Debt Management
ASIC Debt Management Review Report
The debt management industry is booming in Australia. The objectives of those providing a service under this industry are to supposedly help people repair their credit to get a loan, and to obtain debt relief when loan repayments or debts become unmanageable.
The Australian Securities and Investments Commission (ASIC) recently investigated the industry and it’s findings were not all that positive about the industry.
ASIC’s Findings included:
- 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.
- 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;
- 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;
- some sales techniques may create a high – pressure sales environment;
- little information was given about important risks;
- 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 - 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; and - while an increasing number of consumers are being represented at External Dispute Resolution meetings (EDR’s) by debt management firms, this is not leading to more credit reporting related disputes being found in favour of consumers.
You can see a copy of the Full Report here.
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Legal Commentary on Report
Tony (Anthony) Cordato of Cordato Partners compiled a commentary on the report and as an intro provided the following observations.
3 out of 10 Australians who order their credit report have needed to complain to Veda to correct an error on their report. The correction process is called credit repair, and is especially useful before applying for a loan so as to improve your credit score. It’s free if you do it yourself.
If you need time to pay a debt, you contact the company you owe money to directly and agree on payment terms. But many Australians are permanently stretched financially with car loans, credit card debts, telecom and electricity bills. And so for these 31% who suffer financial stress, good advice on debt relief is needed, even before the debt collector starts hounding for payment. The advice could be to enter into an informal payment arrangement, prepare a budget (and stick to it), or take out a debt consolidation loan and pay out the debts.
A whole industry has grown up to deal with credit repair and debt management in Australia. The financial regulator, ASIC, has now published an unflattering report on the industry, finding it to be riddled with very high fees and poor service. ASIC suggests using the free services which are available, if you cannot do it yourself.
To look at Tony’s commentary upon the ASIC report use the following link.
Are credit repair and debt relief companies worth using? ASIC has its doubts.