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Out-Law News 2 min. read

Debt management companies urged to audit their operations


Organisations that provide debt advice or that help consumers with debt management plans should consider auditing their operations and controls to ensure they comply with regulatory requirements, an expert in financial services regulation has said.

Andrew Barber of Pinsent Masons, the law firm behind Out-Law.com, recommended the move after the Financial Conduct Authority (FCA) said there are still improvements debt management firms can make to the way they treat some consumers.

The FCA's report came at the end of its second thematic review (41-page / 1.29MB PDF) into the debt management sector. Its first review was carried out in 2014 and 2015.

Barber said: "It is encouraging to see the FCA continuing to take a pro-active role in their analysis of the debt management market, the results of which show that progress has been made since the last review in 2014/2015 – however, there is still room for significant improvement. Commercial providers should look to audit their business operations and controls, particularly in relation to vulnerable customers, to ensure that they are both compliant and fostering a customer focussed culture, to limit their exposure to regulatory risk."

In its report the FCA said that it had seen an improvement in the culture of firms in the debt management sector since its first thematic review. Most firms are "now more focused on customer outcomes, acting in customers’ best interests in the provision of advice and managing customer risks from within firms’ businesses", it said.

"In the most positive examples, we can trace an underlying purpose of achieving good customer outcomes from policies and processes through to its successful application in the actual advice and services customers receive," the FCA said.

However, the regulator said some firms do not appear to understand the purpose of its rules and are "too reactive", while it flagged "unacceptably and consistently poor" standards of debt advice and debt management services at two smaller firms it had reviewed. One business is the subject of an enforcement investigation.

"Despite the improvements seen, we found inconsistencies in all firms’ practices that had caused, or could cause, harm," the FCA said. "In all firms, we found some customers that had received poor advice and unsuitable recommendations. We saw this more often in the advice or suitability reviews for existing or acquired debt management plan customers."

According to the FCA, "significant improvements" are needed in relation to debt advice given to "customers seeking help together or who are already on a joint debt management plan", as it said some firms it had reviewed had "routinely failed to consider or discuss what debt solutions are available and suitable for each customer individually", in breach of FCA Handbook rules.

"Urgent improvements" are also needed in relation to the way some firms identify and treat vulnerable customers, the FCA said.

"Firms need to improve: identifying and recording a customer’s vulnerability, the severity of the vulnerability or multiple vulnerabilities; considering how a customer’s vulnerability might affect the delivery and suitability of the debt advice and the best interests of the individual customer, and how it might affect the customer’s decision making; understanding why, when, and how the firm should adapt to meet the individual needs of the customer," the FCA said.

In addition to opening up an investigation into one firm, the FCA said it had already taken action against other firms that had not met its standards. It further called on firms to "review their past business to identify and put right where customers have not received the quality of advice or level of service expected", where appropriate to do so.

Debt management firms can expect the FCA to consult on new guidance on the identification and treatment of vulnerable customers later this year.

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