The Office of Fair Trading (OFT) warned consumers this week to avoid companies offering to buy, sell or transfer their debt. The consumer credit watchdog branded the tactic a scam. But that's not stopping desperate debtors being duped by their attractive promises.
Advertisements typically claim that in return for a percentage of the unsecured debt in the form of an upfront fee – often 10 per cent – firms will take over the liability of the borrower's debt, leaving them supposedly 'debt free'. The 'buyer' of the debt would then attempt to prove the unenforceability of the original consumer credit agreement in the courts.
It can appear attractive to those who are desperate and debt-laden. However, regardless of what the ads may say, 'selling' debt doesn't discharge a borrower from their financial obligations. The OFT says that the law doesn't allow debt to be sold without the express permission of the lender and warns that any firm suggesting otherwise is making "clearly misleading claims".
Ray Watson, the OFT's director of credit, says: "Like most scams, when something looks too good to be true, it usually is, and this is certainly the case here. You cannot simply sell on your debt and its liabilities, and businesses that make misleading claims to the contrary are trying to take advantage of consumers' distress."
So how many firms are involved in this debt transfer scam? An OFT spokesman told The Independent that it has seen a "massive increase" in the advertising of these bogus schemes.
Similarly, credit reference agency Callcredit says it has been contacted by a number of consumers who had been given the impression that having 'sold' their debts they would no longer have the debt reported on their credit file. It warns that unless the creditor agrees to the sale of debt, its existence will still be "fully visible" on credit files.
A quick search reveals a plethora of misleading claims on the internet. One website states "the transfer of debt is legally allowable and refers to credit cards, unsecured loans & bank overdrafts". Explaining how lenders often sell debt to third parties (debt collection agencies for example), another advert claims: "If the bank can sell its debt so can the borrower." These are misleading statements that the OFT is looking to crack down on.
Consumer finance internet forums and message boards are rife with hearsay, misleading statements and wishful thinking over the viability of debt transfer. And many posts advertising debt transfer services highlight the fact that legitimate financial services intermediaries are also beginning to market the bogus business model.
Debt transfer scammers are targeting credit crunch-hit mortgage brokers and independent financial advisers with the enticement of lucrative commissions. One site suggests that, for the right type of person, earnings in excess of £100,000 per year "should be easily achievable". In fact, while the OFT was sounding its warning this week, free seminars for brokers espousing the debt transfer concept were taking place around the country.
So what action can the OFT take? An OFT spokesperson said it had a wide range of sanctions available at its disposal. Licensed operators could face anything from an informal warning to legally binding behavioural requirements being placed upon it, or ultimately, the revocation of its licence. This latter most severe penalty would see the firm losing its right to practice in the consumer credit sector.
Anyone found operating without a licence is committing a criminal offence. However, the OFT admits that its adjudication process can take a long time, and any disciplinary action can be appealed, adding even more time before serious action can be taken. All the while, the firms in question can still be offering false hope to consumers.
Matters are further complicated by the fact there is an overlap of regulators. Currently the Ministry for Justice (MoJ) is the Claims Management Regulator in England and Wales. At the same time, the Consumer Credit Act 1974 requires companies who offer debt counselling/adjusting services to be licensed by the OFT. Businesses which are authorised by the MoJ to provide claims management services will also need to be licensed under the Act if they engage in any debt counselling/adjusting activities.
Perhaps unsurprisingly, the MoJ argues its claims management supervision has been a successful one. A spokesperson for the Claims Management Regulator says: "MoJ regulation is focused on the activities of claims management companies – the businesses that usually act as intermediaries between claimants and solicitors. Regulation was introduced in 2007 and has been successful in stopping unauthorised advertising and leafleting of hospital casualty departments. It has significantly reduced cold calling, tackled misleading marketing and removed unfair terms in contracts with clients. All of this progress has benefited the public and helped to reduce their annoyance and distress at these issues.
"We have forged close working relationships with other regulators like the Solicitors Regulation Authority, Office of Fair Trading and the Financial Services Authority (FSA) to ensure malpractice is more effectively dealt with across all those individuals and organisations involved in the claims process."
But it's not just the regulators that those involved in debt transfer advertising are inflaming.
The tactics of the debt transfer brigade are frustrating those involved in financial claims management, who argue that they provide a valuable service to those who have been treated unfairly by lenders.
These controversial firms seek to audit unsecured loans, credit cards and overdrafts to see if they can be contested in court and ruled unenforceable, resulting in the borrower completely clearing that debt. The core of their argument is that many loan agreements are in breach of the Consumer Credit Act of 1974. Generally these firms either take fees before looking at the client's loans or before beginning any legal proceedings. The size of such fees varies considerably, with some charging up to £500 up front per loan agreement.
Carl Wright, managing director of Cartel Client Review, is highly critical of the debt transfer message. Crucially, he believes that telling consumers not to meet monthly repayments is in breach of regulatory legislation."Consumers must be very wary of firms that make misleading claims of buying up debt," says Wright. "To some, their methods may appear attractive. But their lack of legal experience with unenforceable credit agreements will only leave consumers in deeper financial trouble, and potentially even in court."It is imperative that the Ministry of Justice, Office of Fair Trading and FSA step in to ensure these companies are investigated and regulated. If they're found to be in breach of the law, they should be reprimanded accordingly."
Yet these claims management firms themselves aren't immune from controversy. Cartel Credit Review had a complaint about its adverts upheld by the Advertising Standards Authority at the start of the year. And in the past 10 days, the advertising watchdog has rapped two other firms, Debt Free and Claim Management UK, following complaints about their advertising. The latter, for example, was found to have sent misleading text messages advertising their services.
Their business is all about persuading people to pay them cash in the hope that they can wriggle out of their debts. The firms point to a loophole in the law which means that some consumer credit contracts that have been drawn up prior to 2007 may be non-enforceable. However, critics of the firms say they are 'claims harvesting' – accusing them of profiting from the fees they make from people tricked by persuasive ads to sign up for a process they have no chance of winning.
In February, the MoJ issued guidelines to claims management firms, following widespread concern over the statements a number were making. Messages that it considered to be misleading include: "80% of credit agreements are unenforceable", "50 million credit agreements are created every year, at least 25 million are unenforceable", and "A positive outcome is guaranteed".
At the same time, the OFT said it would take action against "claims management businesses that engage in unfair business practices by deliberately misleading vulnerable consumers". In the meantime, it urges anyone coming across adverts or websites marketing debt transfer schemes to report them to their local trading standards office.
Helping hand: Where to get free debt advice
Anyone struggling to meet monthly debt repayments is likely to be better off getting free help from debt advisers rather than turning to a claims management company. There really is no need to pay for debt help when a number of charities and other organisations can advise you for free. Citizens Advice Bureaux will also be able to explain your legal options at no charge if you think you may have been mis-sold a loan or other financial product. Any of the following bodies could help you.
National Debtline (0808 808 4000) Offers free, confidential and independent help over the phone for people in England, Scotland and Wales.
Consumer Credit Counselling Service (0800 138 1111) Has a helpline providing free, independent and impartial advice to people who have debt problems.
Payplan (0800 716 239) Provides free advice on debt and budgeting, including free debt-management plans and IVAs.
Citizens Advice Bureaux
They provide free information and advice on legal, money and other problems. You can find details of your local office in the phone book.
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- Advertising Standards Authority
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- Loans And Lending Market
- Office Of Fair Trading