With so many consumers having been affected by coronavirus, demand for debt advice is set to increase dramatically. With this increase in demand comes increased risks, so what do firms in this area need to be aware of?
The debt advice sector is certainly expecting unprecedented demand as consumers suffer the financial consequences of the coronavirus pandemic. With this comes certain added risks, and the Financial Conduct Authority has set out what it sees as the risks facing the sector in one of its ‘portfolio letters’.
The FCA expects the boards of debt advice firms to consider the contents of the letter and make any necessary changes to their business model.
The letter starts with a reminder that, as in all sectors of financial services, the FCA can deem individual senior managers to be responsible when failings are identified within a firm, and that individuals carrying out controlled functions can then face enforcement action.
The FCA says it believes there are five key drivers of harm in the debt advice sector:
- Consumers being unable to access debt advice when they need it due to insufficient capacity in the sector
- Poor quality advice being given by firms, including issues with income and expenditure assessments, resulting in consumers entering into debt solutions which are not in their best interests
- Inadequate governance and controls over fee structures leading to consumers paying excessive fees and/or additional charges related to the administration of the debt solution
- Inaccurate regulatory reporting of data and failure to abide by notification requirements, thus adversely affecting the FCA’s ability to effectively supervise firms, which may in turn undermine consumer confidence in the market and conceal harm
- Firms operating with insufficient prudential resources, as required under CONC 10 of the FCA Handbook, to enable them to remediate customers if required, in the event that their actions cause consumer harm
On the subject of capacity, the FCA cites research by the Money and Pensions Service indicating that demand for debt advice may rise by as much as 60% by the end of 2021. The regulator says it expects firms to have effective processes in place to identify, monitor and manage the risks they are facing, or might be reasonably expected to face, and that firms should consider whether the increased flow of consumers seeking advice could be one of these risks.
On the subject of quality of advice, the letter raises a number of issues, including:
- Firms are required to monitor customer repayments for evidence which suggests a change in financial circumstances. The FCA notes that some firms have been struggling to complete these required annual reviews due to operational challenges associated with coronavirus. Where this is the case, the firms should notify the FCA and should develop appropriate plans to ensure that overdue reviews are completed as soon as possible
- The FCA remains concerned about debt packager firms who might prioritise referrals to debt solutions that are more profitable, instead of recommending the most appropriate option for the customer’s needs
- The regulator is concerned that some firms are not considering all of the issues raised in the recent Vulnerable Customers Thematic Review
- The FCA believes there are still weaknesses in monitoring of appointed representatives by some principal firms
Regarding fees, the FCA is still concerned about a lack of transparency around firms’ fee structures in some cases, which may result in consumers paying additional charges that they have not budgeted for or taken into account when choosing their debt solution. The regulator says it has observed instances where customers in debt management plans were paying more towards the firm’s fees than to their creditors. FCA rules say that the way fees and charges are applied must not undermine a customer’s ability to make significant repayments to creditors.
Any debt management firm wanting advice or clarification is advised to speak to their compliance consultant.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article