As more Australians struggle with debt due to COVID-19, the services of credit repair or debt management companies may seem attractive. But it pays to look more closely.
Businesses that charge fees for debt help or to repair credit, also known as debt management firms, have been flagged as a risk to consumers.
ASIC’s report: Paying to get out of debt or clear your record: The promise of debt management firms revealed the problem of debt management firms charging high upfront fees for services which are available to consumers free of charge.
Regrettably, a diverse group of financial counsellors and consumer advocates have found that consumers are at times worse off after engaging the services of debt management firms.
In the wake of the financial fallout from the COVID-19 outbreak, we conducted a study on how the problem of debt management firms has been regulated overseas to draw lessons for Australia.
Similar problems have been found in the UK, Canada and the US.
Despite efforts to curb the harm to consumers through various laws, Canada and the US continue to face challenges in preventing predatory debt management firms from shape-shifting to avoid the law.
The UK has had better success with its stricter licensing regime that enables the regulator to intervene as new business models emerge.
With the temporary debt protection period having ended on 31 December 2020 and the winding back of JobKeeper, problems with debt are likely to increase as the economic consequences of COVID-19 unfold.
In Australia, law reform is imminent and from 1 July 2021, businesses that provide debt management or credit repair services to consumers will require an Australian credit licence.
The reforms will strengthen accountability by requiring these businesses to meet ongoing obligations on credit licensees, such as the requirement to meet the ‘fit and proper person’ test, undertake their activities ‘efficiently, honestly and fairly’, and consumers will be able to bring complaints to the Australian Financial Complaints Authority (AFCA).
What consumers need to know
The important message for the community in these challenging times is that people seeking to repair their credit reports or negotiate with their creditors do not need to pay expensive fees.
If there is an error on your credit history, you can seek free assistance from AFCA. Paying high fees to a credit repair company will not fix your credit report if the record is accurate.
There are various self-help measures for managing debt that consumers can access at no cost.
Consumers who are experiencing difficulties making payments for utilities, telecommunications or loans can contact their service provider for hardship arrangements such as an extension of time for payment.
In some instances, additional help such as utilities relief grants or household relief loans may be available.
In particular, people who are experiencing family violence and are facing financial difficulties can seek hardship assistance from their credit or utility provider.
If consumers have trouble reaching suitable hardship arrangements with a credit or utilities provider, contacting a financial counsellor to assist with negotiations can lead to better outcomes.
Free debt advice and debt negotiation are available from the National Debt Helpline.
Consumers may also lodge complaints with AFCA, the energy and water ombudsman or Telecommunications Industry Ombudsman to resolve disputes with service providers.
Several key features of the approaches adopted overseas contribute to their relative effectiveness in curbing harm to consumers.
In its 2019 thematic review, the UK’s Financial Conduct Authority (FCA) found that its regulatory framework, including the licensing, supervision of the industry and regulatory enforcement, have improved the quality of debt advice for consumers.
The UK has a licensing regime that covers a broad range of regulated activities such as debt adjusting, debt administration, the provision of credit information services and debt counselling.
In the UK, debt management firms must meet fit and proper standards and competence requirements.
The FCA’s Handbook sets out extensive requirements such as responsibilities to fully assess the customer’s financial circumstances and ensure that the solutions they recommend are affordable and suitable.
Debt management firms must treat customers fairly, act in their best interests, be transparent about costs and risks involved, and signpost customers to the availability of free alternatives.
Regulations in Canada and the US have fewer licensing requirements and cover a limited range of debt management firm’s activities.
Variations in state-based regulations and the limited scope of US federal rules have resulted in debt management firms circumventing the rules by reinventing their business models or moving their operations to less-regulated states.
Firms in the US are restricted from charging fees for credit repair before they have fully performed their services. Likewise, in Canadian provinces which regulate debt settlement, firms must have successfully negotiated a settlement with creditors before they may require customers to pay fees, which are limited to a maximum amount.
The countries also differ in their availability of free external dispute resolution services.
Consumers in the UK have access to the Financial Ombudsman services which enables them to obtain compensation for harm caused by debt management firms’ breaches of the rules and enhances accountability structures.
From July, Australian consumers will likewise be able to seek assistance from AFCA to resolve disputes with debt management and credit repair service providers.