Consumer Affairs Funded Report on the Study of the Credit Counselling Industry.

We reported in our blog of June 5, 2006 that Canada’s Office of Consumer Affairs was undertaking the funding of a study on Credit Counsellors in order to ensure that consumers are well served and to reduce the risk of fraud or conflict of interest. Consumer Affairs was prompted to take this step by the widespread abuses of the credit counselling industry in the United States.

The report on credit counsellors was issued on November 20, 2006 by L’Union des consommateurs. The report raises concerns about poorly trained credit counsellors and the conflict of interest “non profit” credit counsellors have because they are funded by credit grantors.

L’Union des consommateurs 257 page report was issued in French only on November 20, 2006. The report covers non profit and for profit credit counselling companies. The report notes that the Credit Counselling Industry is unregulated and raised concerns that there are no standards of expertise and experience required of the people counselling consumers. The report observes that anyone can claim to be an expert, duly qualified to advise consumers—whatever the training and experience he or she may (or may not) possess, thus leaving consumers vulnerable.

The report was also very concerned with the conflict of interest that “non-profit” credit counsellors have since a significant part of their funding comes from creditors. The report recited the following warning on page 54 of its Conclusions:

Is Credit Counselling a Good Idea? Investigate BEFORE You Act:

Consider that the alternative, bankruptcy, may well permit you to recover a good credit rating much faster than credit counselling. Negative credit items remain on your credit report for up to seven years. This would include the records of your credit counselling and a list of your “bad debts.” Bankruptcy will also remain on your record for up to seven years, but you may well be able to reestablish credit after a couple years. Think about that.

You might consider a credit counselling program now which will stop creditors from harassing you. You can then investigate bankruptcy.

While credit counselling services are generally presented as not-for-profit, unbiased, consumer debt counselling services, they are also often franchises and collect a fee from your creditors for collecting your payments. Not-for-profit credit counselling services may be receiving secret commissions or generous financial support from creditors, the Government, United Way and industry at large. Not for profit does not mean that the employees and/or operators of many of these services are not collecting salaries and growing a business.

The report observed in its Executive Summary that as experience in the U.S. has shown, potential exists for grave abuses at the expense of consumers. Hence the importance and urgency of examining regulating the practices and ethics of budget counselling in Canada to ensure that consumers enjoy an adequate level of protection in this sector.

The report’s conclusions include the following:

1. Lack of regulation of the industry make consumers vulnerable to receiving poor advice from untrained or poorly qualified counsellors; it seems obvious that, to work in this field, one requires appropriate training.
2. Legislative guidelines on the training of certain consultants (e.g. financial advisors) and making it illegal for those without the required training to suggest that they are qualified to offer such services would certainly be steps in the right direction, if we are to provide the public with assurances that what assistance is on offer shall be provided by qualified actors.
3. Some non-profits may advise only those solutions that bring in funding via commissions or donations from creditors;
4. Questions need to be clarified with respect to the nature and scope of the funding structures of organizations offering budget counselling.
5. Organizations offering budget counselling may face a difficult balancing act as they seek to maintain complete independence vis-à-vis creditors and the need for funding, which could quite logically come from creditors who benefit, directly and indirectly, from the results of effective budget counselling. The right balance remains to be found.

The 257 page report was completed on November 20, 2006. It is expected to be available on the L’Union des consommateurs website in January of 2007. We were issued a copy of the full report (in French) and an Executive Summary in English.