1. Budget Services and Credit Repair Agents Presentation to Financial and Consumer Rights Council Inc Amanda Storey Solicitor 18 February 2014

2. What well cover: Part One: The Legal Framework What are budgeting and credit repair services? How does the ACL apply? Case Study 1 & 2 Part Two: Are budgeting services & credit repair regulated by the ASIC Act and NCCPA? Part Three: Complaining to EDR & ASIC What works, what doesnt and how to get the best outcomes for clients Case Study 3 Part Four: CALCs campaign

3. Budgeting service: what is it? Debt management service Establishment fee Service Fee Counselling?

4. Credit Repair Service: what is it? Promises to repair consumers credit files $990-$1,500 non-refundable administration and service fee

5. 2013 CHOICE Shonky Award Credit Repair Australia The name Credit Repair Australia is in itself shonky Overstate ability to repair credit report Created more debt where consumers already in financial hardship and despair Services are provided elsewhere for free – COSL, FOS and Financial Counselors Source: www.choice.com.au/shonkyaward/shonky-award-credit- repair-australia.aspx

6. Why do consumers use these services? I had people on my doorstep ready to take my car away and my home loan was in default. That's what drew me towards MyBudget, I was trying to handle it by myself plus handle two jobs and all. So I just thought, why not give it a try? (The Age, Financial counsellors urge caution over new industry offering help for budget difficulties, 9 December 2013)

7. Australian Consumer Law Potential Breaches Section 18 Misleading & Deceptive Conduct Section 24 Unfair Terms Section 60 Lack of due care and skill Section 61 Services not fit for purpose

8. Misleading and Deceptive Conduct The purchase and sale of commodities and services Trade & commerce Express representations Implied representations Silence Conduct The conduct must lead or be capable of leading a person into error Misleading & Deceptive

9. Budgeting Services Promises vs Conduct What they promise To help put their lives back together They will pay all the consumers bills in accordance with the budget Their living expenses will receive the highest priority What actually happens They fail to pay consumers creditors They did not explain/disclose fees Establishment fee & service fee was given greater priority than consumrs living expenses

10. Credit Repair Promises vs Conduct What they promise To repair a credit default or the consumers credit file upon payment of a fee ($900-$1,500) What actually happens They simply send the consumer information about EDR They send one letter to a creditor requesting that they consent to removing the default They subsequently claim that there is nothing they can do to remove a default judgment

11. Guarantees as to services Consumer services Not financial services Services Standard and quality reasonably expected from a competent person in the particular trade or profession Due Care Consumer makes it known (expressly or by implication) to the supplier a particular purpose Fitness for Purpose

12. Examples of defective budgeting services Failing to pay creditors in accordance with the budget or financial plan Failing to obtain or apply for a hardship variation or moratorium of payments in accordance with instructions Failing to assess a consumers financial situation and that they could not afford the repayments Placing consumers in a worse financial position

13. Case Study 1 Mary is a single mother with one child. She is currently on newstart and looking for a job in the trade. After going through a separation, she fell behind in her bills. She has a car on finance, worth $6K with $9K owing. She is also behind in credit card repayments. Mary went to MyFudget for help. She told them her key repayments were her car and car insurance but she also wanted to get on track with her credit card. They told her that they would take care of her creditors. Mary agreed to pay $250 p/m including $50p/m service fee plus a $1000 establishment fee paid over 6 months and some money for her creditors.

14. Case Study 1 continued Mary didnt hear anything from MyFudget for 2 months and she presumed everything was going great. However she was just served with a repossession notice for her car. She now believes that MyFudget has failed to pay any of her creditors. She wants to get out of her contract with MyFudget.

15. Case Study 1 continued What was the conduct? What was the service? What ACL claims apply? What further information do you need from Mary to strengthen her case?

16. Unfair contract terms A supply for goods or services... To an individual For personal, domestic or household use or consumption Consumer Contract Where one party has all the bargaining power Contract was prepared prior to any discussion No opportunity to negotiate Standard Form Contract Significant imbalance of the parties rights Not reasonably necessary to protect the legitimate interests of the party relying on the term It would cause detriment if relied on Contains a term which is unfair

17. Examples of potential unfair terms Terms which allow budget service providers (BSPs) to prioritise payments to itself while failing to pay the consumers bills or creditors Terms which allow BSPs to limit its own liability for losses suffered by the consumer Terms which allow BSPs to amend the terms of the agreement unilaterally (i.e. decided by one party)

18. Case Study 2 Ben works part time in retail. As a result of some extravagant spending, he has accumulated $30K on his credit cards with Big Bank. He recently applied for a mobile phone contract but was declined. He is now concerned that he has bad credit as a result of his Big Bank debt. Ben saw an advertisement on TV promising that Credit Repair Company (CRC) could help him get instant approval for finance. Ben called CRC and they said they could remove any listing on his credit file.

