Debt Management Firms Are 'Failing Public'
Indebted people who try to get out of financial trouble by using the services of consolidation firms are seeing up to four fifths of the money they pay going on fees and charges rather than their debts, a Sky News investigation has found.
Over a quarter those who have employed debt management companies wind up seeking advice about bankruptcy, or entering into Individual Voluntary Arrangements, figures show.
Debt management companies charge a fee to consolidated an individual's debts, arrange repayment schedules with creditors and prevent nuisance collection calls, texts and letters.
But in one case, only £8 out of the £38 paid monthly to the debt management firm when to the individual's creditors, with each debt receiving only a £1 payment, while the remaining £30 was taken in service fees.
The Office of Fair Trading, says the market for these services is 'large and growing', with the total cost to consumers in fees paid for debt management services around £250 million a year.
But concern is mounting over the cold-calling tactics, excessive front-loaded fees charged by some firms, as well as delays in passing payments on to creditors.
Gillian Guy, Chief Executive of Citizen's Advice, told Sky News: "The first step has to be a rule book, has to be regulation.
"There are certain practices that are not acceptable, cold calling is not acceptable, front-loading charging is not acceptable, and it is not acceptable that money does not go towards the debt the person intended."
Citizen's Advice wants the cold-calling of potential customers banned by the Financial Conduct Authority to protect vulnerable people.
The consumer group has also called for the FCA to force debt management firms to ring-fence customer cash against bankruptcy sooner than the regulator's plans to introduce this measure in 2016.
Two million people a year approach Citizens Advice with money problems.
Last year alone, it received more than 1,300 problem cases relating to debt management companies specifically.
Sky News has seen evidence that fees are even sometimes collected in months companies do not provide management services, meaning an individual's debts are reduced much more slowly.
Tomorrow, the Financial Conduct Authority is expected to publish new rules for debt management companies it plans to enforce when it takes over responsibility for consumer credit issues from the Office of Fair Trading on April 1.
Ahead of that report, a spokesman for HM Treasury said: "The government is determined to protect hardworking people from sharp practice in the financial sector, which is why we have created a powerful new consumer regulator, the Financial Conduct Authority (FCA), to regulate the debt management industry along with all other consumer credit firms.
"The FCA will have robust powers to protect consumers who use debt management firms to help get problem debts under control, including binding standards and the ability to impose unlimited fines on firms if they break the rules."
But there is concern that more vulnerable people will be pushed nearer to bankruptcy if the regulator doesn't act more quickly.
Gillian Guy added: "We are expecting the FCA to take this seriously.
"What we don't want is a plan for action, we want to see actual action taken, and we will keep that pressure up."
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