FCA supervisory strategy for debt advice firms

Jul 1, 2022 12:00:00 AM

What has happened?

In June 2022, the FCA issued a Dear CEO letter outlining its supervisory strategy for the debt advice firms portfolio. This follows a letter issued to debt advice firms in July 2020 setting out the FCA’s view of the key risks of harm that debt advice firms pose to their customers and the markets in which they operate and setting out a two-year strategy for mitigating those risks. This letter is available here. While the FCA has seen improvements in some areas, there are risks of harm that remain and new risks that firms within the portfolio need to address.

In the June 2022 letter, the FCA;

Updates firms on the key risks that debt advice firms pose to their customers and the markets in which they operate,
Outlines its expectations of debt advice firms, including how firms should be mitigating these key risks, and
Sets out its supervisory strategy and programme of work to ensure that firms meet the FCA’s expectations, and that harms are being appropriately remedied.

What are the key points of the letter?

Firms should consider the extent to which they present these risks, and ensure strategies are put in place to mitigate them. The FCA expects firms to be able to demonstrate the steps being taken to address the risks covered in this letter. It is particularly important that debt advice firms mitigate these risks given their important role in assisting consumers facing repayment and debt difficulties, including those impacted by the rising cost of living.

The rising cost of living

The FCA explains that firms will see a wider group of consumers in financial difficulty, who will find it harder to pay their debts. Some of these consumers will be in vulnerable circumstances or may be experiencing financial difficulty for the first time. Firms need to remain alert to the changing situation of their customers and target their efforts in response. It is important that the quality of debt advice meets the standards set out in the FCA’s rules and guidance, and that appropriate resource and attention is given to the treatment of customers in vulnerable circumstances. The FCA expects firms in the portfolio to support consumers struggling with personal debt or showing signs of financial difficulty during this period, helping them obtain appropriate debt advice and debt solutions.

The FCA’s Tailored Support Guidance and its recently published Dear CEO letter reiterate the standards that the FCA expects lenders to meet in supporting borrowers showing signs of financial difficulty or struggling with debt. This letter sets out the expectation of firms to make consumers aware of and help them to access money guidance or free debt advice. As a result of this, firms in this portfolio should be prepared for the likelihood of increasing volumes of consumers seeking debt advice, including those who may be in vulnerable circumstances.

Firms should ensure they have robust and effective governance arrangements to identify, manage, monitor, and report the risks they may be exposed to, such as an increase in the need for advice, sudden increases in the volume of consumer contacts and data protection and cyber resilience risks. They should consider different scenarios that may test their operations to ensure that their internal processes and control mechanisms are adequate.

FCA Business Plan and Strategy

In its strategy for 2022 to 2025, the FCA set out its vision and ambitions for the next three years, the consistent high-level outcomes expected from financial services and the key strategic areas it will be focusing on. The commitments are grouped into three areas:

Reducing and preventing serious harm – the FCA focus is on protecting consumers from the harm that authorised firms can cause, including tackling fraud and poor treatment.
Setting and testing higher standards – the FCA is focusing on the impact that authorised firms’ actions have on consumers and markets. It expects all regulated firms to adopt the same high standards and to have an open and cooperative approach.
Promoting competition and positive change – the FCA wants to use competition as a force for better consumer and market outcomes.

The FCA’s view of the key drivers of harm

The FCA explains that financial pressure is starting to build, with increasing living costs potentially resulting in a net reduction in consumers’ disposable income. As such, it is considered paramount that firms take action in accordance with FCA rules and guidance to mitigate harm to consumers. Debt advice firms have offered an important service to consumers who find themselves in financially vulnerable positions. However, the FCA is not satisfied that all firms have adequately responded to the key drivers of harm set out in its previous Portfolio Letter. Since that letter, the FCA has updated its view of the key drivers of harm by examining a range of data and engaging with firms and consumers; its updated view of the key drivers of harm encompasses harms highlighted previously as well as emerging harms. Firms should be aware of the drivers of harm that surround their business and mitigate them wherever possible.

