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Debt management firms slammed by FCA Debt management firms slammed by FCA
(35 minutes later)
Debt management firms that claim help to those struggling with money problems have been slammed by the City watchdog for offering poor advice and pushing people into costly repayment plans.Debt management firms that claim help to those struggling with money problems have been slammed by the City watchdog for offering poor advice and pushing people into costly repayment plans.
The Financial Conduct Authority, which has recently switched its attention from payday lenders like Wonga to debt management firms, said many of the companies were “failing Britain’s most vulnerable consumers”.The Financial Conduct Authority, which has recently switched its attention from payday lenders like Wonga to debt management firms, said many of the companies were “failing Britain’s most vulnerable consumers”.
In one example of staggeringly poor practice, the City watchdog found a firm recommending a 125-year debt repayment plan to a person on low-income.In one example of staggeringly poor practice, the City watchdog found a firm recommending a 125-year debt repayment plan to a person on low-income.
Debt management firms are set up to provide solutions including bankruptcy and debt management plans for people whose debts have spiralled out of control. Many of the companies charge a fee and it is these paid-for providers in particular that provide a level of advice that is “unacceptably low”, the FCA said.Debt management firms are set up to provide solutions including bankruptcy and debt management plans for people whose debts have spiralled out of control. Many of the companies charge a fee and it is these paid-for providers in particular that provide a level of advice that is “unacceptably low”, the FCA said.
Linda Woodall, acting director of retail supervision at the FCA, described debt management as “one of the highest risk activities in consumer credit” and said that people who turn to debt management firms do so as a last resort.Linda Woodall, acting director of retail supervision at the FCA, described debt management as “one of the highest risk activities in consumer credit” and said that people who turn to debt management firms do so as a last resort.
“When people 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,” she said.“When people 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,” she said.
“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.”“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.”
In particular the watchdog found firms were:In particular the watchdog found firms were:
Debt management firms have been widely criticised for bad practice and poor advice since they began to proliferate just over 10 years ago. In 2006, the Guardian highlighted poor practices such as people on state benefits with huge debt problems being put into expensive, and often inappropriate, repayment plans.Debt management firms have been widely criticised for bad practice and poor advice since they began to proliferate just over 10 years ago. In 2006, the Guardian highlighted poor practices such as people on state benefits with huge debt problems being put into expensive, and often inappropriate, repayment plans.
However, it has only been in the last year, since the FCA took over regulatory responsibility for consumer credit that the firms have really been scrutinised.However, it has only been in the last year, since the FCA took over regulatory responsibility for consumer credit that the firms have really been scrutinised.
As recently as September 2014 the FCA warned debt management companies that they must “raise their game” or be shut down.As recently as September 2014 the FCA warned debt management companies that they must “raise their game” or be shut down.
Many people who sign up for the services of a debt management company may not even have asked them for help. Often they are contacted following, for example, being declined a loan. Their details may have been sold to the debt management firm by a third party, such as the loan provider.Many people who sign up for the services of a debt management company may not even have asked them for help. Often they are contacted following, for example, being declined a loan. Their details may have been sold to the debt management firm by a third party, such as the loan provider.
Most debt management firms, particularly fee-charging ones, set a minimum level of disposable income (typically £70-£100 a month) which customers must have in order to access their products and services. The FCA found a “significant number of cases” where debt management firms were fiddling with the figures to make it possible to take on debtors with lower incomes than this.Most debt management firms, particularly fee-charging ones, set a minimum level of disposable income (typically £70-£100 a month) which customers must have in order to access their products and services. The FCA found a “significant number of cases” where debt management firms were fiddling with the figures to make it possible to take on debtors with lower incomes than this.
The FCA also found most of the firms it surveyed were offering some form of financial incentive to their staff. These either related to the debt solutions offered, cross-selling additional products such as payment protection insurance (PPI) – or both.The FCA also found most of the firms it surveyed were offering some form of financial incentive to their staff. These either related to the debt solutions offered, cross-selling additional products such as payment protection insurance (PPI) – or both.
The Money Advice Service, one of a number of organisations alongside Citizen’s Advice and StepChange to offer free debt advice, said that the FCA’s findings were disturbing. The Money Advice Service, one of a number of organisations alongside Citizen’s Advice, StepChange and National Debtline to give free debt advice, said that the FCA’s findings were disturbing.
“There now needs to be a period of greater scrutiny and significant improvement in the debt management sector, to eliminate the practices that have been revealed,” said Lesley Robinson, UK debt advice director for the Money Advice Service.“There now needs to be a period of greater scrutiny and significant improvement in the debt management sector, to eliminate the practices that have been revealed,” said Lesley Robinson, UK debt advice director for the Money Advice Service.
“It is vitally important for people who seek out debt advice that the organisations they access, and the advisers that they engage with, are operating to the highest standards.”“It is vitally important for people who seek out debt advice that the organisations they access, and the advisers that they engage with, are operating to the highest standards.”
Joanna Elson, chief executive of the Money Advice Trust, the charity that runs National Debtline, said the FCA report confirmed what those working on the frontline of free debt advice had long known.
“Many fee-charging debt management companies are failing to give the right advice, making bad debt problems worse,” she said.
“These firms’ profit-driven approach means they have a clear incentive towards recommending debt options that generate them income, even when this is not in the best interest of the debtor.”
Of the eight firms the FCA surveyed as part of its review, one has agreed not to take on any more business until it has improved its practices. Five of the firms are now being made to carry out reviews of past advice supervised by an independent expert. Customers of these firms could receive compensation if they are found to have lost out.Of the eight firms the FCA surveyed as part of its review, one has agreed not to take on any more business until it has improved its practices. Five of the firms are now being made to carry out reviews of past advice supervised by an independent expert. Customers of these firms could receive compensation if they are found to have lost out.
The FCA said that in light of the “significant failings” across the board it was also undertaking further supervisory work on two other debt management firms that were not part of its original sample.The FCA said that in light of the “significant failings” across the board it was also undertaking further supervisory work on two other debt management firms that were not part of its original sample.