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.
