Potential issues in the debt management market

This page was published in 2015.

Where are the potential issues in the market?

• Consumers making quick, ‘distress’ purchases – makes them more vulnerable to unfair or improper business practices.
• Lack of shopping around and switching – weakens pressure on firms to compete to provide good value in the market. The initial arrangement fee may act as a disincentive to switch.
• Complex products and insufficient information – consumers often lack product knowledge, making it difficult for them to ask appropriate questions, shop around and ultimately decide on the most suitable debt solution.
• Misleading advertising – for example, the OFT[1] identified a lack of fees transparency and some firms incorrectly representing themselves as free services.
• Poor quality advice – the OFT found that frontline advisers may lack competence and provide poor-quality advice based on inadequate information and training.
• Incentives and conflicting interests – focus on a high initial fee may reduce incentives for firms to provide good ongoing customer service. The OFT also found evidence of firms incentivising staff based on the products sold.  
• Non-transparent/high fees – also make it difficult for consumers to shop around.  Our research also found consumers do not know the level of fees. Historically, the OFT also found in 2010 that up-front fees were disproportionate to the service provided. Our recent Policy Statement[2] helps to reduce the risk of this, by introducing a policy rule to require firms to make significant repayments to creditors from the first month of a debt management plan.
• Lead generators – gather and sell data from potential consumers, usually online. These could have significant impacts on the market. For example, paying for leads may be significantly contributing to the fees paid by consumers of debt management services. The quality or accuracy of the information in some leads may also be variable, increasing the likelihood in some cases of consumers being placed in unsuitable debt solutions.
• Competition in the debt management market appears to be focused on capturing consumers through marketing and other methods of obtaining leads rather than on providing good value debt management services.  

Areas of concern

As a result of the issues above, there are various ways consumers may be experiencing detriment in this sector. 

We are concerned about possible severe detriment arising from:

• Poor value for money – some fee-charging debt management firms may be charging high fees to customers. 
• Unsuitable debt solutions – consumers may be put on an unsuitable solution by their debt management provider. This may result in debts increasing and/or further fees to switch to a different solution. Our research found evidence of staff encouraging customers to increase their debt before taking the plan or to lie about their expenditure. Some respondents said that they were allowed to commit to payments they could not afford. Others identified pressure to buy other products.
• Lack of care for client money – for example, the OFT looked at 148 firms and found that five firms were not passing funds to creditors within five days, four were not keeping client money in separate accounts, and two were failing to accrue interest on client accounts. Our research also found evidence of delays in paying creditors and a lack of clarity in agreements between the provider and creditors.