Debt vulture companies are ripping off Australians and stirring up the credit industry

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It is not often that consumer advocates and the credit industry see eye to eye.

Money worries keep many Australians up at night and for some companies this is good for business. When watching TV browsing the internet during those early morning hours, Aussies cannot avoid advertisements that promise solutions to their financial problems. The advertisements offer different services like erasing a bad credit report and shrinking debt—all things that sound good to anyone who has been rejected for credit or is having trouble making ends meet. However, the reality of these so-called debt solutions can be very different.

Marketing beats free and fair advice

Unlike debt vultures, qualified financial counsellors offer free and truly independent advice on money and debt problems.  So why are expensive, profit-driven companies doing so well when there is a free alternative? The explanation is an aggressive ad-race where the cash-strapped, not-for-profit financial counselling organisations are bound to get second place, or to put it in online terms—page three on an internet search. As a result of the aggressive marketing, the debt vulture companies reach a large audience. TV advertisements add credibility and catch the attention of people that are trying to manage their debt and want to find a way to get ahead.

Debt vultures companies’ high pressure sales tactics are now so widespread that financial counsellors working for free counselling services are having to change how they introduce their assistance. At the annual conference for Victorian financial counsellors organised by the Financial and Consumer Rights Council (FCRC) in September 2016, financial counsellors reported that they feel that they are competing with debt vulture companies. One of the financial counsellors that has noticed a change is Cathy Clarke.

“When clients come in to see me, I have to explain very clearly that I don’t get commission, I’m independent and that I’m not like the people that they might see on the ads on the TV.”

Financial counsellors assist people from all walks of life to take steps towards solving their financial problems. As part of their job description they untangle complex financial situations and can observe the impact on people in financial distress seeking advice from paid services.

Financial counsellor Kai Zauner-DeVille works with people from all over Victoria.  Kai finds that clients who have had problems with debt vultures find it hard to speak about it.

“We have always had the battles – the payday lender battle, the consumer lease battle. However, traditionally we have focused on the most vulnerable in society like people on Centrelink, people who don’t speak English and Indigenous people. I think that the biggest problem with debt vultures is it is much quieter.”

Unlikely allies agree that action is needed

In a report from January this year the Australian Securities and Investments Commission (ASIC) took a closer look at debt management companies. They found that “little information was given about important risks” and some firms had a poor understanding of the relevant law and the consequences of certain strategies they use. This highlights another aspect of dealing with debt vultures. There is no requirement for debt management companies to hold a credit licence, which makes them an exception in the financial industry. .

It is not only regulators and consumer advocates that are concerned about debt vultures. At a roundtable discussion in February this year, representatives from the banking, credit and debt collection industries agreed that debt management companies must be regulated.

One suggestion that came out of the roundtable was that the debt management companies should be required to have a reasonable basis for claims lodged with external dispute resolution (EDR) schemes. Creditors and EDR schemes alike are concerned about debt management firms pursuing unmeritorious “credit repair” complaints that are not in the interest of the person they claim to represent. Indeed, ASIC found that “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.“

Paradoxically, the debt vulture companies themselves are not required to be a part of an EDR scheme. Unless they voluntarily participate, there is no way for the customer to take their complaint about the debt vulture’s fees or conduct to a free EDR scheme.

We need a seamless regulatory framework for debt management companies to prevent exploitation of financially vulnerable Australians and mitigate the cost for business. Consumer advocates, regulators, EDR schemes and the credit industry agree that action is needed now to stop the harm caused by debt vultures.

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