Consumer advocates have long been concerned that debt management firms charge people for services they can access for free.
Consumers suffering financial hardship are being charged a variety of fees by firms that promise to help restructure personal debt and offer no refund if they fail.
The fees are high and often opaque, according to an investigation started by the Australian Securities and Regulation Commission (ASIC) following complaints by consumer advocates, banks, lawyers and ombudsmen schemes.
It costs nothing to access external dispute resolution (EDR) services such as the Financial Ombudsman Service or similar schemes for telecommunications, gas and electricity and the ombudsmen say charges are often unfair and leave vulnerable consumers worse off.
Debt management firms, sometimes called credit repair firms, offer a range of services such as budgeting and debt negotiation services and their advertising may feature satisfied consumers who say the firm rescued them from a spiralling debt trap.
The firms mostly do not have to hold an Australian Financial Services licence and ASIC found some 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 to free, alternative sources of help, such as financial counsellors and consumer law services.
ASIC also found an increasing number of people are being represented at EDR by firms arguing for a removal of default listings on personal credit reports, but the number of decisions in favour of the consumer is not increasing.
The investigation also found some firms are using publicly available court judgements to market to consumers.
Fee systems vary and a “mystery shopping” exercise by ASIC founded limited tailoring to people’s needs.
Credit repair firms typically charge an upfront fee of $495 – $1095 but this is not refunded if they are unsuccessful in removing a credit listing. Most firms charge further fees for successful removals.