Debt management firms still failing Britain’s most vulnerable consumers, says FCA

The debt management sector remains one of the UK’s highest risk consumer credit sectors, according to a thematic review published today by the Financial Conduct Authority (FCA).

Between June 2014 and May 2015, the FCA reviewed how both fee-charging and free-to-customer debt management firms are complying with the consumer credit rules, including the advice provided and whether customers are treated fairly.

Although many firms have made an effort to improve their practices in the last 12 months, we found the quality of the advice provided by some fee-charging debt management firms was unacceptably low. ‘Free-to-customer’ firms were generally of a higher standard but there is still room for improvement.

Linda Woodall, acting director of Retail Supervision at the FCA, said:

“People who turn to debt management firms do so as a last resort. When they find themselves in this position it is vital that they are able to access suitable advice that allows them to make informed decisions about their future. Debt Management firms play a critical role in the consumer credit market, but far too many are not meeting the standards we expect and we will be looking for significant improvement."

All debt management firms are required to have clear and effective policies in place to identify and deal with vulnerable consumers. However, the FCA found that some firms even failed to identify those customers who had recently disclosed important information about themselves, for example, significant medical problems or difficulties understanding financial or legal issues.

The FCA found:

• firms failing to adequately assess customers’ financial circumstances before recommending a course of action
• firms not making clear the type of service they provide and that free advice is available
• vulnerable customers encouraged to purchase products and services which were not suitable and impeded their ability to repay their debts

The review also uncovered failures and inaccuracies in the information provided by advisers eager to sign people up to a debt management plan (DMP) with their firm. One fee-charging firm misleadingly told a customer that the free sector was “owned by the banks” and that the customer should only use the free sector if “they were prepared to do all the work themselves”.

Firms also failed to properly consider alternative options to DMPs. One customer on a low income told an adviser that she had considered bankruptcy but did not want to lose her car. The adviser not only failed to tell her this assumption may have been incorrect, but recommended a debt management plan that would take 125 years to pay off, well beyond her lifetime.

The FCA reviewed the practices of eight firms, of varying sizes and business models.  Where firms have not met the FCA’s expectations, we have required them to review past cases and provide appropriate redress where customers have suffered harm.

Most debt management firms are now going through the assessment process for FCA authorisation. If firms wish to continue providing debt management services, they will have to demonstrate that they meet the consumer credit rules, including treating customers fairly. At this time the FCA will also assess the level of fees charged by fee-charging debt management firms.

Notes to editors

1. Thematic Review 15/8: Quality of debt management advice[1].
2. In September 2014, the FCA warned debt management firms to raise their game[2].
3. The Money Advice Service offers free, impartial information that can help people get on top of their debts: www.moneyadviceservice.org.uk[3]
4. On 1 April 2014, the FCA became responsible for the regulation of approximately 50,000 consumer credit firms.
5. On 1 April 2013, the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
6. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
7. You can find more information about the FCA[4].