In September 2014, the Financial Conduct Authority (FCA) issued a press release warning debt management firms, payday lenders and credit brokers that:
“Many firms are falling well short of our expectations and they will need to raise their game if they want to continue operating.”
The FCA had only become the regulator for debt management firms in April. As a result, many of these firms currently only have ‘interim permission’. From next month they will be applying for full authorisation by the FCA, which has decided to assess those services first that potentially pose a higher risk to the consumers.
Why debt management poses a high risk
Debt management firms come into this category because, as Victoria Raffe, director of authorisations at the FCA, says: “These firms are advising consumers who have often reached rock bottom, so it’s important that firms get it right.”
This is important. Most consumers seek some form of debt management not because they are worried their debts are getting too high but because there has been a specific external trigger. These trigger events can include:
- a drop in income or rise in expenses making a default imminent;
- letters from creditors or debt collectors threatening court action;
- CCJ or Liability Order proceedings being started; or
- bailiffs being instructed.
As a result, consumers are often very stressed and vulnerable to signing-up to any suggestion that seems to resolve their situation. Additionally, many people, especially perhaps the elderly, are ashamed of being so far in debt and find it difficult to talk about it. The result is that few people shop around for debt advice, so it is essential that the first debt management firm a person speaks to “gets it right”.
FCA required standards for debt management
The FCA is warning that its process for authorisation will be more rigorous than the previous licensing regime by the OFT. All debt management firms will have to meet the FCA’s required standards, which include:
- providing suitable advice for the client’s circumstances;
- debt solutions should be appropriate, affordable and sustainable; and
- advice to be provided by trained staff whose interests are in getting the best outcomes for the customer, rather than driven by incentives.
For a lot of commercial debt management firms, those are a pretty stiff set of criteria. The FCA’s Press Release or the CONC Handbook doesn’t go into detail about what some of those standards involve, but I would suggest that:
- appropriate means that if an alternative debt solution not provided by the firm is more suitable for the client, the firm must signpost the client to an appropriate source of help for that debt solution. Typically this would be relevant for clients where a Debt Relief Order or bankruptcy appear to be more appropriate than a DMP or an IVA;
- affordable has to be on the basis of an assessment of the client’s expenditure and needs that includes provision for all essentials items such as clothing and, if the debt management process will take several years, provision for replacing worn-out household goods; and
- sustainable implies that consideration has to be given as to whether a client’s finances are likely to improve or deteriorate over the probable duration of debt management. So if a client is likely to retire or have a reduced income when children become adults and benefits fall, this should be taken into account in assessing suitability.
If these criteria are rigorously applied by the FCA, then it seems likely that there will have to be a major changes at some debt management firms or they will have to exit the business.
Two missing pieces of the regulatory jig-saw
There are two areas of the debt management world which aren’t within the FCA’s regulatory reach at the moment. These need to be resolved in order to ensure the same standards are applied to all debt advice situations.
The first is the role of the Insolvency Practitioner. Some IPs work for firms that are authorised by the FCA, others do not. Even where an IP’s firm is FCA regulated, the role of the IP in administering an IVA is explicitly exempted from FCA oversight, although the initial debt advice process is not. This is not just a technical problem – the recent growth in IVA number may be partly attributed to the fact that some are being ‘mis-sold’ to customers where a DRO would have been more appropriate.
One possible option, and probably the quickest to bring in, might be for all eight IP authorising bodies to adopt mirror versions of the FCA’s proposed debt management standards. Alternatives could include giving the oversight regulator greater power or the more fundamental regulatory change of bringing protocol-compliant IVAs completely within the FCA’s ambit so that any IPs offering them would require FCA authorisation.
The second missing piece is even more problematic. A significant proportion of debt management business is routed to debt management firms by lead generators who are unregulated. Most consumers who talk to someone at a lead-generator are unaware of the distinction and believe they are talking to a debt advisor. It is vital that this first point of contact for the consumer also “gets it right” – that they should be suitably trained and incentivised, and that they should act in the best interests of the consumer.
This could be achieved either by requiring lead-generators to be regulated themselves or by requiring debt management firms to take responsibility for the quality of advice given by their lead generators. Neither of these options is going to be easy to introduce but this issue should not be ignored just because it is difficult.
The FCA’s Press Release is a warning shot across the bows of debt management companies about tighter regulation to more effective standards. The standards proposed appear good, although how they are implemented will be crucial. The FCA however will need to consider the problem of IP regulation and find a way forward with the Insolvency Service to resolve this. And it will also have to tackle the major problem of unregulated lead generators.