The updated assessment of key consumer harms is that;

Consumers are unable to access debt advice when they need it, due to insufficient capacity in the sector,
Poor quality advice is being offered to customers, which does not adequately support recovery from financial hardship,
Customers in vulnerable circumstances do not achieve good outcomes, due to firms failing to correctly identify these customers,
Poor consumer outcomes are driven by firms that fall outside the FCA’s perimeter, and
Consumers do not receive redress owed to them due to firms operating with insufficient financial resources.

The FCA’s expectations and areas of focus

Following its analysis of firms in the debt advice portfolio, the FCA’s strategy to reduce harm will prioritise supervisory work in the following areas:

Insufficient capacity

The impact of coronavirus has amplified potential capacity concerns, highlighting the need to do more to meet the demand for debt advice. The financial hardship arising from the pandemic has been felt by firms and consumers, with 16% of UK adults finding themselves over-indebted, while firms have faced operational and business model challenges which have had the potential to affect capacity. The expected increase in demand for debt advice resulting from the pandemic has yet to materialise significantly, with many consumers having received support from government schemes and their lenders in a range of forms. However, it is important that the sector is prepared for the implications on consumers arising from the rising living costs forecast, as this may require increased capacity for the sector as more consumers find themselves in arrears.

The FCA is committed to encouraging solutions that will improve the sector’s ability to meet demand. Its Innovation Department offers a selection of tools that have been designed to help firms pilot innovative business models, including the following;

Innovation Pathways encompasses and builds on two previous Innovation Services (Direct Support and Advice Unit). Innovation Pathways provides tailored regulatory guidance to innovative businesses, including established firms, start-ups, and technology firms that want to deliver positive innovations and consumer outcomes in the financial services market, including firms serving gaps in the advice market.
The Regulatory Sandbox allows businesses to test innovative propositions in the live market with real consumers, alongside regulatory oversight. It allows firms to see how new proposals work in the market in a controlled environment, gives an understanding of the benefits and risks that may arise, as well as helps firms to identify appropriate consumer protection safeguards to build into new products and services.

Quality of advice

Good quality advice is fundamental to the integrity and functionality of the sector. As such, firms should ensure that;

All advice given has regard to the best interest of customers, is appropriate to the individual circumstances of the customer and is based on a sufficiently full assessment of the financial circumstances of the customer,
Customers receive sufficient information about the available options identified as suitable for their needs, and
They explain the reasons why the firm considers the available options suitable and other options unsuitable.

When firms are administering debt management plans, they should regularly monitor and review the financial position and circumstances of the customer. Harm may happen when advisers recommend suitable debt solutions but do not adequately explain what these solutions entail and the impact they may have on the customer. Quality of advice can also be compromised when firms offer non-compliant advice that is biased towards debt solutions that generate referral fees for the firm.

FCA supervisory work has identified concerns that some firms in the portfolio appear to have manipulated customers’ income and expenditure to meet the criteria for revenue-generating insolvency solutions, used persuasive language to promote these products to customers without fully explaining the risks involved, and provided advice that did not accurately reflect their conversations with customers or information that customers had given. Customers should be presented with available options identified as suitable for their needs, while also being provided with sufficient information on why these solutions are suitable, in a clear and not misleading manner.

Customers in vulnerable circumstances

In the most recent Debt Management thematic review, the FCA highlighted that customers in vulnerable circumstances are not always identified and that improvements need to be made in this area. The coronavirus pandemic has exacerbated the number of people facing difficult circumstances, personally and financially. It is imperative that firms embed the fair treatment of customers in vulnerable circumstances into their business models and firm culture, in an effort to reduce harm. In February 2021, the FCA released guidance for firms on the fair treatment of vulnerable customers, detailing how they can implement policies and procedures that protect consumers across the financial services industry. Customers in default or arrears difficulties must be treated with forbearance and due consideration (including where firms administer debt management plans). Appropriate support should be offered when required, to ensure customers in vulnerable circumstances achieve outcomes as good as those for other customers.

