Adapted from an original article by our friends at Consumer Action Law Centre
It is not often that consumer advocates and the credit industry see eye to eye. Money worries keep many Australians up at night and for some companies this is good for business. When watching TV, or browsing the internet during those early morning hours, Aussies cannot avoid advertisements that promise solutions to their financial problems. The advertisements offer different services like erasing a bad credit report and shrinking debt—all things that sound good to anyone who has been rejected for credit or is having trouble making ends meet. However, the reality of these so-called debt solutions can be very different.
Marketing beats free and fair advice
Unlike debt vultures, qualified financial counsellors offer free and truly independent advice on money and debt problems. So why are expensive, profit-driven companies doing so well when there is a free alternative? The explanation is an aggressive ad-race where the cash-strapped, not-for-profit financial counselling organisations are bound to get second place, or to put it in online terms—page three on an internet search. As a result of the aggressive marketing, the debt vulture companies reach a large audience. TV advertisements add credibility and catch the attention of people that are trying to manage their debt and want to find a way to get ahead.
Debt vulture companies’ high pressure sales tactics are now so widespread that financial counsellors working for free counselling services are having to change how they introduce their assistance. At the annual conference for Queensland Financial Counsellors organised by the Financial Counsellors Association of Queensland in 2016. Karen Cox from the Financial Rights Legal Centre presented an overview to FCAQ members on “the rise of, for profit, debt management firms. The presentation outlined serious concerns relating to the high service fees charged by debt agreement services to their client (who are already struggling with their finances), poor financial advice and options for clients and catastrophic outcomes for most clients when dealing with a debt agreement service. Jon O’Mally, senior financial counsellor for the Indigenous Consumer Assistance Network states:
“When clients access a financial counselling service they are being catered for by a professional person that has obtained qualifications to assist people struggling with their finances. The financial counselling service is strictly confidential and most importantly free.
“A debt agreement service is expensive and provides limited options for clients as their main priority is to encourage people into setting up debt agreements to solve their debt problems. These services employ people that have no qualification in financial counselling, lack of necessary expertise to professionally assist a client in financial stress and provide reduced options for a client to get back on their feet”
Financial counsellors assist people from all walks of life to take steps towards solving their financial problems. As part of their job description they untangle complex financial situations and can observe the impact on people in financial distress seeking advice from paid services.
Unlikely allies agree that action is needed
In a report from January this year the Australian Securities and Investments Commission (ASIC) took a closer look at debt management companies. They found that “little information was given about important risks” and some firms had a poor understanding of the relevant law and the consequences of certain strategies they use. This highlights another aspect of dealing with debt vultures. There is no requirement for debt management companies to hold a credit licence, which makes them an exception in the financial industry.
It is not only regulators and consumer advocates that are concerned about debt vultures. At a last year’s roundtable discussion, representatives from the banking, credit and debt collection industries agreed that debt management companies must be regulated.
One suggestion that came out of the roundtable was that the debt management companies should be required to have a reasonable basis for claims lodged with external dispute resolution (EDR) schemes. Creditors and EDR schemes alike are concerned about debt management firms pursuing unmeritorious ‘credit repair’ complaints that are not in the interest of the person they claim to represent. Indeed, ASIC found that “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.”
Paradoxically, the debt vulture companies themselves are not required to be a part of an EDR scheme. Unless they voluntarily participate, there is no way for the customer to take their complaint about the debt vulture’s fees or conduct to a free EDR scheme.
We need a seamless regulatory framework for debt management companies to prevent exploitation of financially vulnerable Australians and mitigate the cost for business. Consumer advocates, regulators, EDR schemes and the credit industry agree that action is needed now to stop the harm caused by debt vultures.