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Debt firms 'may lose licences'

More than 100 debt management firms are facing losing their licence after the trading watchdog uncovered widespread problems in the sector.

The Office of Fair Trading uncovered a catalogue of poor practices among firms that offer advice to people struggling with debts, with companies often more focused on boosting their profits than helping their customers.

It said misleading advertising was one of the main problems in the sector, with many firms claiming their service was free when it was not.

It said advisers also often lacked competence and provided poor advice, without collecting enough information on customers' circumstances.

Nearly all of the firms looked at during a mystery shopping exercise failed to give information on all of the debt solutions that were available, while companies tended to suggest the solution that was most profitable for them, rather than the one that was best for the consumer.

The group, which carried out an 11-month review of the sector, said in some cases it appeared that business models had been set up to take the maximum amount of money from consumers, regardless of their circumstances.

Three quarters of firms front-loaded their fees, reducing the amount of consumers' money that initially went towards repaying their debts, while some businesses appeared to deliberately "recycle" customers from one debt solution to another, in order to earn more fees and extract the maximum profit from them.

The OFT said there was also a lack of transparency for consumers, with many firms' websites not making the commercial nature of their business clear, or setting out the fees they charged.

It said this made it difficult for consumers to distinguish between fee-charging firms and charitable bodies that offered their services for free, while in the worst cases, groups were using misleading trading names to make it appear that they were charities or Government bodies.

In other cases, firms sought to mis-represent or discredit the services provided by charitable debt advice groups.

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