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Debt management firms blur boundary between advice and sales, finds FCA report

by: Carmen Reichman
  • 28/04/2014
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Debt management firms blur boundary between advice and sales, finds FCA report
A report commissioned by the Financial Conduct Authority (FCA) has accused debt management companies (DMC) of blurring the boundaries between financial advice and sales and pressurising consumers to opt for their products.

The report, put together by research agency ESRO in November and December 2013, formed part of the FCA’s Consumer Credit Research Programme ahead of its takeover of the regulation of consumer credit in April this year.

It looked at consumers’ experiences with debt management services, both fee‑charging and non‑fee‑charging, as well as payday loans and logbook loans.

It found consumers were faced with a general lack of distinction between financial advice and sales, and often wrongly believed they were receiving impartial advice when speaking to DMCs.

The report read: “During the sales/application process consumers indicated that DMCs blurred the boundaries between ‘financial advice’ and ‘sales’, leading consumers to believe that the DMC representative had a much higher level of financial knowledge and expertise than was the case. This contributed to consumers feeling pressurised to act on this ‘advice’.”

“In some cases”, it added, “salespeople would close down discussions, making it difficult for consumers to find opportunities to ask questions”.

It also found ‘advised’ consumers were also sometimes provided with inaccurate and misleading debt advice.

For example, it claimed, consumers were falsely told they had to be on a Debt Management Plan (DMP) for six months before they could apply for an Individual Voluntary Arrangements (IVA) – a slightly different debt management product.

To give more clarity, ESRO suggested, DMC sales staff should be required to tell their clients they are not qualified to give financial advice.

It added: “In order to further facilitate the distinction between advice and sales for the consumer, it might be useful to identify mechanisms that could link a physical contract to the verbal read‑through provided at the point of consumer contact with a representative.”

Under new regulations advisers who are involved in debt counseling need to hold consumer credit licences.

Financial services firm Tenet last month suggested most advisory firms will carry out some kind of regulated activity that requires a consumer credit licence from time to time.

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