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ASIC has released its report into Debt Management Firms. To those close to the industry, the key findings will not come as a surprise. We will explore this report in more detail in the coming months. From the executive summary, the key findings are detailed below;
(a) debt management firms offer a range of services to consumers—in many cases, multiple services. For example, a firm promoting itself as dealing with credit defaults may be a gateway to refer consumers to other services from the same firm or a related firm (such as budgeting or debt negotiation services) or, in some cases, to lenders who will provide credit to consumers in financial hardship;
(b) fees and costs were opaque, making it difficult for consumers, often in significant financial hardship, to assess the cost of the services relative to the purported value;
(c) fees were often high and heavily ‘front loaded’—that is, fees were payable before services were provided or promises met, which is likely to increase consumer commitment and exacerbate sunk cost bias;
(d) some sales techniques may create a high-pressure sales environment;
(e) little information was given about important risks;
(f) some firms had a poor understanding of the relevant law and the consequences of particular strategies, which may lead to unsuitable services for some consumers; and
(g) firms rarely referred consumers in financial hardship to free, alternative sources of help—such as financial counsellors, consumer law services or ombudsman schemes—or advised consumers they could resolve the problem themselves at no cost.
The Financial Rights Legal Centre (FRLC) also provided us with case studies that, while not representative of all consumer experience of the services of debt management firms, show poor outcomes for some consumers and may be representative of complaints received by community legal services about the services of debt management firms.
(a) a growing number of firms are representing consumers at EDR—this is concentrated among a few large players, with an increasing number of small firms entering the market;
(b) the disputes brought to EDR schemes by debt management firms relate almost exclusively to arguments about the removal of default listings on consumer credit reports (despite the breadth of issues that can arise for indebted consumers); and
(c) while an increasing number of consumers are being represented at EDR
by debt management firms, this is not leading to more credit reporting
related disputes being found in favour of consumers.