Watchdog calls for clampdown on shady debt firms

Consumer champion Citizen's Advice Bureau has led calls for tougher legislation to better regulate the debt industry in order to stamp out the firms which operate poor practices and take advantage of those with financial difficulties.

The Citizen's Advice Bureau was responding to guidelines set out by the Office of Fair Trading which make it clear how debt firms are expected to operate. However, whilst the move has been welcomed by the CAB, it says that compulsory laws are required rather than general guidance, in order to force companies to toe the line or face being closed down.

The CAB says it has provided services to more than 3,000 consumers who have encountered problems as a result of becoming involved with rogue traders promising to manage their debts or repair their credit, who end up charging exorbitant fees for which little return is seen.

The chief executive of the CAB, Gillian Guy, described how many individuals who end up consulting the CAB are already facing an uphill struggle to get on top of their finances and could be easily 'pushed over the brink' by firms with unethical practices.

Ms Guy also said that history had shown that OFT guidance would not act as a sufficient deterrent to debt firms determined to flout the rules and tough action would be needed in order to enforce the points, which is why the regulator must have the power to take 'robust' measures against any firm defaulting on the agreement.

The CAB said that dealing with individuals who had mistakenly engaged the services of a debt agency, believing that they were securing professional help, only to discover they were being exploited, was steadily increasing. As well as charging individuals with fees that were out of proportion to the work being carried out, many firms also attempted to persuade individuals to take a certain course of action even when it was clearly inappropriate or could bring about greater levels of debt.

The temptation to provide products which are not appropriate is an issue which affects many aspects of financial services and not just the debt collection and credit repair industry. There have been a large number of mis-selling scandals over the years, largely caused by the commission the financial advisor would earn in return for pushing the product. Therefore, the way in which financial products are sold is undergoing an entire overhaul with commission being stopped by the end of next year. Instead advisors will receive their money via a fixed fee basis which experts hope will help prevent the temptation to promote an unsuitable product, by removing the financial incentive to recommend the product which pays the highest amount of commission.

In addition, financial advisors will also be required to hold qualifications at a more advanced level than at present, a move which has sparked controversy in the industry, with many having to study for further exams in order to be able to continue to work.

However, despite the unpopularity of the radical changes, financial experts believe that the number of people who end up needing the services of debt firms will reduce, as the products they end up taking out will be more appropriate for their needs and affordable.

Unfortunately, improving the way in which products are sold will not completely eradicate the problem and there will inevitably still be a large number of people who experience financial difficulties due to either a change in their circumstances or by overstretching on commitments. For these people, the call from CAB for a regulator who has the 'right powers and political clout to deter bad practice and aggressively tackle firms' will be long overdue.

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