Debt management firms giving poor and misleading advice, FCA finds

A review of eight fee-charging and 'free-to-customer' debt management firms carried out between June 2014 and May 2015 by the Financial Conduct Authority (FCA) has found serious failings with the level of advice provided by some fee-charging debt management firms.

See our Debt Help guide for what to do and where to get help if you're struggling. Other major failings the regulator found among the firms in its review include:

• Fee-charging firms universally failing to adequately assess customers' financial circumstances before recommending a course of action.

• Firms failing to identify customers who had recently disclosed important information about themselves, for example, significant medical problems or difficulties understanding financial or legal issues.

• Firms not making clear the type of service they provide and that free advice is available.

• Vulnerable customers encouraged to purchase products and services which were not suitable and impeded their ability to repay their debts.

• Advisers eager to sign people up to a debt management plan (DMP) giving inaccurate information. One fee-charging firm, for example, misleadingly told a customer that the free sector was "owned by the banks" and that the customer should only use the free sector if "they were prepared to do all the work themselves".  

• Firms also failed to properly consider alternative options to DMPs.One customer on a low income, for example, told an adviser she had considered bankruptcy but did not want to lose her car. The adviser not only failed to tell her this assumption may have been incorrect, but recommended a debt management plan that would take 125 years to pay off, well beyond her lifetime.

Advice given by 'free-to-customer' firms was generally of a higher standard than that given by fee-paying firms, but the FCA says there is still room for improvement.

Redress for customers who have suffered 'harm'

As a result of the FCA's findings, it's required five of the eight firms to review past cases and provide "appropriate redress where customers have suffered harm" – for example where people have lost out financially due to the quality of advice given.

However, the FCA won't disclose the names of the firms involved, nor will it tell us whether they're fee-paying or 'free-to-customer' firms, how much redress customers will receive, or when they'll get it. It confirms only that the businesses involved will contact customers directly.

If you think you might have lost money as a result of dealing with a debt management firm, first complain to it directly. If you don't get a satisfactory response, or if you don't get a response at all within eight weeks, take your complaint to the free Financial Ombudsman Service.

'The earlier you ask for help with debts, the easier things are to deal with'

Wendy Alcock, campaigns manager at MoneySavingExpert.com, says: "“It’s not surprising the debt management sector hasn’t always had people’s best interests at heart, but it’s certainly disappointing to hear that people who are already in a vulnerable situation might not be getting the help they need at the time they most need it.

“There are several options available to people who are struggling to pay their bills, but it’s important to say that no debt problems are unsolvable. It might not be easy or quick, but there's always a route. And the earlier you ask for help, the easier things are to deal with.

"Although we don’t know which firms have had their knuckles wrapped by the regulator, our advice to people who are in debt crisis is to first talk to your lender. Let them know if you’re going to be unable to pay your bills and it should find ways to help. "Then search out free debt advice if you’re still unsure of your options; just make sure you don’t pay for anything upfront and you know exactly how it’s going to help you get your finances back on track."

'Debt management firms failing vulnerable consumers'

What about firms other than the eight in the review?

The FCA says debt management firms are currently going through a new assessment process to become authorised, and if firms wish to continue providing debt management services, they'll have to demonstrate they meet consumer credit rules, including treating customers fairly.

It adds that it will assess the level of fees charged by fee-charging debt management firms at the same time.

'We will be looking for significant improvement'

Linda Woodall, acting director of retail supervision at the FCA, says: "People who turn to debt management firms do so as a last resort. When they 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.

"Debt management firms play a critical role in the consumer credit market, but far too many are not meeting the standards we expect, and we will be looking for significant improvement."