Pay £400 into a debt management plan, see £300 disappear in fees
People who are struggling with their finances and pay for a debt management plan are often at greater risk of it failing than when they set up a free alternative, a study has warned.
Research from charity the Money Advice Trust and Lloyds Banking Group raised concerns about the “high” upfront fees and charges being levied on people who are already living on the brink.
The findings suggest that around half of people who are being charged fees for a debt management plan are not aware that plans for them to get back on track can be set up for free.
Researchers said people struggling with loans were found to be making “distressed decisions” and not shopping around for the best solution and it is often hard to compare what debt management firms have to offer.
They found that almost one in 10 (9pc) of people paid all of their fees up front, a practice the research said should be banned. People were often found to be unclear about exactly what they had signed up for, including the level of fees and charges.
One person said they were paying £400 a month into a debt management plan – of which £300 was being kept as a fee by the debt management company.
The study, conducted by the Centre for Research in Social Policy at Loughborough University, found one interviewee had made two upfront payments of more than £600 just to set up a plan.
Researchers said that people using free plans tended to be clearer about their expected repayment levels and the length of the plan.
Joanna Elson, chief executive of the Money Advice Trust said: “We have long held the belief that, whilst people should be free to pay for debt advice if they choose, that decision should only be made from a truly informed position.
“The research makes clear that around half of those paying for debt help are not aware of the free alternatives.
“In times when free, charity providers of advice are facing tight budget squeezes, whilst the marketing budgets of fee-charging debt management companies seem to grow exponentially each year, we have to be very careful that this 50pc figure does not grow any further.”
The findings come after figures showed last week that personal insolvencies have gone up for the first time in a year. While these official figures do not include people using debt management plans, insolvency experts have said that anecdotally, the volume of people turning to them appears to be rising.
The Government has already said it plans to strengthen consumer protections and clamp down on the payday lending and debt management industries, to weed out unscrupulous firms.
It recently announced that the Office of Fair Trading (OFT) will be given powers to stop rogue money lenders and debt collectors in their tracks by instantly suspending their licences.
In March, the OFT published fresh guidance on standards that debt management firms should follow and warned they risk being stripped of their licences if they are found to be targeting consumers with unsolicited texts, emails, or voicemails, following a rise in complaints to the ombudsman service.
The Financial Ombudsman Service has said that typical complaints include poor administration, delayed payments to creditors despite the businesses having taken money from the consumer and debt management companies taking a large chunk of a consumer’s cash to pay their own costs as a priority, rather than using it to pay off the debt.
The toughened OFT guidance also warns that the companies must not make misleading claims about the status of the business, such as operating websites which make them look like a charity or a government body.
Graham Lindsay, group director for responsible business at Lloyds Banking Group, said: “Today’s research lays bare how many people in financial difficulty are completely in the dark when it comes to getting free, practical debt advice.”
More than 1,000 people took part in the study across Britain.