Britain’s financial watchdog, the Financial Conduct Authority (FCA), has been reviewing the debt management industry since last June, after gaining responsibility for the sector last April.
The results of the review are in and they’re not good.
The FCA said on Thursday that too many companies that provide advice to people struggling with debt are “failing Britain’s most vulnerable consumers.”
The regulator was particularly unhappy with firms that charge a fee. Debt management companies are supposed to provide advice on how to structure repayments and handle debt, but the FCA said fee-charging services were offering “unacceptably low” quality service in many cases.
The FCA found firms weren’t taking enough interest in the financial circumstances of the people who came to them, instead focusing on what products they could sell them. In many cases the products themselves were also inappropriate.
Here’s the FCA:
One customer on a low income told an adviser that she had considered bankruptcy but did not want to lose her car. The adviser not only failed to tell her this assumption may have been incorrect, but recommended a debt management plan that would take 125 years to pay off, well beyond her lifetime.
Other damning findings include “misleading marketing,” inadequate protection of client money, and selling people products they didn’t need, like insurance or fee-charging bank accounts.
Here’s an example, again from the FCA:
A customer approached a firm to seek help with their debts of around £27,000. The firm assessed the customer’s financial situation and calculated a disposable income of £90pm [per month], taking into account the firm’s fees; it would take the customer approximately 37 years to clear their debt.
The firm also sold the customer a fee-charging bank account at £14.50pm. This was not taken into account when calculating the £90pm disposable income, therefore reducing the amount the customer had available to pay towards their debts (to £75.50pm), and increasing the length of the debt management plan by an additional 10 years. This was not discussed with, or explained to, the customer to enable them to make an informed decision about the additional product.
In other words, a customer signed up to a bank account without knowing that it would turn a 37-year plan into a 47-year plan.
The FCA also mentions payment protection insurance (PPI) as one of the many unnecessary products pitched to customers. PPI has become a byword for dodgy salesmanship after banks were found to have been unnecessarily pushing it on clients for years. Banks have paid out billions over the issue.
Debt management firms who sold PPI and other inappropriate products could also be forced to payout — the FCA has told company’s that failed its tests to review past cases and “provide appropriate redress where customers have suffered harm.”
The FCA says that overall the results of the review were “very disappointing.” The regulator has effectively put the industry on watch now, closely monitoring several firms while it works out what action to take next.