Established to provide advice and relief solutions (including bankruptcy declaration and debt management plans) to those with out of control debts, debt management firms began to proliferate in the UK a decade ago. While concerns have been raised about the industry since its inception, it has only entered the FCA’s crosshairs in the past year, when the body assumed regulatory responsibility for consumer credit.

Following an investigation of the industry, the FCA has found that the standard of advice typically offered is “unacceptably low”, and believes that the majority of debt management firms “fail Britain’s most vulnerable consumers”.

One particularly egregious example of poor practice noted by the FCA involved a firm recommending an individual take a debt repayment plan that would last 125 years.

Common failures and areas of concern identified by the FCA included;

• Inadequate assessment of individuals’ financial circumstances before recommending a course of action
• Recommending individuals utilise unsuitable products and services, which in some cases could hinder their ability to manage and repay debts
• Not disclosing that free debt management advice and support is available

• Staff being offered financial incentives to sell particular products and solutions to customers

• Firms accepting debtors who fall beneath minimum disposable income requirements

The FCA also found that many customers had been poached through cold calling, with debt management firms purchasing the details of people whose loan applications had been declined from loan providers.

Eight debt management firms were investigated by the FCA in its review. One has already agreed not to take on any more business until it has improved its practices. Five will be compelled to conduct reviews of advice offered in the past, supervised by an independent expert. Customers who received poor quality financial advice will receive compensation.

Due to the “significant failings” identified, the FCA will now review a further two debt management companies not originally included.

“Debt management is one of the highest risk activities in consumer credit,” said Linda Woodall, acting director of retail supervision at the FCA.

“When people find themselves in this position it is vital that they are able to access suitable advice that allows them to make informed decisions about their future.

“Far too many debt management firms are not meeting the standards we expect, and we will be looking for significant improvement.”