The debt management industry is booming in Australia. It helps people repair their credit to get a loan, and to obtain debt relief when loan repayments or debts become unmanageable.
The Australian Securities and Investments Commission (ASIC) investigated the industry and found that the industry charges exorbitant fees for poor service, when good service is available for free elsewhere.
In particular, ASIC found that:
- The fees are opaque: hidden either in the fine print or not advised until the consumer is committed;
- The fees are high for the services provided and are heavily ‘front loaded’ (payable up front);
- High pressure sales techniques are used, often to ‘sell’ a debt consolidation loan;
- Important risks with debt agreements are not disclosed, given that it is similar to bankruptcy;
- Unsuitable services are being offered: usually standardised instead of being tailor-made;
- Rarely are consumers referred to the free services provided by financial counsellors, not-for-profit agencies, consumer law services or ombudsman schemes, or advised they can do the same themselves for free.
These findings are contained in the ASIC Consumer Advisory Panel report – Paying to get out of debt or clear your record: The promise of debt management firms [Report 465, January 2016].
This is commentary on the ASIC report, followed by a commentary on the marketing practices used in the debt management industry:
What services do credit repair companies offer?
‘Credit fix’ companies offer to ‘clear black marks from the record’ to improve the borrower’s credit score so that they qualify for a loan. They identify incorrect credit listings on the borrower’s credit file and apply to the credit agency to remove or amend those listings.
Errors in credit files are common. According to the Office of the Australian Information Commissioner (OAIC), three in ten (30%) of those who obtained a credit report found errors, and of those, nearly six in ten (57%) had the credit file corrected by the credit agency (Veda or Dun and Bradstreet).
Common errors found in credit files are: out of date personal data appears, expired credit default listings are not removed, the same debt appears twice, paid debts appear as unpaid, and credit reports for different individuals are combined by mistake.
Credit files contain more data than ever before. Since March 2014, the Privacy Act, 1988 has allowed credit agencies to include data showing regular payments under the ‘positive credit reporting regime’. In return, the credit agencies agreed to allow the individuals to complain about incorrect credit listings free of charge, with a 30 day turnaround. For more details about credit files see my article Qualifying for a loan is about to become harder and the ASIC Credit Repair web page.
If the credit agency fails to correct a credit listing, a complaint may be made free of charge directly to the Credit and Investments Ombudsman (CIO) or the Financial Ombudsman Service (FOS) (for credit defaults) or an ASIC-approved External dispute resolution (EDR) scheme (for utility defaults). In 2013, 89% of the complaints made were to amend a default credit listing.
ASIC commissioned a ‘mystery shopping exercise’ of the fees charged by prominent debt management firms for credit repair. ASIC found that several companies had a ‘no win, no removal fee’ policy. That is, they charged an upfront fee of between $495 and $1,095, which was not refundable, but charged a removal fee only if the default credit listing was removed. Removal fees of between $880 and $1,029 were charged per removal – the total is often higher because often several listings are removed. One company charged a contract cancellation fee of $990. Unpaid fees are collected through court processes, and it comes as no surprise that they place a default listing on the individual’s credit file.
This is a lucrative business - complaints made by debt management firms (on behalf of clients) to CIO, FOS and other EDRs increased from just 99 in 2010 to 2,580 in 2013.
The ‘front loaded’ fee structure encourages applications with little prospect of success. The statistics are that complaints made to CIO and FOS were successful just 12% of the time, and were compromised 31% of the time.
ASIC questioned the need to use debt management firms given the complaints / dispute resolution processes provided by the credit agencies, the CIO, FOS and other EDRs, were free, and easy to use.
What debt relief assistance do debt management firms offer?
The ‘flip side’ of cleansing credit default listings to qualify for a loan, is helping consumers to stop harassing calls from debt collectors and to manage financial hardship – to deal with loan repayments which are in arrears, unaffordable mortgage and credit card payments and situations where there is no money at hand to pay pressing debts.
According to the ASIC report, the ‘target market’ is the 31.8% of households in Australia which are experiencing financial stress, especially those experiencing financial hardship.
Debt management firms offer three types of ‘debt relief solutions’ to help people ‘get out of debt’:
- Debt negotiation services which are offers to reach an informal debt agreement with creditors, with the aim of reducing the debtors’ balance owed without affecting their credit rating. They also negotiate payment terms. Often a debt consolidation loan is proposed, where a new loan is taken out to pay out the debts. The ASIC Money Smart web page has advice on debt consolidation and refinancing.
- Budgeting services which are offers create a debt payment plan to manage the payment of bills and reduce debt. In practice, this means that the consumer’s wages are paid directly to the firm, which is responsible for paying the bills and loan/credit card repayments and an allowance for day-to-day expenses.
- Debt Agreement services which are offers to arrange the entry into a formal debt agreement with creditors to accept a sum of money (usually less than the full amount owed) in full satisfaction of the debts. It is called a Part IX Debt Agreement which is often described as a ‘government program’ or ‘government sponsored debt relief’ because it is made in accordance with legislation, namely Part IX (Part 9) of the Bankruptcy Act, 1966. It is an alternative to a Part X Personal Insolvency Agreement and a Part XI Bankruptcy.
