As the credit crunch bites and the OFT warns consumers about “debt sale” scams, Zoe Hare reports on the regulator’s action against companies offering such services and highlights similar cases recently before the ASA.
Topic: Financial services
Who: Office of Fair Trading and the Advertising Standards Authority
When: 23 June 2009
Where: UK
Law stated as at: 22 June 2009
What happened:
The Office of Fair Trading ("OFT") has published a press release warning consumers and borrowers against misleading adverts by debt and claim management businesses.
Although the primary regulator for claims management companies is the Ministry of Justice, any company which operates in the credit/debit sector needs a licence from the OFT.
There has been a significant increase in the number of adverts from companies which misleading states that they will take over a consumer's debt liability by "buying" their credit agreement. In particular, some companies have been offering these services for a nominal £1.00.
These adverts are misleading on two counts:
- although the debt is offered to be bought for £1.00, the consumer is then charged subsequent fees. Typically these have included a £350 "administration fee" plus a further 10-20% of the total debt as a "transfer fee"; and
- the law does not permit debt obligations to be transferred and sold to another without the permission of the creditor. Therefore the consumer remains legally responsible for the repayment of the debt while losing the money paid to the debt company at the same time.
The OFT has stated in its press release that it is not possible to "simply sell on your debt and liabilities, and business that make misleading claims to the contrary are just trying to take advantage of consumers' distress".
The OFT is seeking to warn consumers of the dangers involved and highlight that the original borrower may still be chased by bailiffs and debt collectors for the creditor even after the "selling" of their debt.
Brokers have also been condemned by the OFT for their part in the advertising of such companies. Any broker which introduces clients to such debt companies is also deemed to have been misleading clients.
Why this matters:
Debt and claims management companies which operate in this way are being prosecuted and closed down. In particular, companies which do not have the necessary OFT licence are being prosecuted for unlicensed trading as it is a criminal offence to carry out an activity which requires a consumer credit licence to trade without such licence. Ray Watson, OFT Director of Credit, has warned companies that "the OFT will not hesitate to take swift action against businesses which deliberately mislead consumers."
Other bodies have become involved as well, including those in the advertising and marketing sector. The Advertising Standards Authority ("ASA") recently warned Loan-Free, a claims management website, not to advertise such companies. The ASA deemed an advert promoting the chances of people being able to write off their debts as misleading. An advert on Loan-Free suggested that credit card and bank debts prior to April 2007 may not need to be repaid. However, this was considered misleading as insufficient evidence and information was provided to the consumers, it misled consumers as to the likelihood of their debts being written off and it did not inform consumers of the possible fees to be paid.
This is therefore a stark warning to all advertisers in this sector to provide more information and not to create false hope for the consumer that their debts will be cleared. Consumers should also be careful about companies claiming that they will purchase the consumers' debt as they will remain liable to the creditors while being further out of pocket from the fees incurred.
