On 5 October, the FCA wrote a Dear CEO letter saying:
We have undertaken a review of a small sample of debt advice provided by Debt Packager firms and are very concerned about the poor standards we have seen…
The FCA then asks the CEO to review:
- your quality of debt advice;
- the firm’s identification and treatment of vulnerable customers;
- financial promotions, and
- systems and controls.
What is a Debt Packager?
A “Debt Packager” is a firm authorised to give debt advice but which doesn’t provide the debt solutions themselves, they advise a customer on the best debt solution and then refer (or signpost) the customer to a suitable firm to provide that solution. Where this is a referral, the Debt Packager provides information on the client to that firm and gets a fee for this.
The size of the fee depends on what solution is being advised. The fees for an IVA are normally a lot larger than for a DMP, and no fees at all are paid for DRO or bankruptcy referrals.
As a result, many Debt Packagers make most, in some cases probably almost all, of their money from recommending IVAs. They are effectively IVA Lead Generators.
The problems with IVA Lead Generators
Lead Generators have a very important role to play in the advice process. As the Insolvency Service has said in its recent report on IP regulation:
The initial conversation is crucial in helping to determine the course of action chosen by the debtor.
People in debt need good advice on their options, otherwise they will take the first solution offered, particularly if it sounds very tempting.
In 2016, Money Advice Trust said:
we are now seeing a worrying growth in lead generation companies solely passing on leads to IPs for IVAs, which is a course of action that neatly bypasses FCA scrutiny. This could easily result in a much less rigorous or holistic debt advice process being carried out, and the exacerbation of a new trend in possibly unsuitable IVA products being sold to clients with lower incomes and lower available income.
In my article that year on unauthorised IVA Lead Generators I looked at how lead generators often gave too positive an impression of IVAs and too negative impression of other debt options.
In 2017, IVA numbers continued to grow and so has the concern that IVAs are being mis-sold to people who would have qualified for a DRO or who, with better advice, may have chosen to go bankrupt, see 2017 Insolvency Statistics – the real story.
But since 2016 some previously unauthorised IVA Lead Generators have chosen to become authorised, either directly by the FCA, or as an Appointed Representative (AR). So has the additional FCA scrutiny not resulted in improved advice?
The problems described in the Dear CEO letter
The Dear CEO letter says:
[higher fees for IVA referrals] may create a conflict with a key requirement of our rules which requires that staff (whether
employees, agents or appointed representatives (ARs)) are not incentivised to provide advice that:
- does not have regard to the best interests of the customer, or is not appropriate to the
customer’s individual circumstances, or
- is not based on a sufficiently full assessment of the customer’s financial circumstances.
We expect you to ensure that you are putting customer interests at the heart of the business to achieve the right outcomes…
- make a sufficiently full assessment of the customer’s circumstances to ensure that the advice provided is appropriate
- ensure that your staff have the necessary skills, knowledge and expertise to provide advice
- ensure that vulnerable customers are identified and receive appropriate support throughout their customer journey
- ensure that the financial promotions and customer communications used by your firm, its employees and its agents are clear, fair and not misleading.
The Annex to the letter gives more details including the need for firms:
- to provide not misleading descriptions of the different debt options;
- to assess reasonably foreseeable changes in customers circumstances so the advice given is likely to be sustainable;
- to provide advice in a durable medium and allow sufficient time for the customer to consider it before taking a decision;
- to not unfairly incentivise staff – advice has to be in the best interest of the customer.
Some examples of these problems
The FCA letter doesn’t give examples, but here are some of my thoughts :
- if a website looks like an advert for IVAs, it is misleading. This includes having no information about debt solutions apart from IVAs; having the majority of the home page of a website devoted to IVAs, and only providing testimonials for IVAs;
- it is misleading to highlight an advantage or disadvantage of one debt solution and not mention if that also applies to other debt solutions. So if your website says you cannot borrow more than £500 in a DRO without informing the lender, it should also point out that you cannot borrow more than £500 in an IVA without the agreement of your IP;
- it is misleading to suggest that IVAs may have a less detrimental effect on a customer’s credit rating than bankruptcy or DROs (eg “However, compared to other arrangements such as bankruptcy – which leaves a mark on your credit file for up to six years – it may not be quite as impactful”);
- it is misleading to suggest that IVA monthly payments will always be affordable;
- a separate assessment should be made for each member of a couple;
- debt advisers and websites should not play on people’s fears (eg “For many people, an IVA is the preferred solution as it enables them to avoid bankruptcy and all the unsettling consequences that come with it.”);
- what are facts may require more explanation so they are not misleading (eg for bankruptcy “you will hand over all rights to your personal belongings (assets) to a ‘Trustee’. It’s the Trustee’s job to oversee the sale of your assets”.) It is a debt adviser’s job to try to dispel any myths and explain how bankruptcy may be better for some clients;
- firms should provide useful information and signposting about the ways a client could get the necessary bankruptcy fee;
- debt advisers need to be aware that disability costs are routinely taken into account in DROs and bankruptcy so a customer with an assessed IVA monthly payment of over £50 on an IVA basis may still qualify for a DRO or pay no IPA/IPO in bankruptcy;
- debt advisers should ask questions about possible changes over the next five years – need to move house? retire? lose benefits? support a child at uni? car finance ending? etc;
- IVAs should not be sold as a quick and simple way of avoiding problems with bailiffs without detailed consideration of the other alternatives.
Phone call recordings need to be listened to by the FCA
The Dear CEO letter says baldly that:
We have concerns that this business model has the potential to cause harm to customers.
Many of the examples above relate to websites. These should be simple and quick to correct and it’s easy for a regulator to check it has been done.
But in practice, most of the harm probably comes through phone calls. These are the single most important part of the process. A good debt adviser will be alert to any signals about vulnerability; will not coach people into giving “suitable” answers when completing an I&E; does not treat the call as a sales process.
Given the seriousness of the FCA’s concerns and the potential detriment to consumers sold an IVA where they have a better debt option available, it seems to me to be essential that the FCA should be systematically listening to call recordings as part of its supervision process.
I don’t think it can be left to authorised firms to regulate their ARs – they have a financial incentive to spend as little effort as possible in doing this and to decide the AR is doing a good job. I think the FCA needs to supervise all firms doing business as Debt Packagers directly.
A welcome move by the FCA
I think the Dear CEO letter is a very important and welcome move by the FCA. Unregulated IVA lead generators have a huge potential for causing harm to people in debt. But authorisation by the FCA does not by itself solve these problems, that requires effective supervision and enforcement of the provisions in CONC. This Dear CEO letter is a warning shot to the firms that the FCA is focussed on these problems and will act to prevent them.