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Concern over debt management plans
The FCA says debt management firms must provide consumers with information on where they can get free debt advice
It is unacceptable that people struggling to make ends meet are being encouraged to sign up to "unsuitable" and expensive debt management plans, the Financial Conduct Authority (FCA) has said.
The regulator is set to start regulating consumer credit and said debt management firms must provide consumers with information on where they can get free debt advice as part of the new rules which come into force on April 1.
Firms will also have to pass on significant repayments to creditors from day one of a debt management plan.
The FCA is concerned that too many firms are encouraging consumers into costly fee-paying debt management plans that are not tailored to their needs or to what they can afford when the focus should be on agreeing a sustainable plan or the right solution.
Debt management firms will consolidate the various debts a consumer has into one debt, paying creditors on that individual's behalf, and the consumer will be charged a fee for this service.
Christopher Woolard, director of policy, risk and research at the FCA, said: "Debt management firms must start putting consumers first. It's frankly unacceptable that those people who are struggling to make ends meet are being talked into unsuitable plans."
The FCA is conducting research into the sector that will be published next month, but initial findings show that paid for services do not offer consumers, most of whom are already in difficult financial circumstances, the best value for money.
The research shows that outstanding UK consumer debt is estimated at £12.8-15.2 billion, and fees for debt management plans are estimated to be £25 million a year.
Evidence suggests fees for debt management providers average £390-620 per year for each debt management plan, and the number of new debt management plans are estimated to have doubled since 2007, and now stand at around 520,000 - 645,000.
Citizens Advice dealt with 1,300 problems with debt management companies last year.
Gillian Guy, Citizens Advice chief executive, said some paid-for debt management firms are "cashing in" on people's money troubles and instead of solving their debt problems are only prolonging them.
Ms Guy said: "We helped one person who was paying £38 a month to a debt management firm but only £1 was going to each of her eight creditors, the rest was taken in fees."
She added: "There is a clear problem with people being signed up to debt plans that are completely unsuitable for them. By making firms tell customers about free debt help available, the FCA is recognising the importance of the free, independent advice that Citizens Advice provides.
"This will help people make informed decisions and avoid unnecessarily spending hundreds or thousands of pounds on fees, money which could have gone towards paying off their debts."