FCA targets debt management firms in latest consumer credit enforcement drive

Out-Law News | 26 Sep 2014 | 12:01 pm | 2 min. read

Debt management firms must be able to demonstrate that they provide appropriate advice, do not charge unfair fees and have adequate client money handling processes in place before they will be granted consumer credit authorisation, the Financial Conduct Authority (FCA) has said.

The market regulator, which became responsible for consumer credit businesses in April, said that many debt management firms had not been properly following its rules. The FCA will begin assessing debt management firms and others that provide "higher risk" services to consumers, such as payday lenders and credit brokers, before lower risk services when it begins authorising the 50,000 firms granted interim permission to offer consumer credit services from next month.

"Like claims management companies (CMCs), who have been a previous target of the FCA, debt management companies can offer consumers a useful service," said banking and finance litigation expert Michael Isaacs of Pinsent Masons, the law firm behind Out-Law.com. "But, also like CMCs, there is often a free or cheaper alternative to using them that is not being identified to the consumer."

"The FCA is also right to highlight that the business model of debt management companies can lead to inappropriate or unsuitable debt advice being given, or the cost to the consumer not being transparent," he said.

The FCA took over regulation of consumer credit from the Office of Fair Trading (OFT) on 1 April 2014. All firms and individuals that offer overdrafts, credit cards and personal loans, selling goods and services on credit, offering goods for hire or providing debt counselling or debt adjusting services to consumers now fall within its jurisdiction. Regulated firms are subject to the FCA's consumer credit sourcebook rules, which are set out in the FCA Handbook.

Debt management firms will be expected to meet certain standards before they will be granted FCA authorisation under a process that the regulator said would be "more rigorous" than the OFT's licensing regime. Firms and individuals looking to offer any consumer credit service must be able to show that their business model fully benefits consumers, backed with fair and transparent fees; while advice must be provided by trained staff who have the consumer's interests at heart and which takes account of the consumer's circumstances in a way that is appropriate, affordable and sustainable.

Firms are also subject to new rules to protect client money, and must notify the FCA if they have obtained a book of customers from a third party undertaking debt management. They also have a new responsibility to tell customers about free debt services, including the Money Advice Service (MAS), in their first communication with the customer.

Since April, the FCA has been visiting debt management firms in order to establish how well they are following the rules. Over this period, it has issued final notices against two firms who have had their authorisation applications refused while another has cancelled its interim permission. Seven firms' bank accounts have been frozen to protect client money, 14 have agreed to stop taking on new business and seven have been directed to appoint a 'skilled person' to report on the firm's compliance with FCA rules, according to the regulator.

"The FCA is flexing its consumer credit muscles again by making it clear to firms that the test for authorisation is going to be a stricter one than firms are either used to or may expect," said financial services enforcement expert Michael Ruck of Pinsent Masons, who previously worked for the regulator. "The FCA is aware from its visits to debt management firms that standards are not where the FCA would expect them to be and either refusing authorisation or removing authorisation is a big part of its early intervention approach."

"Firms need to understand what the FCA is asking of them and ensure they are meeting the required standards. Large, high profile firms are likely to have had significant legal and compliance input to get up to speed. Only time will tell if the work they have undertaken is sufficient and whether firms lower down the scale have been able to meet these new standards," he said.