Government ‘must act urgently’ to regulate debt management industry that will cost consumers £¼bn in 2010

Written by PayPlan on 22 April 2010

£¼ billion bill to consumers in 2010

New research published today says that consumers will be hit with a bill of over £¼ billion in 2010 in set up and management fees to ‘debt management plan’ (DMP) providers despite the existence of free alternatives. Payplan, a free to consumer DMP provider that released today’s findings, is calling for Government action to safeguard consumers, because the industry remains poorly regulated and open to abuse.

£54m in up-front fees charged to consumers expected in 2010

The research estimates that by the end of 2010 as many as 562,000 fee-charging plans will be in operation, up from the current level of 375,000. This is the equivalent to around 15,000 new schemes being taken out every month in 2010. By comparison, the free-to-consumer sector has 220,000 DMPs currently in operation. The report says that fee-charging DMP providers are expected to levy up to £54m in up-front fees to consumers in 2010, an average of £290 per person. There are no limits to how much consumers can be charged, but it is usual for families in debt to pay 17.5% of their monthly repayments to the DMP provider. The quality of fee-charging debt management plan providers throughout the UK varies widely. There is little correlation between the level of fees charged and the quality of service, but strong correlation between fees charged and advertising spend.

Unscrupulous Operators

Owing to the absence of effective regulation it is easy for unscrupulous operators to offer debt management plans to consumers – and despite the existence of free alternatives, many people don’t know that they exist. A debt management plan is a structured arrangement between a person in debt and their creditors. The consumer pays a single monthly payment to their debt management plan provider, which is then distributed to the person’s creditors by the debt management company on a pro-rata basis. Fee-charging DMPs levy up-front and monthly fees on the consumer, unlike free plans which charge a much smaller fee from creditors – costing the consumer nothing. John Fairhurst, Managing Director Payplan, said:
“It is a fact that providers who charge fees can afford to spend large sums on advertising and therefore attract high numbers of consumers. When people are looking for debt help they are often very stressed and will sign up with the first provider they come across – this provider, although most visible – will not always be the one that will provide the best standards of care and service. With the number of people seeking debt help growing, action to bring proper standards to the industry in the form of regulation must be taken sooner rather than later.”
David Hawkes, AdviceUK‘s National Money Advice Co-ordinator, said:
“AdviceUK supports the introduction of regulated Debt Management Schemes because we believe they will have clear benefits for vulnerable debtors. Not only will regulated schemes relieve debtors from uncertainty because they are binding on creditors, but they will also protect debtors from being exploited by the bad practices of the less scrupulous fee-charging debt management companies.”
Henry Bellingham, Conservative Shadow Minister for Justice, said:
“The Government needs to act urgently to regulate the debt management industry. This year alone it is estimated that the industry will grow by up to £100m. It is high time the Government took the necessary steps to introduce regulatory oversight to give consumers the assurance that they are not being ripped off by excessive charges and high up front payments. The Government have singularly failed to make this a political priority. At a time when the downturn has pushed many families to the brink of bankruptcy, more and more people are forced to turn to debt management providers. The recent Government consultation exploring the merits of regulation demonstrated that there is widespread support for statutory oversight. It isn’t asking too much for consumers to expect such a huge and influential industry to face scrutiny from an independent regulator. If there was ever a time for the Government to act it is now.”
Steve Meakin, Chair Institute of Money Advisers (IMA), said:
“It is imperative that people facing financial hardship are better protected and informed about which way to turn when looking for debt help. We are extremely worried that poor regulation is in many cases resulting in bad advice and high charges to consumers who are in genuine distress and need help.”

About Payplan

Payplan is a free debt advice and solutions service that provides impartial advice to people in financial distress. Payplan helps over 100,000 people every year and works closely with organisations in the field of money advice and consumer and employee welfare.

Payplan Press Office

For further information please contact: Jane Jenkins, Payplan PR Manager Email: jane.jenkins@payplan.com Telephone: 01476 581 279

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This article was checked and deemed to be correct as at the above publication date, but please be aware that some things may have changed between then and now. So please don't rely on any of this information as a statement of fact, especially if the article was published some time ago.

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