The FCA has published Thematic Review 15/8: Quality of debt management advice (TR15/8).
TR15/8 is the FCA’s second thematic review into the consumer credit market (the first being on how payday lenders and other high-cost short-term credit providers collect debts and treat borrowers who experience financial difficulty).
The FCA considers that debt management is one of the highest risk activities in consumer credit and its recent thematic review assessed compliance with existing rules, most of which are based on the Office of Fair Trading’s former Debt Management Guidance. TR15/8 does not establish any new standards or expectations. The thematic review focused on the core service offered by debt management firms – the advice they provide. The scope of the thematic review covered quality of advice, transparency and disclosure, cross selling and incentives and systems and controls relating to debt advice.
The FCA found that:
- quality of advice provided by the fee-charging debt management firms it sampled was of an unacceptably low standard. Firms were not assessing customers’ financial circumstances reasonably and this could result in a solution being recommended that was not suitable;
- the various debt solutions available to customers were not adequately explored in the advice process. This was particularly the case where a potential solution would result in little, or no, remuneration for the firm and for customers in Scotland who were recommended debt management plans;
- advice provided by the “free to customer” debt management firms in the FCA’s sample was generally of a higher standard. These firms exhibited fewer of the more significant failings seen in the fee-charging firms, but there was still scope for material improvements;
- information about the availability of free advice was either not provided, was not sufficiently prominent or was biased against, or derogatory about, the free sector;
- debt management firms were not adequately considering the suitability, or appropriateness of additional products that they were offering the customer; and
- some firms lacked the fundamental regulatory infrastructure needed to manage the risk of providing unsuitable advice. This included deficiencies in compliance resources, management information and quality assurance arrangements.
The FCA states in TR15/8 that as part of its on-going assessment of consumer credit authorisation applications, it will determine, amongst other matters, whether individual debt management firms meet the threshold conditions and therefore whether they should be granted FCA authorisation. Where firms are authorised the FCA will continue to focus on the quality of debt management advice as part of its on-going supervisory work. Firms are expected to take note of the FCA’s findings in TR15/8 and ensure that they are providing advice to an appropriate standard.
View TR15/8: Quality of debt management advice, 25 June 2015
