Vulnerable consumers require professional advice for debt issues
The Financial Conduct Authority's (FCA) report on the quality of debt advice in the UK contains a stark warning for the debt management industry, reports David Menzies.
The FCA report, which follows a thematic review, says that quality standards are unacceptably poor and that the FCA will be taking a close look at every debt management advisory firm, to ensure that consumers obtain appropriate and unbiased advice to deal with their debt problems.
The scope of the thematic review centred on those offering debt management plans (DMPs). The FCA concluded that poor debt management firms pose a high risk to consumers, particularly those in vulnerable circumstances.
The FCA's review also highlighted that the standard of advice provided by fee-charging debt management firms was of an unacceptably low standard and that while the advice provided by free-to-customer debt management firms was generally of a higher standard, there was still scope for material improvement.
Worrying examples of poor practice
While the conclusions reached are after reviewing only eight debt management providers (and there is little information on how they were chosen), there are some worrying examples of poor practices given within the report.
It seems apparent from many of the examples that a sales culture exists where signing a client into a DMP is far more important than ensuring that the client receives appropriate advice to deal with their underlying debt problems. Instances were noted where consumers were being provided with biased views or not being advised of insolvency solutions thereby preventing them from making informed decisions.
This contrasts with Insolvency Practitioners (IPs) who are also key stakeholders and providers of debt advice. IPs are highly regulated, have undertaken rigorous training and strenuous exams to be able to provide debt advice, and will have many years of experience in advising clients on their options.
They are required to consider statutory as well as non-statutory debt solutions and products.
While it would be naive to think there are no IPs who have ever portrayed traits similar to those highlighted in the report, the regulatory regime for IPs is a robust one. Consumers approaching an ICAS licenced IP can be confident that they will receive appropriate advice regarding their situation.
Best practice for providing debt advice
IPs, however, should not conclude that the FCA report has no relevance to them. The areas of concern highlighted by the FCA are core to all debt advice and to ensure that the most appropriate debt solution is made available to a debtor.
It is worth reflecting on the following areas when giving advice:
- Debtors circumstances – is sufficient information available about, and challenge given to, the stage in life of the debtor? Are there any 'life events' that are likely or could occur during the course of any particular debt solution? This could be retirement, ill health, dependants moving into/out of education, anticipated employment position or a new baby.
- Assessment of financial position – is there sufficient evidence being collated to support income and expenditure figures? Are assumptions being made reasonable? Income and expenditure should be challenged even where supported by evidence on the basis of whether adjustments can be reasonably made by the debtor.
- Appropriate debt advice – debtors should be treated fairly and provided with unbiased advice. That doesn't mean that they can't be provided with a recommendation, but that all the available options should be explained to them with the advantages and disadvantages set out. Particularly vulnerable debtors should be supported through the process through the involvement of friends or family or providing additional time for them to consider information provided to them.
A need for skilled professional input
The clear conclusion from the FCA report is that appropriate debt advice cannot be given without skilled professional input.
While debt information initiatives from government and others are helpful in signposting those with debt issues to solutions, extreme care must be taken to ensure that such services do not become the debt advisor.
Debt advice is a complex area and rarely will there only be a single debt solution available to the debtor. The most appropriate solution can normally only be identified through personal interaction, understanding the debtor's unique circumstances and by ensuring that the consumer has all relevant information available to them to make their decision.