The Financial Conduct Authority (FCA) reviewed the free and fee-charging sectors between June 2014 and May 2015 to find out if they were complying with the consumer credit rules. They were also measured on the quality of advice given and if they were treating their customers fairly.
It found that some fee-charging debt management firms were providing an ‘unacceptably low’ level quality of advice compared to their free counterparts.
The report revealed that one fee-charging firm made false claims to persuade customers to pay for its services rather than using a free alternative.
The firm told a customer that the free debt management sector was ‘owned by the banks’ and by using free services they would have to be prepared to do the work themselves.
Another example of poor practice was found when a customer on a low income had said she had considered bankruptcy but was worried she would lose her car. The adviser failed to tell her this assumption may have been incorrect and recommended a debt management plan that would take 125 years to pay off.
Linda Woodall, acting director of retail supervision at the FCA, said: “People who turn to debt management firms do so as a last resort. When they find themselves in this position it is vital that they are able to access suitable advice that allows them to make informed decisions about their future.
“Debt management firms play a critical role in the consumer credit market, but far too many are not meeting the standards we expect and we will be looking for significant improvement.”
The FCA found that even when customers gave firms important information about their medical problems or disclosed that they had difficulties understanding financial or legal issues, firms failed to identify them as having vulnerable circumstances.
Further shortcomings were found in firms’ failure to assess customers’ financial situations before giving advice and not disclosing the type of service they provide or that a free option was available. Consultants encouraging vulnerable customers to purchase unsuitable products and services which wouldn’t help them clear their debts also featured in the review.
It was found that free-to-customer firms were generally of a higher standard but there was still room for improvement.
Most debt management firms are now going through the assessment process for FCA authorisation. If firms want to continue providing debt management services they must demonstrate that they meet the consumer credit rules including treating customers fairly.
At this time the FCA will also assess the level of fees charged by some debt management firms.
