Debt management firms still failing the vulnerable
Vulnerable customers continue to be sold unsuitable debt management plans (DMPs) that impede their ability to repay what they owe, the City watchdog has reported.
The Financial Conduct Authority (FCA) said the industry - which it deems to be "one of the UK's highest risk consumer credit sectors" – has made an effort to improve but the quality of the advice provided by some fee-charging debt management firms is "unacceptably low".
The year-long review, which finished in May, revealed companies are failing to adequately assess customers' financial circumstances before recommending a course of action and not making clear the type of service they provide or that free advice is available.
It also found instances of advisers giving inaccurate information when signing people up to DMPs.
It gave the example of one fee-charging company misleadingly telling a customer that the free part of the debt management sector was "owned by the banks" and that the customer should only use the free services if "they were prepared to do all the work themselves".
Other companies failed to give debtors alternative options to DMPs. In one case, a customer on a low income who told an adviser she had ruled out bankruptcy because she thought she would lose her car was not informed her assumption may have been incorrect. Instead, the adviser recommended a debt management plan that would take 125 years to pay off.
The watchdog said companies that are free for customers were "generally of a higher standard" than those that charge fees "but there is still room for improvement".
Linda Woodall, acting director of retail supervision at the FCA, said: "People who turn to debt management firms do so as a last resort. When they 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.
"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. "
The FCA has required companies falling below expectations to review past cases and compensate customers who may have been harmed by their practices.
Most debt management companies are currently being assessed for FCA authorisation, a process in which the level of any fees charged will be assessed.
The watchdog said: "If firms wish to continue providing debt management services, they will have to demonstrate that they meet the consumer credit rules, including treating customers fairly."
Lesley Robinson, UK debt advice director at the Money Advice Service, said: "This review's findings are clearly disturbing and present a challenge to the debt management sector. However, we would urge those who are experiencing problem debt not to be put off from seeking debt advice as soon as possible. We know that nine in 10 people who seek debt advice go on to take action to reduce their debts, changing their lives for the better.
"And everyone should know that free debt advice is available, throughout the UK – no-one should pay for receiving debt advice or indeed debt management."
Debt management plan
Not to be confused with a consolidation loan or bankruptcy, a DMP is a service offered by a specialist debt management company that will negotiate with your creditors to change the terms of how they get their money back. The debt company will renegotiate your debt repayment terms and then deal directly with your creditors on your behalf, and you then pay the debt management company, which passes the money to your creditors minus its initial and subsequent monthly fee. This can be as high as 20%, which means you’ll pay down your debts slower than you thought.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.