ASIC shines a light on ‘opaque’ credit repair industry

Released yesterday, the report titled Paying to get out of debt or clear your record: the promise of debt management firms was commissioned by ASIC's Consumer Advisory Panel (CAP).

The research involved a qualitative analysis and mystery shop of debt management firms by BIS Shrapnel and a survey of the involvement of debt management firms acting for consumers in Ombudsman schemes covering the financial services, telecommunications and energy and water sectors.

ASIC described debt management firms as businesses that target consumers in financial hardship by promising to clean and repair their credit report, develop and manage budgets, negotiate with lenders and advise and arrange formal debt agreements.

The regulator said many firms provided a one-stop-shop model offering a combination of these services.

Findings from the qualitative analysis and mystery shop highlighted that 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,” the report said. In addition, it found that 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,” it said.

ASIC deputy chairman Peter Kell said that 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.

“The promise is always more prominent than the price,” he said. "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.”

Mr Kell said it is also important for consumers to understand that they have alternatives to the use of such firms that could be free of charge, such as financial counselling services.

“Many stakeholders have raised concerns with ASIC and other regulators about potential harms posed by firms that may provide unsuitable services, act in ways not in the best interests of clients, or at worst, engage in predatory conduct leaving the consumer worse off,” he said.

ASIC highlighted that debt management industry has grown despite the fact that consumers can freely access their credit report and challenge an incorrect listing at no cost, receive help from financial counsellors, community legal services, and independent ombudsman schemes to help resolve disputes with lenders, telcos and utilities providers.

“This suggests that there is a lack of consumer awareness about the potential benefits of alternatives to debt management firms,” the regulator said.

“There is no uniform regulatory framework for debt management firms and barriers to entry are low or non-existent,” it said.

“Consumers in financial hardship can be extremely vulnerable and behavioural research shows that financial stress can materially affect people’s ability to make good decisions.”

[Related: ASIC report boosts broker confidence in low-doc lending]