Debt managers are misleading vulnerable people, warns watchdog

One debtor was given a repayment plan that would have taken 125 years to repay

There are now more than three million people in “severe problem debt” (Peter Macdiarmid | Getty Images)

Some debt management firms are making people's money problems worse by selling them unsuitable products and services that make it harder to pay off debt, the City Watchdog has warned.

In one extreme case one desperate debtor was recommended a payment plan which would have taken her 125 years to pay off.

The watchdog the quality of the advice provided by some fee-charging debt management firms was unacceptably low. For instance they’re supposed to tell vulnerable people about free advice but one told a customer that free advisers were "owned by the banks" and that the customer would have "to do all the work themselves".

'Free-to-customer' firms were slightly better but still need to improve, the regulator said.

All debt management companies are required to identify vulnerable consumers. But some firms even failed to identify those who disclosed they had significant medical problems or difficulties understanding financial or legal issues.

Linda Woodall, acting director of retail supervision at the FCA, said: "People who turn to debt management firms do so as a last resort. It is vital that they are able to access suitable advice that allows them to make informed decisions about their future. Far too many debt management firms are not meeting the standards we expect and we will be looking for significant improvement."

Debt management firms are currently being assessed for full FCA authorisation but the watchdog warned some would be turned down if they didn't improve the way they dealt with vulnerable people.

It said that firms will have to demonstrate that they meet the consumer credit rules, including treating customers fairly. The FCA is also planning to assess the level of fees charged by fee-charging debt management firms.

Joanna Elson, chief executive of the Money Advice Trust, the charity that runs National Debtline, said: "The FCA’s report confirms what those of us on the front line of free debt advice have long known – that many fee-charging debt management companies are failing to give the right advice and making bad debt problems worse.

"These firms’ profit-driven approach means they have a clear incentive towards recommending debt options that generate them income, even when this is not in the best interest of the debtor. The FCA is absolutely right to crack down on these practices."

Lesley Robinson, UK debt advice director for the Money Advice Service, said: "There now needs to be a period of greater scrutiny and significant improvement in the debt management sector, to eliminate the practices that have been revealed. It is vitally important for people who seek out debt advice that the organisations they access, and the advisers that they engage with, are operating to the highest standards."

She said the FCA's findings are disturbing and present a challenge to the debt management sector but said that shouldn't put struggling people off seeking debt advice as soon as possible.

"We know that 9 in 10 people who seek debt advice go on to take action to reduce their debts, changing their lives for the better," Ms Robinson said. "And everyone should know that free debt advice is available, throughout the UK – no-one should pay for receiving debt advice or indeed debt management."

Ms Elson added: "Our message to anyone who is struggling with debt is simple – there is never any need to pay for advice. The best thing you can do is seek free advice from charity-run services as early as possible."