UK Debt Relief Companies Criticized for Advance Fees

Research launched today by Lloyds Banking Group and the Money Advice Trust has raised several concerns over the practice of struggling households being charged fees for debt management plans.

The research, conducted by the Centre for Research in Social Policy at Loughborough University, suggests that debt management plans set up by fee-charging companies were more likely to fail as arrangements where no fee is involved. Other findings from the research suggest this is likely to reflect the poorer practices of fee-charging companies, as well as the additional cost of fee-charging plans.

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Particular concerns have been raised about the nature and level of fees often charged to people struggling to make ends meet. The survey findings showed around one in ten (nine per cent) paid all of their fees up front, a practice the research argues should be banned. In general, people were unclear in their understanding of what they had signed up for, particularly in terms of the level of fees and charges applied. One interviewee was paying £400 each month into a debt management plan, £300 of which was being kept as a fee by the debt management company. There were also examples of high levels of upfront charges. One interviewee with a fee-charging DAS had made two payments of £662 for setting up the plan.

Additionally the research found that half of those who were being charged fees for a debt management plan were not aware that such plans could be set up for free. People struggling with debt were found to be making distressed decisions and not shopping around for the best solution. The absence of any objective or regulated means of comparison makes it difficult to choose between competing debt management companies.

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. Whilst Lloyds Banking Group has trained advisors to deal with such customers sympathetically and positively and who will work with customers to get them back on track, our concern remains for those customers who do not approach us first, but end up paying for debt advice, because they are not aware of alternative, free options.

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“We are proud of our own financial education programmes that aim to help people become more financially capable. Working with Money Advice Trust, via this research, we hope to further raise awareness of the free and independent support that is available. We are determined that those that need help the most, know how to get it, to allow them to make informed decisions about their financial future.”

Joanna Elson, Chief Executive of the Money Advice Trust said, “People deal with unmanageable debts in a variety of ways, but far too few people take the one step that stands the best chance of making a real difference, that is seeking free, independent advice. When people do take the brave step of confronting their financial difficulties, we owe it to them to ensure they stand the best possible chance of finding a fair and sustainable way back to financial health.

“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 50 per cent figure does not grow any further.” – Source

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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