IFAs have called for debt management to be regulated on a par with advice, after a series of firm failures which they say damage the reputation of the wider financial services industry.
The latest to go bust is debtDr, the high-profile firm founded by Jeremy Hockley which folded quietly last Thursday, with no details available about the whereabouts of client money.
Now, debt regulator the Office of Fair Trading (OFT) has warned IFAs who referred clients to bust firms could be legally liable for losses.
It would depend on the advice given and on what basis they recommended the particular firm, but an OFT spokesperson warned affected advisers to seek legal counsel.
debtDr's business came from 60 nationwide consultants, IFAs and mortgage brokers who had opened up a side business in referring bankruptcy cases to the Somerset-based service in exchange for commission.
Many of these now fear FOS claims from clients they introduced to the service if they are unable to secure return of the full and final settlement amounts they deposited with the debtDr. Others advisers are owed outstanding commission payments.
One IFA who did not want to be named said he had left Hockley an answerphone message on the morning the firm went bust saying he was going to bank £1,000 of client fees paid to him in cash for a bankruptcy case.
Later that day he received an email Hockley sent to consultants explaining debtDr was bankrupt. Hockley never personally returned his call.
Elsewhere in the email seen by Professional Adviser, Hockley said he had been trying to secure a rescue package for the struggling firm for some time.
However according to another debtDr consultant, the firm held a training course for new consultants less than two weeks ago, and at least three in Stoke, Telford and Chester sat and passed the exams on 14 April. Each may have paid £1,500 to get the now useless debtDr license.
None of the IFAs Professional Adviser spoke to wanted to be named for fear the link to debtDr would harm their main advice businesses.
debtDr is at least the second debt management company to have gone bust this year. Nottingham-based Apex DCM went into administration on 2 March.
Apex DCM clients claim they were only made aware of the default when they received angry letters from creditors asking why the debt repayments had stopped.
One IFA and former debtDr consultant said while the FSA has spent millions over regulating those in credit, the OFT have ignored the plight of those in debt.
She said: "I am concerned about the reputation of the financial services industry. The reputable majority should not have their reputations undermined by the disreputable minority."
However Martin Bamford, managing director at Informed Choice, has questioned why IFAs were referring people in debt to a commercial debt management firm, rather than a charity such as the Consumer Credit Counselling Service.
"Surely charities are the best option," he said.
The government-backed Money Advice Service also gives some free tips on how to avoid becoming indebted and help to tackle debt problems.
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