OFT warns IVA providers over misleading adverts

The OFT has warned 17 financial management businesses promoting Individual Voluntary Arrangements (IVAs) that it considers their adverts and websites potentially mislead consumers. This follows a compliance sweep undertaken by the OFT in November 2006 of 124 adverts in national newspapers and 57 websites promoting and marketing IVAs.

IVAs are increasingly being used by consumers in debt as an alternative to bankruptcy. With the agreement of the majority of the creditors, consumers are allowed to pay back a proportion of the debt they owe over a set period, typically five years.

Some of the claims made about IVAs were considered by the OFT to be in breach of its guidance for consumer credit licence holders engaged in the provision of debt management services, including IVAs. The businesses have been warned to take immediate action to remove or amend a number of potentially misleading statements in order to comply with the OFT's guidance, examples of such statements including:

• falsely claiming that 'up to 90 per cent of your debt may be written off' when the maximum would be in the region of 60 – 70 per cent
  
• falsely implying they can guarantee a favourable outcome by the use of such phrases as 'stop all interest and charges'
  
• failing to state that set-up and administrative fees will be required and will be taken out of payments before the creditors receive any payment
  
• failing to display the required warnings with the same prominence as the savings promised
  
• failing to state that homeowners may be required to re-mortgage their properties after 3 years
  
• failing to state that entering into an IVA also affects an individual's credit rating for six years.

The businesses have been given four weeks to respond and provide evidence of compliance. The OFT will consider taking formal action against any licence holder which fail to address our concerns. We are also currently considering taking action against a number of other financial management businesses whose advertising of IVAs we consider to be in breach of our guidance.

Alan Williams, Senior Director of Markets and Projects - Services at the OFT, said:

'IVAs are still a solution for many, but those supplying them must be clear and honest about what they can and cannot achieve for consumers in debt and the possible negative implications of entering into such arrangements. IVAs are only one of a number of options for people in debt and should only be recommended when in the best interest of the consumer. We will take firm action against businesses which engage in unfair and misleading practices when promoting IVAs.'

NOTES

1. The OFT published guidance for debt management companies on 4 December 2001. It applies to all those providing debt management services including IVAs.

2. As well as complying with the requirements of consumer protection law, all consumer credit licence holder providing these services are also required to comply with the key principles of the OFT guidance which include:

• advertisements and marketing must be accurate, clear and not misleading. Any reference to 'savings' on repayments must make it equally clear that debt rescheduling will usually lead to an increase in the size of the sum to be repaid and potentially affect the consumer's credit record. Advertisements should also state whether a fee is payable for the service
  
• consumers must be given adequate information before entering into an agreement. Contracts should specify the nature of the services provided, total cost to the consumer, amount to be repaid and duration of the contract. Contract terms should be fair, legible and in plain language
  
• a realistic assessment of the customer's financial circumstances must be made before advice is given, including verification of income and regular outgoings and any advice must be in the best interests of consumers
  
• debt management companies must inform clients of the outcome of negotiations with creditors, as well as any developments with creditors such as the issue of default notices or the threat of legal action
  
• no cold calling by personal visit
  
• payments from consumers should normally be passed on to creditors within five working days of receipt of cleared funds.

3. The popularity of IVAs has increased substantially with 20,292 new IVAs taken out in 2005, an 89 per cent increase on the 2004 figures.

4. The OFT can refuse or revoke a consumer credit licence if it decides that a trader is not fit to hold one. The OFT must, when determining whether or not a trader is fit to hold a licence to carry on a business covered by the Act, consider evidence that the trader has engaged in business practices appearing to be deceitful or oppressive or otherwise unfair or improper (whether unlawful or not). Decisions to revoke or refuse a consumer credit licence are made by an adjudicating officer for and on behalf of the OFT. Before a licence is refused/revoked the adjudicating officer issues a 'minded to refuse' or 'minded to revoke' notice to the trader. This is a formal notice letting the trader know that the OFT is minded to refuse to grant a licence or to revoke an existing licence. It sets out the reasons for the proposed action and the supporting evidence. The trader is then given the opportunity to make representations before a final determination is made. In the event that the determination is adverse, the trader has the right to appeal against the determination to the Secretary of State for Trade and Industry.

5. The Control of Misleading Advertisements Regulations 1988 (the CMARs) aim to protect consumers and businesses from misleading advertisements. To come within the scope of the CMARs, an advertisement must be misleading (i.e. it must deceive or be likely to deceive the recipient and affect their economic behaviour, or for those reasons harm the interests of a competitor), and be published in connection with a trade, business, craft or profession, in order to promote the supply or transfer of goods or services, immovable property, rights or obligations. The OFT can take action against anyone appearing to be concerned or likely to be concerned with the publication of a misleading advertisement.

6. The OFT has not disclosed the names of the companies which are the subject of these informal actions. Under restrictions in the Enterprise Act relating to disclosure of information, it is a criminal offence for a public authority such as the OFT to disclose certain specified information relating to a business or an individual which it obtains in connection with the exercise of its functions. The OFT is under a legal requirement to consider the extent to which any such disclosure is necessary and the potential harm it may cause to any business or individual to which it relates.

7. During 2006-07 the OFT's Debt Management Team has taken informal action aimed at changing the conduct of businesses on 38 occasions and to date this has been sufficient to achieve compliance in around 90 per cent of cases.

8. The Insolvency Service is responsible for authorising and regulating the insolvency profession. An insolvency practitioner (IP) has to be appointed to 'supervise' an IVA. The IP must be authorised by the Secretary of State for Trade and Industry (SoS) directly, or by one of seven professional bodies recognised by the SoS as being competent to do so. IPs must comply with several statutory requirements and follow best practice guidance and ethical guidance. Complaints about IPs considered to be acting unprofessionally, improperly or unethically can be made to the appropriate authorising body. Neither the SoS nor the professional bodies can intervene directly in individual insolvencies or give directions in relation to the conduct of individual cases. The SoS has no power to impose any disciplinary sanction or penalty against an IP but if complaints are found to be justified, the SoS will take them into account when an IP seeks re-authorisation, together with other relevant issues.