Almost two million Australians fell victim to 'debt vultures' in 2020, and one consumer group says more regulation is needed in this space.
'Debt vultures' are generally defined as debt management services that often target people in financial hardship with poor quality debt advice and services, and may even offer conflicting advice, charge high hidden fees and leave people worse off than they were before.
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According to Consumer Action Law Centre, approximately 1.4 to 1.9 million Australians have paid for debt management or credit repair services in the last 12 months.
These firms, almost entirely unregulated, have attracted plenty of attention during COVID, as more people flocked to them to escape their financial woes.
For example, NAB in July said it would no longer deal with unlicensed debt operators, after finding out one in 10 of its customers in financial hardship had engaged with one.
Consumer Action's research found almost one in five (17%) people reported an increased likelihood of using such services during the pandemic, and more than half (55%) have seen or heard advertising from them in the past year.
Consumer Action CEO Gerard Brody said debt vultures and a population struggling with bills was a "dangerous mix".
“People are genuinely shocked when they discover the lack of rules and obligations on firms offering debt advice, debt negotiation, credit repair and money management services," Mr Brody said.
“The community expects the Government to introduce strong protections—that’s why 92% of Australians want the same protections against debt vultures as in the UK, where debt advice must be in your best interests and tailored to your individual circumstances."
The government did recently announce some legislation changes in this area, with debt management firms required to hold Australian credit licenses from April onwards.
However, this will not cover debts related to energy, telcos, or other debts that are not credit products.
“The Morrison government is implementing the most significant reforms to Australia’s credit framework in a decade to increase the flow of credit to households and businesses, reduce red tape and strengthen protections for vulnerable consumers," Treasurer Josh Frydenberg said.
Mr Brody says more needs to be done.
“The Federal Treasurer has taken a good first step in committing to licensing part of the industry, but this report shows reform must go further by banning upfront fees, introducing a best interests’ duty and covering the whole industry," he said.
"Anything less would leave gaping holes and undermine the effectiveness of the reform."
Consumer Action's recommended debt vulture framework includes:
- A high bar for entry by ASIC or another licensing organisation
- Ban upfront fees to stop rip-offs, as well as fees for no service
- Make debt management firms members of the Australian Financial Complaints Authority (AFCA)
- Have a duty to act in a client's best interests
- Ban unsolicited selling to overcome high-pressure sales tactics
- Require firms to inform people of free options (seen below).
The National Debt Helpline for help with food and bills
Household Relief Loans, which give interest-free loans for up to $3,000;
Centrelink crisis payments or advanced payments;
Temporary housing (see ASIC for a state-by-state list); and
Free financial counsellors in your area
Being debt-free the top priority
According to Quantum Market Research, which conducted the research on behalf of Consumer Action, being ''debt-free' is the top symbol of success in 2020, the first time it has been so.
This might partly explain why many Australians are flocking to debt management firms.
At $21.2 billion our level of credit card debt is at a 16-year low, and is down almost 30% year-on-year.