Debt management companies come with wealth warning

It is timely advice, as millions of people, including many over-50s who expected to be debt-free by this point in their lives, are struggling to keep their heads above water financially.

A year-long review of the debt management sector published last week by the Financial Conduct Authority concluded the quality of advice provided is often "unacceptably low" and that many firms are failing vulnerable consumers who turn to them for assistance.

Citizens Advice Scotland policy manager Keith Dryburgh said: "You would think that when people pay for debt advice from fee-charging companies they would be entitled to the gold standard in advice, but the report by the FCA shows that 60 per cent of fee-charging firms pose a 'high-risk' to their customers.

"This is mirrored by our own evidence. Many Scots have come to the Citizens Advice Bureaux because the advice they got from debt managers landed them in even bigger financial trouble than they were in to start with."

Debt management firms, which exist purely to make a profit, claim to offer an easy, stress-free route back to financial health by negotiating with creditors to reduce their clients' debt burden. In return, instead of continuing to pay creditors directly, clients make a single monthly payment, which the firm shares out on their behalf.

However, management firms deal only with what are known as "non-priority" debts, such as personal loans, finance plans and credit cards. Priority debts, which include mortgage, rent, energy and council tax arrears, can't be included in a management plan and remain the borrower's problem.

Also, sky high plan fees, which are often not fully explained to clients, frequently mean they will remain in debt for years - and, in some cases, decades - to come.

The FCA review found that some fee-charging firms were keeping 90 per cent of clients' payments for themselves, meaning only 10p in each pound was going towards debt repayment.

A worrying number of firms were so keen to sign people up for lucrative management plans that they were failing to fully assess their financial circumstances, to provide accurate information, particularly about the costs, or to make clear that free alternatives were available.

Linda Woodall, the FCA's acting director of retail supervision, said: "Debt management firms play a critical role in the consumer credit market, but far too many are not meeting the standards we expect."

In one case, when a client rejected the possibility of bankruptcy because she feared losing her car, the debt "adviser" not only omitted to tell her that this might not happen, but he also recommended a management plan that would take 125 years to pay off.

The FCA says that "free-to-customer" firms, which make their money from the creditors they deal with, are generally of a higher standard, but there is still room for improvement.

All debt management firms that want to continue trading must now go through the watchdog's authorisation process and demonstrate that they meet consumer credit rules, including those on treating customers fairly.

This is good news as there is greater need than ever for trustworthy and effective debt help, particularly among older people. Management plan provider the Debt Advisory Centre says almost half of over-55s are struggling with debt and many don't know how they will clear it.

A fifth of households headed by someone over 50 still have a mortgage, and, according to the Council of Mortgage Lenders, a third of home loans currently being taken out will extend beyond the borrower's 65th birthday, when many expect to retire and, therefore, face a significant drop in income.

Nicolas Frankcom, money expert at uSwitch.com, said: "If you're unable to meet your repayments, you should first contact your lender so they're aware of the issue and see how they could help. Consumers can also seek high quality, free advice, which is available from debt charities like StepChange or the Money Advice Service.

"Doing nothing is not an option - the long term impact of not managing debt or keeping up with repayments should not be underestimated."

If you are already tied into a debt management plan, contact your provider to ask exactly how much of your monthly payment is being swallowed up by fees and how much longer it will take for you to be debt free.

If you have any concerns that you are not getting a good deal, check whether your plan includes any early exit penalties, then contact one of the providers of free, impartial help listed below to discuss your options.

There is no need for anyone in financial difficulties - however serious - to hand themselves over to a debt management company.

Mr Dryburgh said: "The best and most trustworthy debt advice available comes from free-to-access, non-profit organisations such as Citizens Advice Bureaux."

Citizens Advice Scotland helps more than 300,000 people solve their money problems each year. For information, log on to citizensadvice.org.uk/Scotland. To find your nearest bureau, visit cas.org.uk or call 0808 800 9060.

During the last financial year, the government-backed Money Advice Service funded over 250,000 free advice sessions - 28,000 of them north of the Border - and had more than 22 million customer contacts via its web, phone and face-to-face services, a 35 per cent increase on 2013-14.

The service's website, moneyadviceservice.org.uk, has extensive, clearly written sections on taking control of debt, getting free advice and how to borrow affordably.

Other sources of free, impartial help include:

€¢ Debt charity StepChange at stepchange.org or 0800 138 1111;

€¢ The National Debtline at nationaldebtline.co.uk, mymoneysteps.org or 0808 808 4000, and

€¢ The Debt Advice Foundation at debtadvicefoundation.org or 0800 043 4050

Glasgow-based Debt Support Trust at www.debtsupporttrust.org.uk

.

Mr Dryburgh added: "The message here is that nobody has to pay a penny for expert debt advice."