A review of the industry by the OFT found that the debt management industry faces "widespread problems", with misleading advertising and a lack of awareness about how to deal with complaints.
What are the biggest issues?
The OFT has found a number of ways in which companies are failing to adhere to the current correct standards.
A number of debt management firms are accused of misleading consumers by failing to disclose that there's a fee to pay, so people sign up believing it's a free service.
Mystery shoppers found that many frontline advisers working for debt management companies lack competence and give poor advice.
The OFT also found that many debt management firms don't know the Financial Ombudsman Service's rules for resolving customer complaints.
Director of the OFT's Consumer Credit Group, Ray Watson, said: "People who are heavily indebted, desperate and vulnerable need advice which makes their problem better not worse and should not be exploited.
"Debt management firms must be clear about their charges and the options available to customers."
What can struggling borrowers do?
This kind of report is going to be another blow for people struggling with debt who really need qualified help and advice.
Head of loans at moneysupermarket.com, Tim Moss, said: "The debt management industry is littered with companies who have used the current economic difficulties to their own advantage. Unfortunately it is the most vulnerable in society who are being exploited at a time when they really need expert help and guidance."
If you are struggling with debt, don't put your head in the sand and give up. There are many reputable and reliable sources of advice and support available.
Here's what we recommend:
Make sure you need debt advice
Do you definitely need help managing your debts or could you make arrangements with your creditors yourself?
While not everyone feels able to negotiate with their lenders, if you can then there are no fees to pay and everything stays under your control.
National Debtline has loads of useful letter templates to use when dealing with creditors, as well as plenty of advice on your rights.
On top of that, there's also a
personal budget sheet you can use to really get a grip on your finances and show lenders you're working to get things under control. Find free advice
Before you consider paying a debt management company to sort out your affairs, why not see if you can get some free help from one of the excellent debt charities.
You can get fee-free debt help through organisations like the
Consumer Credit Counselling Service or Citizens Advice.
The only difficulty you may have is that these organisations are swamped by the number of people needing help and there may be a waiting list for assistance.
If that's the case, you may decide to look at a debt management company as a quicker way to find help.
Only use a DEMSA-accredited debt management company
If you do decide to use the services of a debt management firm, make sure it's reputable.
Tim explained: "For many consumers in financial difficulty, a fee paying debt management service can be a suitable solution. Unfortunately, it is a minefield trying to find a reputable company who you can trust to deal with your financial problems and liaise with your creditors in a timely manner."
The good news is that there is a way of checking a potential firm is reputable - whether or not it's a member of DEMSA (the Debt Managers Standards Association).
In order to qualify for DEMSA membership, a company has to comply with the OFT code.
moneysupermarket.com only lists DEMSA-accredited firms. Be clear on fees
You're likely to pay a number of different charges with a debt management company and it's essential to be clear exactly what these are before you start.
There will usually be an arrangement fee, after which some debt management companies will keep a number of your monthly payments without passing any cash on to repay your debt. For very unethical debt management companies, that can be for as long as six months!
Most debt managers will take a percentage of each monthly payment you make, often of between 15% and 18%.
Some debt management companies have been known to take payments from any remaining available credit their customer has left.
With that many opportunities to take payment, you can see why it's important to be clear about any charges before you sign up.
You want as much of your money as possible to go towards clearing your debt, and not towards paying your debt management company.
Rate This Article
Click on a star to rate this article.