Debt management firms must raise their game, says FCA

The Financial Conduct Authority (FCA) says debt management firms must demonstrate they provide appropriate advice, do not charge unfair fees, and have adequate processes for handling client money when assessments for consumer credit authorisation start next month.

Firms that provide services which pose a higher risk to consumers will be assessed first, including debt management firms, payday lenders and credit brokers.

Victoria Raffe, director of authorisations at the FCA, said:

"These firms are advising consumers who have often reached rock bottom, so it’s important that firms get it right. Many firms are falling well short of our expectations and they will need to raise their game if they want to continue operating."

The process for authorisation will be more rigorous than the previous Office of Fair Trading licensing regime. The emphasis is on creating a sector that works well for both firms and consumers. The FCA expects all debt management firms to meet required standards, including:

• a business model where customers benefit fully from the service offered, and fees are fair and transparent
• providing suitable advice that takes into account a client’s circumstances and for debt solutions to be appropriate, affordable and sustainable
• advice to be provided by trained staff whose interests are in getting the best outcomes for the customer, rather than driven by incentives
• appropriate systems and controls that will protect client money
• notifying the FCA if they have obtained a book of customers from a firm or a legal entity undertaking debt management
• telling customers about free debt services and signposting them to the Money Advice Service for more information in their first communication with the customer.

The FCA has conducted targeted firm visits and has found that many debt management firms are failing to adequately follow the consumer credit rules brought in to provide additional protection for consumers in April.

Since April:

• we have issued final notices against two firms who have had their applications refused
• seven firms’ bank accounts have been frozen to protect client money
• two firms have entered administration
• one firm is closed to all business
• fourteen  firms have agreed to stop taking on new business
• seven firms have been directed to appoint a “skilled person” to report on the firm’s compliance with FCA rules
• a further firm has cancelled its interim permission and will no longer provide debt management services
• the FCA is also investigating a number of other debt management firms and individuals.

The application periods for firms with interim permission start in October 2014.

Notes for editors

1. The assessment process for authorisation will help to establish a clear standard across the industry which is in the interests of both firms and consumers. Further information about the authorisation periods[1].
2. On 17 September, the FCA issued a consumer warning[2] about Gregson and Brooke Financial Services (trading as Expert Money Solutions), One Tick (trading as Debt Savers and 1-Tick) and the Money Management Service.
3. On 22 May 2014, the FCA announced that Debt Help & Advice Ltd and First Step Finance Ltd had stopped trading and were in administration[3].
4. In May, the FCA released research[4] which showed that some debt management providers were giving consumers poor advice and lacked the necessary training to advise customers on suitable plans.
5. On 1 April 2014, the FCA became responsible for the regulation of approximately 50,000 consumer credit firms. Further information.
6. The Money Advice Service[5] provides free and impartial information that can help people get on top of their debts.
7. On the 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
8. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
9. Find out more information about the FCA[6].