In an investigation that ended last September, the OFT found that firms in the debt management industry were guilty of conning people into believing their advice was free and accused them of profiteering at the expense of debtors. Now the OFT has set out new rules aimed at making the firms treat people more fairly.
There are more than 300 DMCs operating in the UK, but the crackdown could see that number halved, with dozens having been shut down already.
The firms, which purport to help people tackle their debts, have benefited from a sharp rise in serious debt cases in recent years, with a massive increase in the number of websites dubiously claiming to offer free debt advice.
Tim Moss, head of loans and debt at moneysupermarket.com, said: "With times extremely tough for many people, we have seen an explosion of debt management companies over the last few years and there is little sign of demand for their services waning."
Misleading advertising is rife in the industry, according to the OFT, which also raised serious concerns over the quality of the advice given. Complaints to the Financial Ombudsman Service about DMCs have risen sharply over the past two years. The FOS upholds about 60 per cent of complaint in favour of the consumer.
People going to DMCs for help with their money worries will be given a full breakdown of the services offered and the cost, under the OFT's proposed rules. They must also be given an explanation of the pros and cons of any debt solution recommended.
DMCs must ensure their advice is in the consumer's best interest and those using misleading names or advertising face further enforcement action by OFT. Several companies have used deliberately misleading brand names to con people into believing they are a charity or a government agency.
David Fisher, director of the Consumer Credit Group at the OFT, said: "This guidance is designed to leave firms in no doubt about the standards the OFT expects and what they must do to comply with the law. The failings identified by our recent review are unacceptable and show that debt management businesses must raise their standards or face enforcement action."
Joanna Elson, chief executive of the Money Advice Trust, said: "Debt management companies have time and again demonstrated they cannot be trusted to treat customers fairly of their own accord. In many cases there is a clear conflict of interest between what generates a profit for the company and what is the best course of action for the individual in debt," she said.
Moss warned consumers against tarring all debt management firms with the same brush. He added: "Consumers should always speak directly with their creditors to try and come up with a suitable repayment plan. Debt advice charities such as the Consumer Credit Counselling Service or Money Advice Trust are also a good option and may be able to offer help free of charge."