The kicker is that many such operations – also called debt consolidation firms – charge high upfront fees for services you could do yourself for free, including challenging incorrect information on your credit report or working out payment agreements with utility or telco companies.
It's no accident that the fee structures with debt consolidation businesses are nothing short of incomprehensible; figuring out how much you'll owe in the long run is all but impossible.
Get better advice for free
The ASIC report, Paying to get out of debt or clear your record: the promise of debt management firms, makes a strong case that seeking free financial advice from a financial counselling service is always better idea than falling for false promises from a dodgy debt management firm.
As ASIC points out, "there is no uniform regulatory framework for debt management firms and barriers to entry are low or nonexistent".
"Where consumers go to debt management firms, it is important they understand what they are getting and how much it will cost, so they can decide if it's worth it," said ASIC Deputy Chairman Peter Kell. "It is hard to find information about fees and they tend to be high, front-loaded, and not refunded if the promise isn't delivered. The promise is always more prominent than the price."
Disturbingly, debt consolidation businesses are increasingly representing consumers through ombudsman schemes like the Financial Ombudsman Service, the Telecommunication Industry Ombudsman and state energy ombudsman services – something consumers can do themselves – without improving outcomes for consumers.
What do debt management firms promise to deliver?
- 'Cleaning', 'fixing', 'repairing', 'removing' or 'washing away' default listings on credit reports.
- Developing and managing budgets.
- Negotiating with creditors, including lenders, telecommunications companies, utilities companies or debt collectors.
- Advising and arranging formal debt agreements under Part IX of the Bankruptcy Act, 1966.
What is already available for free?
- You can access your credit report and challenge an incorrect listing at no cost.
- Seek help from financial counsellors or community legal services.
- Use an independent ombudsman scheme to help resolve disputes with lenders, telcos and utilities providers.
- Enter a hardship program and negotiate a timeframe to pay back your debts – creditors including energy, telecom and other essential services suppliers as well as banks and other lenders are required to offer flexible payment arrangements in hardship cases.
How ASIC investigated
ASIC commissioned a mystery shop of debt management firms and investigated the involvement of such firms acting on behalf of consumers in ombudsman schemes covering the financial services, telecommunications and energy and water sectors.
Findings, mystery shop:
- Fees and costs were opaque, making it difficult for consumers, often in significant financial hardship, to assess the cost relative to the purported value.
- Fees were often 'front-loaded' – that is, fees were payable before services were provided thereby increasing consumer commitment through sunk costs.
- Some sales techniques create a high-pressure sales environment.
- Little information was given about important risks and some firms had a poor understanding of the relevant law and the consequences of particular strategies which may lead to unsuitable services for consumers.
Findings, ombudsman schemes:
- A growing number of firms are representing consumers at external dispute resolution (EDR).
- The disputes brought to EDR schemes by debt management firms relate almost exclusively to arguments about the removal of default listings on consumer credit reports (despite the breadth of other issues that can arise for indebted consumers).
- While an increasing number of consumers are being represented at EDR by debt management firms, this is not leading to more credit reporting-related disputes being found in favour of consumers.
The report was commissioned by ASIC's Consumer Advisory Panel and based on principal research conducted between February and June 2014 with further work in 2015.
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