Will anything be done to regulate a financial service that feeds off people’s fears and financial insecurity? Should dangerous financial products, not covered by our consumer protection laws and regulations, be permitted to be sold?
While the last Government procrastinated in responding to the consumer debt crisis, debt management companies started selling dangerous products to financially vulnerable consumers under the nose of state consumer protection agencies.
Many of these companies are engaging in abusive marketing, making false and misleading statements and not disclosing their product’s risks or costs. They market “free” advice and consultations to prospect for their commission driven sales forces. It’s a manipulative soft sell. Playing on people’s worries to deliberately heighten feelings of inadequacy, they say they relieve the stress of dealing with debt. But there is nothing “soft” about their products. They are designed to extract as much fee income as possible from financially inexperienced consumers.
Debt managers have only one objective, to sell lucrative fee earning debt management plans. Claiming they negotiate and agree affordable monthly loan repayments, their product only works if lenders agree to lower repayments, suspend debt collection and stop interest clocks running.
The product sees people pay the sum of agreed monthly loan repayments, through the debt management company. After deducting a hefty fee, the debt manager then disburses the money to their lenders. Monthly fees range from €35.00 to over €100.00 depending on, how much is paid, the number of transactions or lenders to be paid. But first, a plan “set up fee” is charged and nothing will be paid to lenders until this fee is paid in full. Set up fees range from €495.00 to over €800.00. VAT at 21.5% is charged on fees.
But should I buy a debt management plan and pay through a debt manager, it would take seven and a half years.
The debt manager would charge me €7000.00 in fees. At 20% of the debt it’s equivalent to an annual interest rate of 5.12%. And these figures get worse if loan interest clocks keep running.
Who are these outfits? Some are merely internet prospecting engines for British based operations, others are British owned Irish operations and some are home grown. Most of the latter two outfits have one thing in common – they are, or once were, commission driven mortgage brokers who used to sell mortgages on overpriced properties, frequently marketed by their real estate partners. They are now selling debt management plans to the same people they sold unaffordable credit to a few years ago.
There is no economic business case or supporting empirical evidence for commercial debt manager’s claims of providing economic value to consumers or their creditors. Their claims that they lower costs of indebtedness for consumers and costs of recovery for lenders are spurious and unproven. Many state they can arrange for substantial debt settlements. Totally unfounded in fact, such statements could be regarded as misleading, negligent and false declarations.
By using abusive marketing and emotive sales tricks, debt managers aim to induce people to buy dangerous products. Their emergence could be seen as an opportunistic exploitation of a social and economic debt crisis. If so it’s being made possible by Government’s failure to close off a dangerous gap in consumer protection.
Given they provide advice on their financial products and a money transmission service, debt managers should be subjected to prudential and consumer protection regulations. If authorised under a licensing system, they would have to comply with minimum competency requirements, consumer protection codes, fitness and probity, and prudential solvency standards. Their customers would have a right to complain to the financial ombudsman.
As it stands there is no consumer protection for people when sold debt management products or during the term of the plans. Debt management companies are not obliged to treat people fairly, to ensure they understand risks and costs, to provide proper advice or to recommend suitable products based on need, experience and affordability.
Abusive marketing of credit to consumers was largely responsible for the debt crisis. Have consumer protection lessons been learned? Surely rushing into empty stables, disclaiming responsibility for letting the door open, is part of the past. Protecting vulnerable, indebted consumers is too serious an issue to allow the unfettered development of economically unproven and ethically questionable debt management companies.
They should be required by Government to prove they have a cogent, rational business case supported by independent empirical evidence and if so, Government should ensure they are licensed and regulated as high risk consumer protection operations.
A version of this article appeared in the Irish Examiner, Business Section, Monday 7th March 2011
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