The Financial Conduct Authority (“FCA”) thematic review 15/8 focuses on the level of compliance with existing Consumer Credit Sourcebook rules as based on the Office of Fair Trading’s former Debt Management Guidance. The FCA is concerned that debt-management firms, fee charging ones in particular, are failing to provide advice that is in a customer’s best interests creating the risk of further indebtedness.
Debt management firms authorised by the FCA provide debt management services in respect of negotiating with creditors on behalf of debtors and acting as a conduit for payments between them. Debt management solutions most commonly include Debt Management Plans- an informal arrangement between the debtor and creditor(s), where creditors are requested to freeze interest and charges.
The FCA reviewed a combination of fee-charging and free-to-customer debt management firms operating in the relevant UK market. All fee-charging debt-management firms will have now already submitted their full authorisation applications to the FCA and await assessment against amongst other things, the FCA Principles for Businesses and Threshold Conditions.
- High-level findings on the quality of debt-management advice include:
- Failure to assess a customer’s personal circumstances and potential vulnerability;
- Failure to assess a customer’s financial position specifically, the inadequacy of income and expenditure assessments;
- Recommendation of debt solutions which are not in a customer’s best interests e.g. those which reduce the amount of income available to repay creditors;
- Inadequate governance and risk management arrangements e.g. low samples sizes for QA, insufficiently resourced Compliance functions and commercially as opposed to outcomes focused management information;
- Unbalanced financial promotions advertising debt management services; and
- Inadequate client money arrangements.
The FCA thematic review raises some compelling points about what appear to be inherent conflicts between debt-management firm business models and good customer outcomes. Overlaid with the complexity of customer vulnerability, the review paints a somewhat murky picture.
To give an illustration, half of all advice cases reviewed by the FCA were assessed as posing a high risk to customers i.e. where advice was not appropriate and in the customer’s best interests and where the recommended solution was potentially unaffordable and unsustainable. This rose to 60% of all cases, when looking at fee-charging debt-management firms.
Case examples included one instance where a customer indicated (following a thorough income and expenditure assessment) that they could repay their debts in two months. However, as the firm could only get involved where repayments plans were for six months or more, the customer was encouraged to increase expenditure figures so that it would take them longer to repay the debt. Thereby allowing them to enter into a six month debt management plan with the firm.
Given the operational backdrop to the provision of such debt-management firms, the findings are perhaps unsurprising. Indeed, the most significant outlay to debt-management firms is experienced in the process used to determine whether a customer is eligible or not. The mechanics usually involve a lengthy telephone call to assess income and expenditure including external credit referencing and/or validation. Following this outlay, it is perhaps unsurprising that an eagerness to find a debt solution offered by the firm can result in a loss of perspective as to what is in the best interests of the customer. This, coupled with incentives aligned to the number of call to customer conversions and monitoring of time spent on calls can create a potentially fractious environment.
Forming a link between an elegant theory of customer protection and the complex reality of profit seeking organisations is as always, the ultimate challenge.
Vulnerability has been a key area of focus for the FCA since it came into being in 2013. Similarly, its focus on behavioural economics has been with a view to guiding it as both a policymaker and supervisor towards the underlying causes of a problem and mapping biases to possible regulatory solutions.
The FCA has frequently signposted consumer vulnerability in recent times and this pervades its most recent thematic review in identifying over-indebtedness as a risk factor for vulnerability. Furthermore, the FCA acknowledges that whilst customers are unlikely to shop around for help with debt, they display over-optimism and a sense of compulsion when faced with someone offering to ‘solve my problems’.
This too appears to be another hurdle inherent in debt-management firm business models given their interaction with individuals at their most desperate, seeking help with unmanageable debts through the provision of distress purchase products.
The FCA fears the all too easy to imagine situation where an individual suffering from stress and anxiety regarding a seemingly never-ending cycle of debt leaps at the first offer of help. And this does not yet touch on other broader biases linked to overconfidence regarding the ability to reduce expenditure and projection bias in respect of current financial circumstances remaining the same for the length of a debt management plan.
The challenge here is identifying particularly vulnerable customers given the nature of the business and delivering a suitably tailored service that adequately responds to their needs.
- The FCA expect debt-management firms to:
- Accurately advertise the potential benefits of debt solutions and the firm’s ability to freeze interest and charges imposed by creditors;
- Request evidence to support customer income and outgoings- as opposed to relying on self-declaration;
- Make referrals to not-for-profit debt advice firms where a customer does not have sufficient disposable income to pay the firm’s fees;
- Supplement customer views with accurate and impartial information about the advantages and disadvantages of solutions and how there relate to their particular circumstances; and
- Use plain, intelligible language and avoid unfair terms so that contracts provide a clear picture of what is being entered into, potential changes to this and the charges imposed by the firm.
The FCA have noted that a significant number of firms are unable to evidence and/or stand by how they made the judgements in relation to debt advice and this is particularly concerning due to the potential impact of such failings.
Can your firm answer and evidence the debt management firm advice questions below?
- How are vulnerable customers identified and assurance provided that they are being treated appropriately?
- How is information regarding the range of available solutions presented in a way that doesn’t emphasise or underplay certain factors?
- What happens where an assessment indicates that the best solution for a customer is not aligned to one the firm’s offering?
- Is there appropriate monitoring and MI in place to assess customer outcomes?
- Is it clear that the outputs of any monitoring and MI are reviewed, understood, shared as necessary and acted upon?
- Are significant conduct issues related to the product/service likely to be promptly identified and acted upon?
Scrutiny of debt-management firms shows no signs of letting up. The previous Government accepted a recommendation that HM Treasury, the Insolvency Service, Money Advice Service and FCA would undertake a review of: the legal framework for debt administration, in order to provide consumers who agree to specified debt repayment schemes with a ‘breathing space’ by freezing interest and charges, and to ensure a fair and appropriate basis for debt repayments to different classes of creditor.
In addition to this, the FCA will be looking for evidence from those firms obtaining authorisation that improvements required are maintained and that advice is provided to an appropriate standard.