Debt management firms in spotlight
People desperate for help with their debt problems are being recommended plans by debt management firms which would take them more than a century to clear what they owe, an investigation by the City regulator has found.
The Financial Conduct Authority (FCA) found that the quality of advice being provided to vulnerable consumers by some fee-charging debt management firms was "unacceptably low".
It said "many instances" had been found where customers had been recommended very long-term debt management plans.
Often, these were many decades long, with some lasting 100-plus years.
In some cases, a formal debt relief solution, such as the consumer going bankrupt, was likely to have been more appropriate, but adequate information and advice about this alternative was not provided, the FCA said.
Between June 2014 and May 2015, the FCA reviewed how both fee-charging and "free to the consumer" debt management firms were complying with consumer credit rules.
The watchdog said that people were "at their most desperate" when seeking debt management help, as this was often prompted by a critical event such as a visit from the bailiff or the consumer being overwhelmed by calls and texts from creditors.
Sometimes customers have not been seeking debt management services when they first come into contact with a firm but their details may have been sold on to them.
The FCA said that the vulnerability of this type of customer could lead to poor outcomes as they were very unlikely to shop around and were likely to engage with the first organisation offering them the prospect of "making the problem go away".
Debt management customers often have multiple debts ranging from credit cards, loans and catalogue debt to priority debts such as utility bills, rent and council tax that are no longer manageable.
The FCA found that while many firms had made efforts to improve, "the quality of the advice provided by some fee-charging debt management firms was unacceptably low".
F ree to customer firms were generally of a higher standard, with some room for improvement.
Fee-charging firms often charged customers a percentage of their disposable income, while free to customer firms could be funded in other ways.
In one example uncovered by the FCA, a customer with high debts and a low level of disposable income told an adviser that she did not want to go down the bankruptcy route because she would lose her car .
The adviser failed to correct the customer's likely incorrect assumption that she would be unable to keep a car, and went on to recommend a debt management plan running for 125 years, when a formal insolvency solution was likely to have been suitable.
The FCA also found evidence of firms failing to adequately review customers' circumstances - which also had an impact on the suitability of the solutions offered.
In another case, a customer approached a firm with debt amounting to £27,000.
The firm recommended a debt settlement plan and estimated it would take the customer around 17 years to clear the debt.
But the customer was single, aged 60 and had an interest-only mortgage - a type of mortgage where the capital is only repaid when the mortgage term comes to an end.
The adviser did not explore when the customer would retire, or ask when the interest-only mortgage was due to finish, or whether there was a repayment vehicle in place, the report found.
The FCA requires firms to refer customers to an appropriate not-for-profit debt advice organisation where the customer does not have enough disposable income to pay the firm's fees.
Most debt management firms set a minimum level of disposable income which customers must have to access their products and services.
But the FCA saw cases where the customer's disposable income was misrepresented so that it met minimum requirements.
One fee-charging firm also misleadingly told a customer that the free sector was "owned by the banks" and that the customer should only use the free sector if they were "prepared to do all the work themselves", the FCA said.
Evidence was also found of firms failing to be clear about the service they provided.
In one case, a customer was turned down for a loan to consolidate their debts .
A debt management firm purchased the customer's details from the lender and contacted the customer, explaining they were making contact in relation to their recent loan application.
Throughout the conversation, the firm used loan-related terminology, rather than making it clear that they were discussing a debt management plan, the FCA said.
Firms were also selling add-on products alongside their plans, which customers may have felt obliged to take up as they thought it was part of the debt help "package", the FCA found.
This could reduce the customer's disposable income further and leave them in debt for longer.
Linda Woodall, acting director of retail supervision at the FCA, 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. "
The FCA said that while the results of the review were "very disappointing", it still considered that debt management firms that did meet its standards could provide a valuable service.
It took over the consumer credit sector in April 2014 and firms need to apply for full permission to operate under the new regime.
The FCA said it would continue to focus on the quality of debt management advice as part of its ongoing supervisory work, as well as working with organisations including the Money Advice Service and government, to improve outcomes for consumers with debt.