.

Debt management companies typically make money by setting up "individual voluntary arrangements" with creditors – which are repayment plans that leave clients debt free within five years. However, a rising tide of evidence has been produced that suggests that many of these are unsuitable for the people they are arranged for.

The OFT will say that it is planning to update its guidelines "to take explicit account of new and emerging unfair business practices". Ray Watson, director of its Consumer Credit Group, said of the regulator's findings: "People who are heavily indebted, desperate and vulnerable need advice which makes their problem better not worse and should not be exploited.

"Debt management firms must be clear about their charges and the options available to customers. The level of non-compliance we found across the industry is unacceptable. If any of the 129 firms identified does not improve its standards substantially they will be the subject of licensing action by the OFT.

"We are also looking to the two main industry bodies to lead the way in raising standards and to meet their commitments to make the industry more professional and responsible."

The OFT has taken advantage of new powers that came into force in April 2008 and have enabled it to take a proactive and intrusive approach against a background of rising complaints and a rapid growth in new entrants into the fee-charging, debt-management sector, which operate mainly through the internet.

The OFT has identified frequent instances of cold calling, companies masquerading as charities, and the mis-selling of IVAs. Between April 2008 and June 2010, the OFT undertook 37 formal actions to either accept undertakings to improve from companies, impose requirements to improve or to revoke licences held or applied for. Despite these actions, the OFT says the industry has failed to respond.