Major changes are coming to a free government service that helps welfare recipients manage their money.

On Wednesday the federal government announced reforms to its Centrepay service it says will better protect Australians and deliver fairer outcomes.

Centrepay assists people receiving welfare pay expenses like bills and medications and is often used in rural and remote First Nations communities.

Loopholes in the current system have been exploited by a small number of businesses to take automatic payments from Centrepay customers, even when it is not in the customers' interests.

Some businesses have been found to have continued to take automatic deductions from a Centrepay customer's pay each fortnight, even if that customer has not shopped at the business for months or even years.

The changes – which come into effect from November 3 – would protect customers, crack down on high-risk goods and services, and introduce safeguards to ensure businesses do not abuse the system.

The federal government said the reforms follow consultation and co-design with customers, advocates, and businesses.

The changes include the removal of approximately 250 businesses from the scheme that currently provide high-risk goods and services, ensuring customers don't hand over money for products they don't need.

The government would also mandate end dates for deductions on most services, ensuring customers do not continue paying for services longer than they need to, and direct businesses to set target amounts, so that customers do not accrue large credit accounts with businesses that they may never spend with.

Businesses removed from Centrepay will start a 12-month transition period, during which Centrepay customers with existing arrangements with these businesses can keep paying through the service, but no new deductions will begin, and existing deductions can't be increased.

The changes will be complemented by other improvements, including stricter approval processes for businesses requesting to use Centrepay, improving the complaints process to assist customers, and establishing stronger actions against businesses that try to game the system.

Centrepay customers will still be able to buy goods and services from businesses that have their Centrepay eligibility revoked; through normal payment methods.

Services Australia would communicate with customers and businesses in the lead up to these changes coming into effect, to ensure a smooth transition.

Mob Strong Debt Help senior financial counselling and strategy lead Bettina Cooper said Centrepay should be an invaluable service for social security recipients to help people manage their monies.

"Centrepay had lost its way and become a vehicle for financial abuse, with decades of misuse by some businesses," she said.

"After taking a detailed look at the Centrepay use data, it was clear that First Nations consumers were being disproportionately harmed."

Ms Cooper said the findings did not surprise Mob Strong Dept Help financial counsellors.

"After being let down by successive administrations, consumer advocates now applaud the current government, the Centrepay reform team and Services Australia for backing these reforms," she said.

Services Australia has engaged in extensive consultation, including with First Nations advocates, and demonstrated a willingness to codesign the reform process over the past 18 months.

"The Centrepay reform team have set the new government standard for genuine and inclusive consultation, and we look forward to other government departments engaging in the same way," Ms Cooper said.

"Centrepay is now fit for purpose for recipients to manage their monies with the risk of financial harm proactively addressed."

MoneyMob Talkabout managing director Carolyn Cartwright said the reforms were long overdue and very welcome.

"As a service working in the remote space with First Nations people, we have far too often over more than a decade witnessed how easily the Centrepay system has been used as a tool to line the pockets of predatory businesses, rather than support people doing it tough," she said.

Government Services minister Katy Gallagher said the reforms would help ensure Centrepay remained an important tool to help with the management of household budgets each fortnight.

"The feedback we've heard from customers, businesses, and advocates is clear; we need the right safeguards in place to ensure people aren't being ripped off and can make more informed decisions about their finances," she said.

"These reforms will deliver a safer social security system and deliver better and fairer outcomes for Australians."

Financial Rights senior policy and communications officer Julia Davis said financial counsellors and consumer advocates had seen many examples of Centrepay being used as a vehicle for exploitation and financial abuse of Australians.

"Services Australia's Centrepay reform team is a good example for how government departments can do effective consultation with consumer groups, especially First Nations advocates, to improve outcomes for consumers," she said.

More information is available at servicesaustralia.gov.au/centrepayreform.