This is a guest post by Nick Pearson, CEO of The Debt Counsellors Charitable Trust, who is writing in a personal capacity.
The overwhelming majority of commercial Debt Management (DM) firms were required to submit their applications for full Financial Conduct Authority (FCA) authorisation by the end of December 2014. To date, as far as I’m aware, no firm has yet received full authorisation and they continue to trade with FCA Interim Permission. Indeed, I know of one DM firm, who applied to be a DM Principal for Approved Intermediaries, that applied to the FCA in August 2014 and has still not yet had a decision.
The FCA have stated publicly that they want to make “the right decision, not a quick decision” about whether DM firms are fit to be authorised. They have also said that it is a myth that if DM firms have got this far in the process it means that they will be authorised. Not even the FCA’s fiercest critics could suggest they have been overly hasty with regard to applications.
On 13th January 2016 the FCA issued a press release that stated “We are aware of a number of debt management firms leaving the sector. These changes may affect consumers with DMP’s and we are taking steps to help them.” The FCA suggests consumers should contact the Money Advice Service for advice if their Debt Management Plan has “stopped or moved to another firm.” Perhaps this indicates FCA authorisation decisions are imminent? Or perhaps not.
Before Christmas the FCA issued a press release reminding DM firms buying or selling back books of DMP’s of their responsibilities, for example the need to advise the FCA about any deals early in the piece. Perhaps this indicates the FCA expect widespread exits from the Commercial DM market? Or perhaps not.
Can we glean anything about what all this means in terms of the future of the commercial Debt Management sector?
My sources inform me that the FCA think few, if any, DM firms are fit to be authorised as it stands currently. Indeed as recently as this week the FCA advised firms that few, if any, firms they had inspected fully met their CASS Client Money Handling Rules.
Given the length of time the authorisation process has taken it seems reasonable to conclude that the FCA wish to work with those firms who they believe could become authorised with some additional advice and support. Perhaps the FCA thematic review of the quality of debt advice, which showed 70% of advice from the two free-to-client providers surveyed was of medium or high risk of giving rise to consumer detriment, has meant that the FCA feel that closing down the commercial DM sector and allowing the free-to-client sector to pick up the pieces is not a sensible option? Better perhaps to see if they can lick the commercial DM sector into shape? It is all speculation of course.
Anyway, let’s assume that some major DM firms cannot be made fit to be authorised and are obliged to exit the market. What will be their next step?
My guess is that some DM firms who don’t get FCA authorisation will simply pop back up using a loophole created by HM Treasury in the Regulated Activities Order and continue trading ( see PERG 2.9.25 – 27).
Many, mainly smaller, DM firms have already opted out of FCA regulation altogether because they use the PERG loophole to claim they operate “in reasonable contemplation” of acting in a formal insolvency capacity e.g. by offering only IVA’s and therefore are not legally obliged to be FCA authorised. These firms are regulated instead by the Insolvency Practitioner trade bodies such as the Insolvency Practitioners Association and not the FCA. Where clients are not suitable for IVA’s they simply sell the ‘lead’ on to firms who are authorised (interim!) by the FCA to provide DMP’s.
In October 2015 I wrote to Tracey McDermott, CEO of the FCA, to share my concerns about how this exclusion is already being abused by firms. The FCA replied by saying that “In relation to the exclusion itself, this is a matter you would need to take up with HMT in the first instance as the responsibility for the extent of the FCA’s regulatory remit is a matter which sits with the HMT. Having said that, if we become aware of widespread abuse of the exclusion, then the FCA might also raise that with HMT.”
Only time will tell how all this is going to pan out but be assured of one thing; the senior folk in commercial DM firms are smart and those that want to continue to operate are not going to allow their businesses to simply disappear.
This one will run and run!