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Some debt management firms are posing as charities and are driven by a sales culture, the Office of Fair Trading has found.

The regulator has ordered 129 firms to clean up their act within three months or face losing their licences.

A damning report into the state of the sector highlighted widespread problems including misleading advertising and poor advice to those in debt.

One trade body welcomed the report, arguing that standards were improving.

Fees

People in financial difficulty often go to debt management companies in desperation, the 11-month review by the Office of Fair Trading (OFT) found.

These businesses charge a fee for advice and to come up with solutions, such as debt management plans or deals with creditors known as Individual Voluntary Arrangements.

Three-quarters of those firms checked by the OFT charged their fees at the start of the process. This, the OFT said, would minimise the risks faced by the firms while not dealing immediately with consumers' difficulties.

"In some cases, it appears that business models may be set up to take the maximum amount of money from a consumer regardless of their circumstances," the report said.

"Firms are not giving the advice or offering the solution that is in the best interests of the consumer, but instead that which is most profitable to them."

This could lead some people to end up in a worse financial position than before they sought help.

Catalogue

Fees were expected to reach a total of £250m by end of 2010, the OFT said, with the market growing mainly through the internet.

Standards should be higher, the OFT said, and it highlighted issues including:

Some businesses tried to discredit the free services offered by the advice sector.

Others tried to "recycle" customers through different debt plans to extract more fees, the OFT said.

The Financial Ombudsman has received 394 complaints in the last year, three times the number of the previous 12 months.

Trade bodies

Companies in the sector tend to negotiate on behalf of consumers to reduce their debt burden.

About 100,000 debt management agreements are reached every year in the UK, but the number of debt management companies is not clear. One estimate suggests there are between 300 and 400, but others suggest there are more.

Only about 10 are members of the Debt Managers Standards Association (Demsa). The OFT said that this trade body, and the equivalent Debt Resolution Forum, could do more to push up standards, although improvements had been made.

"There is no question there are lots of cowboys in the industry," said Michael Land, chairman of Demsa, who welcomed the report.

However, he said he was confident that all Demsa members were now compliant with their licence requirements.

Andrew Smith, spokesman for the Debt Resolution Forum industry association, which has 46 members, said 11% of UK households had a debt problem and dealing with this was too much for the charitable sector.

Charities also organised do-it-yourself debt plans, which meant people were still chased for interest, he said.

He said good training, accreditation to a trade body, and an independent complaints procedure were key to bringing up standards in the commercial sector.

"Debt is a problem that is not going to go away, and it is really important that the industry that is there to help people actually does have confidence from consumers," he said.

"By Spring next year, that should be the case for everybody."

He said reputable firms in the industry did not cold-call customers, and members of the body were listed on the association's website.

The OFT said it had been taking action to close down websites and revoke some licences since 2008, but it has now stepped up the warnings.

"People who are heavily indebted, desperate and vulnerable need advice which makes their problems better not worse and should not be exploited," said the OFT's Ray Watson.

"Debt management firms must be clear about their charges and the options available to consumers. The level of non-compliance we found across the industry is unacceptable."