Consolidation loans under fire

A report this week from the Office of Fair Trading promised to crack down on the debt consolidation industry after an investigation found possible evidence of unfair practices.

It follows an eight-month probe and has been welcomed by debt advice agencies for pinpointing the unacceptable face of lending to people already in debt.

The regulator concluded that despite the rapid growth of the debt consolidation market, most people going down this route are unaware of its true implications.

Consumers needed to be given more and clear information to help them assess whether products were suitable, its report said.

In what was a scathing indictment, the OFT concluded that some lenders, including major high street banks, may be inappropriately pushing customers to take out consolidation loans to pay off debts.

It also said evidence had been found suggesting that expensive payment protection insurance policies (PPI) are being "inappropriately" sold to borrowers who would be unlikely to ever claim on it.

This comes hard on the heels of a Jobs & Money investigation which last week exposed the huge profit margins made by Barclays from selling PPI.

The OFT investigation also found possible breaches of credit advertising rules by loan firms which it says it will now investigate further.

The findings have resurrected concerns about soaring levels of personal debt in the UK and in particular, the role debt consolidation plays in exacerbating the problem.

Debt consolidation is a blanket term for taking out extra credit or loans to pay off two or more existing debts. Consolidation loans are taken out to cut monthly repayments. The loans tend to spread the payments over a longer period of time, however, meaning the overall debt increases.

The regulator estimates that £32bn of unsecured lending and £8.8bn of secured lending were used for debt consolidation during 2002.

Time and again, consumer groups and debt advice organisations such as the Consumer Credit Counselling Service (CCCS), Payplan and Citizens Advice, have highlighted the fact that consolidation loans are frequently sold to the wrong people.

John Fairhurst, of Payplan said: "There is no doubt that debt consolidation is appropriate for some people but it is not right for everyone. Around 50% of people who come to us for advice have gone down the consolidation route and it has failed."

The groups have also highlighted that firms are not required by law to thoroughly examine a person's ability to pay, and have expressed concern that advertising by lenders often targets the most vulnerable. The OFT is now launching separate formal investigations into a number of areas of concern including PPI.

Malcolm Hurlston, chair man of the CCCS, said: "The OFT has uncovered a number of questionable practices and there needs to be urgent follow-up action."

The CCCS is backing consumer minister Gerry Sutcliffe's proposed "debt gateway" initiative. This would establish a single, highly publicised - and free - phone number where consumers can go as a first port of call for advice. It could be set in motion when revised consumer credit legislation comes into force late this year.

Jonathan May, director of the OFT division that carried out the study said: "Where lenders or brokers are in breach of the regulations, we will not hesitate to take enforcement action."

If the regulator does uncover evidence of unfair practices, it can compel the firms concerned to end them or take the offenders to court.