A recent workshop highlighted the importance of record keeping as intermediaries and lenders need to be able to evidence why advice to consolidate debts is suitable and appropriate to a customer’s needs and circumstances. This includes considering the costs associated with increasing the period over which a debt is to be repaid; each debt needs to be looked at individually with many factors needing to be taken into account, not just the interest rate. As such, firms should not take an ‘all or nothing’ approach to consolidation as it may only be appropriate to consolidate some of the debts. It is unlikely that debts with a remaining term of less than 12 months should be consolidated.
While suitability letters are not mandatory, if a firm does use them they should be specific to a customer’s circumstances rather than based on a generic template. This is particularly important with the often complex nature of debt consolidation cases. Files should reflect where a customer has payment difficulties whether negotiating an agreement with creditors is more appropriate than taking out a mortgage. The regulator is also unlikely to look kindly on any disclaimers signed by the customer. In undertaking this work the adviser is responsible for the advice to consolidate the debt; stating that it was the customer’s choice is not sufficient.
Documenting wider conversations with a customer is particularly key if the customer can already afford to repay their unsecured debts. While the regulator has been clear that a customer’s desire to consolidate is not sufficient justification on its own for the mortgage advice, we hope that its supervisory approach does not cross boundaries. Comprehensive conversations should of course take place to be able to make recommendations which are in the customer’s best interests, but these shouldn’t be political. Firms should not be expected to actively discourage those customers who prefer to consolidate debt even if there is clear affordability. Advising on a customer’s lifestyle feels a step too far.
There are, however, understandable concerns about customers who repeatedly consolidate debt as this could indicate payment difficulties. These customers are not always visible and are often vulnerable. Product innovation could help with this. If a customer was given the option to consolidate the debt into a shorter term than the rest of the remortgage with the same rate and conditions, it would not only be more transparent but also help the customer manage their repayments. Innovative lenders, take note.
Advice can be more complex where a customer is looking to consolidate debt, so there is often more work involved and a higher advice risk. Firms should therefore have in place a policy which sets out a clear framework for its advisers, and also be mindful of likely crossover with customer vulnerability. Senior management should be able to demonstrate effective processes in place to identify, manage, monitor and report risks it is or may be exposed to.