19. Case Study 2 continued Ben agreed and paid the credit repair company $1,500. The credit repair company called Big Bank and requested that they remove the default. Big Bank refused as they believed that the default was listed correctly. The CRC told Ben they tried their best and then sends Ben forms to lodge a COSL complaint.

20. Case Study 2 continued Ben comes to see you. You notice that his contract with CRC has the following terms: The client agrees to pay $1,500 upon CRC accepting the application. This fee is non- refundable. The client acknowledges that the provider makes no representation or promise of rectifying or changing the clients records of creditworthiness with any agency or reporting body

21. Case Study 2 continued Is this term unfair? Significant imbalance? Reasonable to protect CRCs interests? Causes detriment? What other claims may Ben have under the ACL?

22. Regulated by the NCCPA or the ASIC Act? UNCLEAR if NCCPA applies Suggests that the consumer remain in a particular credit contract with a particular credit provider? (section 8 NCCPA) UNCLEAR if it falls under the ASIC Act

23. Credit Repair Companies Vast majority do not hold a credit licence Majority are not members of EDR Credit repair unlikely to fall under definition of credit assistance (NCCPA) Unlikely to be regulated by ASIC Conduct regulated by ACL & ACCC

24. For-profit debt negotiators Some for-profit debt negotiators hold a credit licence Unlikely to hold a financial services licence Might belong to EDR Might provide credit assistance under NCCPA Might provide a financial service under the ASIC Act Definitely covered by the ACL

25. ASIC Act - Arguments Section 12DA Misleading & Deceptive Conduct Section 12BF Unfair Terms Section 12ED Due care and skill Warranties

26. How to help your clients Practical guidance on how to help clients who are in financial hardship When to go to EDR and when not to go What to do if they are not a member of EDR Complaining to the right regulator

27. Obtaining instructions 1. What were they promised? 2. How were they promised? (verbal statements, advertisement etc) 3. What does their contract say? 4. How much have they paid? How much have they lost? 5. Are they liable for any further payments? 6. What outcome do they want? (a refund or just to get out of the contract)

28. Taking Action Do they belong to EDR? No Demand - ACL VCAT - 6 year time limit Consumer Affairs - Conciliation service Yes IDR Complaint (45 days) - ACL - ASIC Act? EDR Complaint - FOS - COSL

29. Are they members of EDR?

30. Making a complaint in EDR Generally attach IDR complaint together with FOS/COSL authority Note that FOS/COSL can consider legal principles, guidance as to practice and good industry practice (FOS Terms of Reference 8.2; COSL Rule 12.1) FOS and COSL have jurisdiction to hear a dispute in relation to a financial service (FOS Rule 4.2; COSL Rule 6.1)

31. Going to VCAT – the basics Consumers will usually need to appear themselves for small claims under $10,000 Not liable for the other partys legal costs They can lodge their complaint online They need to include a copy of their demand, a contract, their receipt and company search or business extract Expect at least 6 month wait to be heard

32. Case Study 3 Jim is a middle aged man working in trade earning $45K per annum. He has a listing on his credit report relating to an old motorbike debt. He was managing the debt but things got out of hand and judgment was entered against him for the debt. Frustrated about being denied mainstream credit, Jim did a google search and discovered The Debt Dudes.

33. Case Study 3 Continued Jim calls the Debt Dudes and tells them about his situation. Debt Dudes assure him that as long as he follows their instructions, the listing would be removed. Jim pays the Debt Dudes $1,500. Two weeks later Jim receives a call from Debt Dudes saying that Jim would need to go to the Magistrates Court and apply for a re- hearing.

34. Case Study 3 continued The Debt Dudes give Jim a script on what to say to the Magistrate and tell him that this works every time. At the hearing the Magistrate tells Jim that his application lacked merit and ordered that he pay $2,000 costs. Jim is furious and calls Debt Dudes who say that all cases are different and they dont know why this happened.

35. Case Study 3 Presuming that Debt Dudes do not belong to EDR, how would you help Jim? What claims would Jim have under the ACL? How much should Jim claim for?

36. Complaining to Regulators Budget Services ACCC (breach of ACL) ASIC (breach of ASIC Act) FOS or COSL (if service provider is a member) Credit Repair Services ACCC (breach of ACL) Consumer Affairs Victoria (breach of ACL) FOS or COSL (if service provider is a member) Legal Services Commissioner (if engaging in legal practice)

37. Consumer Actions Campaign ASIC Consumer Advisory Panel Academic research about predatory business models Please report any systemic issues to advice@consumeraction.org.au Profiting Off Poverty – Making a Buck from Bad Luck

38. Where to go for more help Consumer Action worker line 9602 3326 or advice@consumeraction.org.au ACCC Guide to Unfair Terms ACCC Guide to Consumer Rights and Guarantees VCAT – Guide to making an Application in the Civil List