The FCA plans to complete another review of the debt management sector by the end of Q1 2019. This will follow on from a previous review conducted in 2014, which outlined several areas that need improvement if firms are to meet regulatory requirements and provide quality services to their customers.
What is the state of UK debt?
According to Alex Brazier, the Bank of England’s Executive Director for Financial Stability, the UK’s personal debt has risen by 10% in the past year, compared to a 1.5% growth in household incomes. Alex is concerned that in a period of good economic performance and low loan losses, lenders can enter a “spiral of complacency”, with lenders thinking they can reduce prices and loosen lending criteria. As credit becomes cheaper, it’s taken up more widely and is serviced more easily.
This growth of personal debt means that the UK regulators must keep a close eye on the sector to try and minimise the risks to customers, particularly those in a vulnerable financial situation.
What have the FCA already been doing to alleviate risk?
In 2014, the FCA highlighted a number of areas within the debt management sector that need improvement. These included the way that firms provide financial advice, how fees are calculated, and whether firms treat customers fairly, and the ways in which advisors handle customers’ money. The FCA targeted a number of firms for review, and implemented a more rigorous authorisation process, which was followed up again in a thematic review in 2015. The thematic found significant concerns with the quality of advice being given by commercial providers in particular.
Now, the FCA will review the debt management sector again, in order to see how firms have implemented the FCA requirements, and to see whether there is need for further improvement within the sector.
What will the new review entail?
This thematic review will involve the FCA focusing on a sample of fee-charging and free-to-client service providers, looking at their entire process, from the initial stage of giving advice, to dealing with customer complaints and follow ups.
The FCA asserts that it will be looking for debt management firms that could improve their practices by ensuring that their fees are fair and transparent, that advisors have provided suitable advice and whether appropriate systems are in place to safeguard customer’s money.
What’s different this time around?
Since the last review, the FCA have tightened authorisation into the sector, causing some firms to leave the industry or change their business models. The FCA has also embarked on many supervisory activities, including writing two CEO letters to remind them of the FCA’s requirements on annual reviews and on transfers of customers between firms.
The FCA will use the information compiled in the 2014 review which includes complaints files, applications for authorisation and other firm and industry specific data gained from supervision and authorisation. The FCA want to understand where there is good practice that it is helping consumers to achieve positive results in dealing with their debts, as well as identifying areas for improvement.
The latest debt management review will be completed in Q1 2019 – we’ll keep you posted of any updates.