The firms are required to provide independently audited evidence within three months that action has been taken to address identified concerns. If evidence is not provided, the OFT will instigate licensing action.
The formal warnings follow an OFT review of the debt management sector, published today, which found widespread problems.
The key findings to emerge from the review, which included onsite compliance visits by trading standards officers, a website sweep and a mystery shopping exercise, are that:
- Misleading advertising is the most significant area of non-compliance, in particular failing to disclose a fee is retained by the business and misrepresenting debt management services as being free when they are not
- Frontline advisers working for debt management companies are lacking in competence and are providing poor advice based on inadequate information
- There is low industry awareness of the Financial Ombudsman Service (FOS) rules for resolving consumer complaints.
The OFT also plans to update its Guidance to take explicit account of new and emerging unfair business practices, and will work with the two main trade bodies, the Debt Managers Standards Association (DEMSA) and the Debt Resolution Forum (DRF) to support their initiatives to introduce higher standards into the industry.
Ray Watson, director of the OFT’s Consumer Credit Group, said: “People who are heavily indebted, desperate and vulnerable need advice which makes their problem better not worse and should not be exploited. Debt management firms must be clear about their charges and the options available to customers.
“The level of non-compliance we found across the industry is unacceptable. If any of the 129 firms identified do not improve their standards substantially they will be the subject of licensing action by the OFT.
“We are also looking to the two main industry bodies to lead the way in raising standards and to meet their commitments to make the industry more professional and responsible.”
Commenting on the OFT’s crackdown on debt management companies, Joanna Elson, chief executive of the Money Advice Trust, said: "We are pleased to see the OFT taking action on this issue. We have long called for better protection from the fee charging debt management industry for people in debt.
"Research we commissioned last year into fee-chargers found that whilst some clients had been able to repay debts through them, there was also clear evidence of foul play, with many individuals complaining about the way they had been treated by fee charging debt management companies and some people in a worse position than when they had approached the fee charger.
"We are concerned that many people turn to fee charging debt management companies from a position of forced ignorance. Many are unaware of free independent debt advice provided by agencies such as National Debtline or Citizens Advice, since charities don't have the advertising budget of the fee-chargers.
"That's why we believe that all licensed debt management companies should be obliged to inform customers of free, independent alternatives.
"Dealing with unmanageable debt is a difficult problem that leaves many people vulnerable. It is vital that people who take the brave step of trying to repay their debts and get on top of their finances are protected.
"It benefits all of us to work towards a financially healthy UK public."
