On 15 March, the Financial Conduct Authority (FCA) released the findings of its thematic review into the debt management sector.
The review explored whether firms in the sector are meeting the regulator’s standards, treating their new and existing customers fairly, and delivering appropriate outcomes, particularly for vulnerable customers.
It focused particularly on:
- The quality of debt advice given to new and existing customers, and those transferred from other firms
- The services provided to debt management plan customers
The review included not-for-profit debt advice bodies as well as commercial debt management firms.
Here we look at what the review found, and how, if you’re a debt management firm, you can meet the regulator’s requirements.
The FCA and the debt management sector
The UK regulator took over regulation of the consumer credit industry on 1 April 2014. Previously, firms providing consumer credit were regulated by the Office of Fair Trading (OFT). The debt management industry forms a large part of this consumer credit sector.
Today, the sector clearly remains on the regulator’s radar. Its Business Plan for 2018-19 has ‘high cost credit’ as one of its priority areas – an area closely linked to debt management.
What did the thematic review find?
The findings focus on three key areas:
- Quality of advice
- Administering debt management plans
The regulator found that ‘The culture in most commercial firms was now more focused on customer outcomes and managing customer risks from within firms’ businesses’ and believes that its ‘regulatory scrutiny and interventions in the sector’ have been a key reason for the improvements.
There is, though, a lack of understanding among firms of the rationale behind the rules they have to follow, and ‘the risks their business activities could pose to all or some of their customers’.
Quality of advice
The FCA believes that ‘The quality of advice has improved since [its] 2014/2015 review’ but that ‘firms need to work harder to make sure they consistently deliver good outcomes’.
Although most firms were found to be reaching the standards required for most of their customers, all firms showed evidence of ‘inconsistent practices and some customers that had received poor advice and unsuitable recommendations’.
Administering debt management plans
The review found that firms are devoting more time and resources to administering debt management plans, and especially on engaging with customers on annual reviews.
Firms still need to improve, however, when it comes to identifying the need for annual reviews and in adapting or considering the suitability of plans if customers’ circumstances change.
Key areas for improvement
Two areas were singled out as being in need of ‘significant’ improvement:
- Debt advice given to customers seeking help together or who are already on a joint debt management plan, where the FCA noted that ‘some firms routinely failed to consider or discuss what debt solutions are available and suitable for each customer individually’.
- The identification and treatment of vulnerable customers, including firms’ consideration of how an individual’s vulnerability might affect the delivery and suitability of the debt advice and their best interests.
The regulator used the release of the review’s findings to reiterate its expectations of firms, saying that ‘Firms should look at the FCA’s findings and consider the implications for their business’.
The full review findings report, available on the regulator’s website, includes examples of good and poor practice to help firms understand its approach. The FCA also reminds firms that ‘they must be compliant with all relevant rules in CONC and SYSC and our Principles for Businesses’.
What can debt management firms do to meet the FCA’s requirements?
- Make sure your financial promotions come up to the FCA’s standards. Treating customers fairly starts with your marketing and communications materials. The FCA requires all financial promotions to be ‘fair, clear and not misleading’.
- The process by which your promotions is produced can be as important as their content. Make sure you follow the correct Compliance review and approvals process, including a compliant audit trail. Many firms are looking to automated solutions to make the approvals process easier, faster and more robust – consider whether this might help your organisation.
- Familiarise yourself with the FCA’s rules on treating customers fairly and its desired consumer outcomes to make sure your processes and financial promotions measure up.
The FCA has fed back to firms and taken supervisory action where they have not met its standards. It expects firms to review the way they have operated in order to identify and rectify any instances ‘where customers have not received the quality of advice or level of service expected’.
Where issues have persisted, the regulator is taking further supervisory action, including opening an enforcement investigation into one firm.
Create a culture where regulatory compliance is front and centre
FCA regulation is still relatively new for the debt management sector. Embedding a culture of good governance is key to making the required behaviours and actions second nature.
What do we do?
At LS Consultancy, we offer a complete solution with a range of cost effective, regulatory compliance and marketing products and solutions including Copy Advice which are uniquely suited to supporting firms.