Problems outside the FCA’s regulatory remit

There are a number of businesses that are not subject to FCA regulation but are currently involved in recommending and/or arranging debt solutions for consumers. These include businesses that forward the details of potential customers to debt advice firms and Insolvency Practitioners in exchange for a fee (lead generators).

In its recently published Perimeter Report, the FCA highlighted concerns over the practices of unregulated lead generators. Often these firms are able to advertise online. In some instances, this advertising employs misleading practices, such as:

potentially imitation of specific debt charities or government agencies,
misleading descriptions of Individual Voluntary Arrangements,
misleading claims about the proportion of debts resolved in an IVA,
misleading illustrative examples,
potentially false testimonials,
unauthorised debt counselling or misleading statements over who is giving advice,
misleading use of the term ‘debt free’, and
misleading use of regulator logos/regulatory status/Money and Pension Service referrals.

The FCA has reminded firms that receive leads from lead generators of their obligations under chapter 8.9 of the Consumer Credit Sourcebook (CONC). This includes ensuring that lead generators do not provide debt counselling unless they are authorised to do so

FCA authorised firms must ensure that their financial promotions comply with CONC 3, which includes ensuring that the communication is clear, fair, and not misleading, and states the services the firm offers and any relationship with a business associate which is relevant to the services offered. Their financial promotions should also include (if relevant) a statement that the firm’s service is profit-seeking, contain a reference to impartial information and sources of assistance from not-for-profit debt advice bodies and state the most important actual or potential advantages, disadvantages and risk of any options mentioned in detail. Under CONC 8.2.4, an authorised firm must also prominently make customers aware that free debt counselling, debt adjusting and providing of credit information services are available to customers and that the customer can find out more by contacting MoneyHelper.

Insufficient prudential resources

The FCA expects firms to manage their financial resources prudently, with clear planning for the future. Its policy statement on wind-down planning should be used by firms to assess whether they have sufficient resources to wind down in an orderly manner, with minimal adverse impact on customers and the wider markets. The FCA also reminds firms operating in the debt advice sector of their requirements, as set out in CONC 10.2, to ensure that the firm is always able to meet its liabilities as they fall due.

Data-led regulation

As the FCA transitions towards becoming a more data-led regulator, it will increase its focus on data generally, including regulatory returns. The data received from firms helps inform the FCA on the potential for harm and identifies areas where supervisory resources should be allocated. The transition towards automated data collection should enable firms to meet their reporting requirements and submit returns more easily

Raising standards

The FCA is proposing to introduce a new Consumer Duty that will set a higher standard of care that firms should provide to consumers in retail financial markets. Consumer Duty would require firms to act to deliver good outcomes for customers, including those in vulnerable circumstances. A second consultation with specific rules and guidance on Consumer Duty is now closed and pending the outcome of this consultation, any new rules and guidance will be published by the end of July 2022.

Environmental, Social and Governance

The FCA has developed a refreshed ESG strategy, which sets out its target outcomes and the actions it expects firms to take to deliver these. Firms in the portfolio should play their part in helping the economy adapt to a more sustainable long-term future. Ultimately, a firm’s own governance and culture will be critical drivers and enablers of its performance on environmental and climate matters.

Diversity and inclusion is a key component of ESG in its own right and as an enabler of creative solutions to other environmental and social challenges. As set out in DP21/2, having staff and Board members from diverse backgrounds and experiences contribute to this. Diversity and inclusion in regulated firms is a priority for the FCA, and DP21/2 (which closed on 30 September 2021) and the accompanying Literature Review started the conversation on what more can be done to improve diversity and inclusion in financial services and set out the links between D&I and conduct risks. The FCA will be consulting on rules and guidance to promote diversity and inclusion in the financial services sector in 2022.

How can we help you?

If you’d like to know more about how we can help you with your debt advice or ESG arrangements, or any other regulatory compliance issues, our specialist team is here to help.

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