FCA publishes hard hitting report on the poor service to consumers provided by the debt management sector

July 2015

FCA publishes hard hitting report on the poor service to consumers provided by the debt management sector

On 25 June 2015, the FCA published its paper reporting the findings of its thematic review of the quality of service provided to consumers in the debt management sector. The firms assessed by the FCA ranged from fee-charging debt management firms of all sizes to free-to-customer organisations such as charities.

The review is the second undertaken by the FCA following its takeover of the regulation of the consumer credit market in April 2014. The FCA believes debt management to be one of the country’s highest risk activities in the consumer credit sector.

Having warned in September 2014 that debt management firms must ‘raise their game’, the FCA’s report does not make for good reading for those subject to the thematic review, or for those consumers struggling to repay their debts and who have sought advice from such organisations. The FCA found significant failings with a number of areas requiring “substantial improvement” in order for providers of debt advice to demonstrate compliance with the FCA’s consumer credit regulatory requirements aimed at treating customers fairly.

Focusing on four areas (quality of advice, transparency & disclosure, cross selling & incentives and systems & controls), the report concluded that the service provided by firms fell short of the standards the FCA expects. The FCA assessed the quality of advice of the fee-charging debt management firms as ‘unacceptably low’, and although the FCA reported that the free-to-customer firms demonstrated fewer signs of the more significant failings of fee-charging firms, there is still scope for material improvements by free-to-customer organisations.

Particular findings of the FCA include:

•Debt advice having been provided which is not in the customer’s best interests.

•Debt solutions and additional products and services recommended that are not suitable, affordable or sustainable for the customer.

•Organisations were failing to adequately assess customers’ financial circumstances before recommending a course of action.

•Fee-charging firms not making clear to customers the nature of the service being offered, including fees that some customers are required to pay.

•Failures to provide proper information about the availability of free advice.

•Evidence of vulnerable customers being encouraged to purchase products and services which adversely impacted on their ability to make significant repayments towards their debts.

Debt management firms that previously held an OFT Consumer Credit Licence and wish to continue providing FCA-regulated services are in the process of seeking FCA authorisation. For such firms offering these services, to obtain necessary approvals, they will need to demonstrate that they meet the FCA’s expectations in respect of its consumer credit regime.  With the FCA’s thematic report illustrating that there are significant improvements to be made in the sector, it will be interesting to see whether those firms currently falling short in the areas of quality of advice, transparency & disclosure, cross selling & incentives and systems and controls raise their standards sufficiently in order to obtain FCA authorisation in the future.

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