Debt firms 'face stricter rules'

14 June 2011 Last updated at 12:30 GMT The advice given by some firms was unacceptable, the OFT found Firms offering debt management services to people in financial difficulty will have to abide by much stricter rules or face being closed down.

The Office of Fair Trading (OFT) is consulting on the new rules to make such firms treat their clients fairly.

They will have to make it absolutely clear what services they offer and how much they will charge.

The firms must not use misleading names or adverts, and the advice given must be in the client's best interests.

David Fisher, a director of the OFT, said: "This guidance is designed to leave firms in no doubt about the standards the OFT expects and what they must do to comply with the law."

"The failings identified by our recent review are unacceptable and show that debt management businesses must raise their standards or face enforcement action," he added.

Poor practice

In September 2010, after an 11-month investigation, the OFT threatened to close down 129 firms, and said the industry was blighted by misleading advertising and poor advice to those in debt.

Continue reading the main story Simon Gompertz Personal finance correspondent, BBC News

How can you justify an industry which includes cases of hoodwinking heavily-indebted families into parting with their last reserves of cash?

The Office of Fair Trading goes into shocking detail about the tactics used by some debt management firms.

They fool people into thinking they are charities, trick them into paying extra fees and even make customers use premium rate phone lines to keep track of events.

The better firms have grouped together in trade associations with acceptable codes of conduct, to differentiate themselves from rogue operators.

Meanwhile, the OFT has been shutting down suspect firms when it can.

The aim is to fashion a new-look debt management sector with the next year or two. But it could be hard to banish the rip-off merchants completely.

"Firms are not giving the advice or offering the solution that is in the best interests of the consumer, but instead that which is most profitable to them," it said.

The OFT was referring to the widespread practice of charging fees up front for organising plans such as individual voluntary arrangements (IVAs).

Some firms pretended their services were free, gave fundamentally poor advice to clients, or pretended to be charities or government bodies. the OFT found.

Since then, 43 businesses have given up their consumer credit licences which allow them to operate, and 11 more face action to have their licences taken away.

Last month, the BBC revealed that some firms had held onto their clients' cash, rather than use it to pay creditors immediately, exposing the clients to further losses if the debt management firm went bust.

The Money Advice Trust welcomed the OFT's plans.

"Debt management companies have time and again demonstrated they cannot be trusted to treat customers fairly of their own accord," said Joanna Elson OBE, chief executive of the trust.

"In many cases there is a clear conflict of interest between what generates a profit for the company and what is the best course of action for the individual in debt," she said.

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