A Cautionary Tale About Debt Management Plans

Updated:  20th September 2016

Smooth Financial, a relatively large provider of debt management plans, collapsed in July 2013. It was reported at the time that the firm’s administrators identified that £850,000 of client money was missing from the firm’s client account. This was customer money that they’d expected would be used to repay their creditors.

Rumour circulated at the time that the police were called in to investigate possible criminality connected to this situation. The administrators investigated loans made to the directors by the company that they believed might have been misappropriated for a property deposit and also to fund holidays. They are also looked into loans made to connected companies that they suspected might have been funded by this client money.

It wasn’t clear at the time how many Smooth Financial clients were based in Scotland, but this unfortunate story once again illustrated the need for residents of Scotland to consider options beyond informal debt management plans.

Today, the standards of debt management plan providers are being driven upwards by their new regulator the Financial Conduct Authority. Of around 200 debt management firms that submitted an application to the FCA to be authorised, it’s currently understood that around 100 firms have already withdrawn their applications or have been informed that their applications will not be successful.

Much stricter rules and checks related to the handling of client money now exist, but DMP client money isn’t protected by the Financial Services Compensation Scheme (like bank deposits are) or necessarily insured (like client money held by insolvency practitioners). 

Many debt management plan customers in Scotland might be finding that their providers are now withdrawing from providing the service. This provides an excellent opportunity to consider whether switching to a different type of debt management arrangement makes good sense.

What’s the alternative to a debt management plan? Residents of Scotland have the Debt Arrangement Scheme (DAS) available to them, a scheme that the Scottish Government has promoted and which provides guarantees against legal action and the imposition of further interest and charges. You can read more about DAS and the benefits it provides here. Client money is handled only by a limited number of closely controlled parties under DAS.

Residents of Scotland also have access to protected trust deeds and bankruptcy, both of which are handled by licenced insolvency practitioners. When licenced insolvency practitioners hold client money it is insured and periodically audited for the protection of clients and their creditors.

If you live in Scotland it’s unlikely that an informal debt management plan will be the best way to deal with your debts. If you’re sure that this is the option you wish to pursue (or if you’re already in a DMP) you can do something to protect yourself by confirming the status of your provider on the FCA Register of Firms.

It’s probably better however to investigate whether you’d be better off proceeding with the Debt Arrangement Scheme (DAS) or a formal personal insolvency like a Scottish trust deed (if your debt problems are more serious).

If you’d like to discuss your situation and options with a qualified debt adviser please contact us. Our advisers can analyse your current financial situation and make suggestions to you about how best to improve your financial future.


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