The ASIC ‘mystery shopping exercise’ found a great variation in fees charged for debt negotiation and budgeting services. One firm charged an upfront ‘set-up’ fee of $550 with an ongoing fee based on the amount owing, another a flat fee of $150 per month for a minimum of 6 months, another $200 upfront and 10% of the original debt, and another a fee of $330 per hour. There were cases where the firm took the amount of the debt reduction negotiated as its fee.
ASIC found that the fees for debt agreement services were either a flat $500 to $660 upfront (+$200 government fee) or a percentage of between 13% and 20% of the total debt.
ASIC was critical that debt management firms did not disclose their fees on their website (excepting one firm), even though ‘internet advertising appeared to represent the largest source of referrals for debt management forms.’ The sales technique is to not present a contract until the ‘free consultation’ – a second conversation or a face-to-face meeting, which ASIC interprets as a cost barrier (in terms of time) to ensure that the caller is less likely to go elsewhere.
ASIC was also critical of the poor disclosure of the effects of a Part IX Debt Agreement, namely that proposing one is an act of bankruptcy, the debtor’s name appears on the public record – the National Personal Insolvency Index, as well as appearing on the credit file for 5 years, and the fact that it is available only to people with low to mid incomes with unsecured debts and assets of just over $100,000.
ASIC viewed the consumers who used debt management firms as vulnerable, as compared with more sophisticated consumers who accessed to good legal and accounting advice on their debt options.
What does ASIC need to do to fill the regulatory gaps?
Not only did the ASIC report find that the debt management firms offered little value for money, but they gave poor service, misrepresented the nature and effectiveness of their services and preyed on the vulnerable consumer. In short, ASIC had its doubts, and recommended consumers use alternatives.
There is no uniform regulatory framework which applies to debt management firms in Australia.
The introduction of the National Credit Act licensing scheme on 1 July 2010 made giving credit assistance a regulated credit activity. Debt management companies need to hold an ASIC Australian Credit Licence ‘if they suggest that a consumer take out a debt consolidation loan with a particular lender’ or suggest that a consumer ‘stays with the loan’ they have renegotiated. Otherwise, they do not.
The Bankruptcy Act requires debt agreement administrators to be registered with AFSA (the Australian Financial Services Authority).
But for the most part, debt management firms do not need to be licensed or registered and are not specifically regulated in Australia for their credit repair and financial hardship assistance activities.
They are governed only by the general consumer law provisions under the ASIC Act in relation to misleading and deceptive conduct and unconscionability in ‘financial services’, and by the Australian Consumer Law. The ASIC report discloses no prosecutions under this law.
To fill the regulatory gap, ASIC might choose to follow the United Kingdom regulatory model, and bring the debt management industry within the Australian Financial Services Licensing regime, or follow the United States by laying down rules such as requiring specific disclosures, restrictions on fee payments and amounts, or both.
To conclude, I have invited Michael Field, a strategic marketing consultant, to provide an insight into how debt management firms market their services.
Marketing comments by Michael Field www.michaelfield.com
This area of consumer marketing is avoided by many marketing practitioners as the trade-off between what is in the best interests of the consumer, what is legally compliant and what is commercially viable for the company supplying the service is often highly contested and blurred by commercial interests.
That being said, if the service is clearly explained, reasonably priced and delivers the desired outcome for the consumer, there is room in the market for a quality organisation to market how it will assist people who have got themselves into financial trouble.
What makes this a tricky area for marketing is the combination of the vulnerability of the consumer and the likelihood of low levels of financial literacy. Although this will not always be the case, there is a strong moral (and potentially legal) argument to ensure the details of the service, fees and expected outcomes are made much clearer so that an unsophisticated consumer can more readily understand them.
The debt management firms I researched for this article are using traditional consumer marketing channels including television and talkback radio. I also found high levels of online activity such as search engine optimisation and ‘keyword stuffing’. Many of the websites had ‘live chat’ meaning a pop up window offering ‘Debt consultants are waiting for your call now’ which clicks through to a consultant ready to engage in a text based sales conversation. Most were unwilling to divulge pricing, instead they encouraged me to schedule a telephone call with a consultant aiming to arrange a face-to-face meeting.
Given the service being offered is for people experiencing financial hardship, it is reasonable to assume there is an associated psychological impact on the consumer including shame, guilt, blame and embarrassment. Online services such as an informative website are the ideal medium for consumers to be able to conduct discreet research and make enquiries.
By not providing detailed pricing information on the website and insisting on a face-to-face meeting, the company is already forcing the customer into a ‘trial close’, as once the agreement to meet is made, the client may feel they are well on their way to solving the problem. It’s just like people who join a gym in January often feel that they have already begun to tackle their fitness goals just by signing a piece of paper.
A review of a number of debt management company websites and their sales materials demonstrated to me that the major issue is that the pricing is unclear to the average consumer. It is reasonable to assume someone with limited financial know-how could easily become confused and be unsure exactly what they are buying. Given their vulnerable state, I personally question if this is fair, and if there should not be a higher level of regulation, oversight and disclosure, similar to other financial transactions and lending institutions.