The debt management sector remains one of the UK’s highest risk consumer credit sectors, according to the Financial Conduct Authority’s thematic review, which found that the quality of the advice provided by some fee-charging debt management firms was “unacceptably low”.
Between June 2014 and May 2015, the FCA reviewed how both fee-charging and ‘free-to-customer’ debt management firms were 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, there are still issues.
Linda Woodall, acting director of retail supervision at the FCA, said: “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 review uncovered failures and inaccuracies in the information provided by advisers eager to sign people up to a debt management plan 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 debt management plans. 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.
The FCA reviewed the practices of eight firms, of varying sizes and business models. Where firms did not meet expectations, it 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 regulatory authorisation.
In September last year, the regulator warned that firms must provide appropriate advice and charge fair fees to consumers.
Last month customers of three firms were told by the FCA to review their debt owed, as they may currently owe more than they initially did due to the firms’ lending practices.
peter.walker@ft.com
