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The FCA recently published the findings of its thematic review of the debt management sector (TR19/01), following up on its first review of the sector in 2015.

The first review found that the quality of debt advice received by consumers was often “very poor” and that “firms were treating customers unfairly.” These poor practices led the FCA to include the debt management sector as a priority area as part of its 2017/18 Business Plan.

This blog explores the main findings from the most recent review and sets out the wider lessons that can be drawn both for debt management firms and the consumer credit sector more generally.

Areas where the FCA judged the industry to have improved

Culture – The FCA found that firms have generally moved towards adopting a more customer centric culture, with a greater focus on customer outcomes, acting in the customers’ best interests when giving debt advice, and in managing customer risks. It attributes these changes to its interventions and continued supervisory scrutiny of the sector.

Quality of advice – The FCA reviewed how firms in the sector assessed their customers’ financial position and wider personal circumstances in order to ensure the suitability of their advice. The FCA found that the quality of advice in the sector had generally improved and that most firms were now meeting the required standards of advice for most of their customers. However, the FCA did find cases in all firms where some customers had received poor or unsuitable advice. These cases were more often found in the advice given to existing or acquired debt management plan customers.

Administering debt management plans - The FCA found that firms were dedicating more time and resources to the ongoing administration of customers’ debt management plans, for example through carrying out regular annual reviews of their existing customers’ plans and relevant circumstances and by making efforts to establish and maintain contact with their customers.

Areas where the FCA judged the industry needs to make further improvements

Debt advice given to customers seeking help together (spouses, couples etc.), or those who are already on a joint debt management plan – some firms failed to assess or consider customers’ needs individually, potentially disadvantaging one of the customers who may have been better off with their own plan.

The identification and treatment of vulnerable customers – the FCA found that two in three firms still needed to make improvements in this area. While most firms had documented policies and processes in place to identify vulnerable customers, they did not always have policies and processes for how to treat vulnerable customers. In some firms these policies and process, although present, were not well established. Furthermore, some firms took a one size fits all approach to vulnerability, and failed to consider how different types of vulnerability might affect their customers.

Although there are no specific remedies or follow up work planned on the back of the review, the FCA says that it has given firms individual feedback on its findings and taken supervisory action to address any perceived shortcomings. It also says that it has opened an enforcement investigation into one debt management firm as a result of its review, and that it will expect the sector to take note of the expectations outlined in its report more generally.

Implications for firms

While the FCA’s findings are targeted at the debt management sector, we see a number lessons that the wider consumer credit sector can draw from the review. Chief among these are the continued emphasis and importance the FCA places upon firms’ culture, the importance of considering individual customer needs, and firms’ treatment of vulnerable customers.

While the FCA’s review focuses on two specific conduct concerns in the debt management sector - the quality of advice and administering debt management plans – it also places a heavy emphasis on firms’ culture and the role this plays in leading to good customer outcomes. This emphasis on culture was given further weight in a recent speech on the consumer credit sector by Jonathan Davidson, the FCA’s Executive Director of Retail Supervision. Davidson stressed that while the FCA does “not believe there should be a ‘one size fits all’ culture” it does think that there are healthy firm cultures, and that a healthy culture drives good customer outcomes. Consequently, firms, especially those in the consumer credit sector, can continue to expect supervisory scrutiny to focus on their culture, with the intensity of supervision and use of supervisory tools likely to be closely correlated with the FCA’s view of how far a firm’s culture needs to change.

The FCA’s findings also draw attention to the importance of considering individual customer needs, in this case in the context of joint debt management plans. However, consumer credit firms may also want to consider how individual customer needs are considered throughout the customer journey and the wider product lifecycle. The FCA will expect firms to consider individual customer needs as part of their affordability checks, checking wider product suitability, through to forbearance and everything else in-between.

The review also highlights, once again, the continued high importance the FCA places on harm and detriment to vulnerable customers, a consistent feature of its work across the consumer credit sector. The FCA has previously looked to cap the prices of rent-to-own products, reform overdraft pricing, and change the rules on credit card repayments, all due to concerns it has had about harm to vulnerable customers. While the FCA is not proposing any reform of this nature to the debt management sector, it is clear that the FCA continues to prioritise firms’ ability to identify, and to ensure good outcomes for, vulnerable consumers.

The review reaffirms the FCA’s commitment to publish guidance on the identification and treatment of vulnerable customers later in the year, which should provide firms with further clarity as to the FCA’s expectations in this area. In the meantime, it is clear that the FCA expects firms to distinguish between different types of vulnerability, such as disabilities, ageing related illnesses, and financial hardship, and to be able to offer appropriate support to ensure that customers with such vulnerabilities are identified and treated fairly.

Andrew Bulley

Andrew Bulley - Partner, Centre for Regulatory Strategy

Andrew Bulley joined Deloitte in October 2016 from the Bank of England, where he was, most recently, the Director of Life Insurance Supervision. Between 2014 and 2016 he was a UK voting member of the Board of Supervisors of the European Insurance and Occupational Pensions Authority (“EIOPA”). In a career with the Bank of England and Financial Services Authority stretching over 27 years, Andrew has held senior roles in the supervision of life and general insurers, the London wholesale insurance underwriting and broking markets, retail and investment banks, asset managers, and IFAs.

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Nicola Vincent  - Director, Risk Advisory

Nicola is a director in our risk advisory practice. She has extensive knowledge in the conduct space built up through years at the regulator and has significant experience of advising consumer credit clients.  She leads our consumer credit proposition.

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Felix Bungay, Manager, Centre for Regulatory Strategy

Felix is a Manager within the EMEA Centre for Regulatory Strategy, where he focuses on conduct regulation across a range of financial services sectors. Prior to joining Deloitte, Felix worked at the FCA where he helped produce a wide range of the organisation's House and Sector Views, including those on Retail Banking and Lending, Retail Investments and Wholesale Capital Markets.

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