SPECIAL FEATURE: Shaping up for FCA fitness test
The FCA has introduced new regulations in a bid to clean up and improve confidence in the debt management sector.
The rules encourage upfront, honest guidance and responsible management of customer fees to build consumer confidence and strengthen business partnerships.
Some of the most significant reforms will be the Approved Persons regime, the Prudential Requirements policy and the restriction placed on debt management firms taking customer payments as fees in the first six months.
These stringent new regulations should be sounding alarm bells for the more unscrupulous businesses in the debt management industry, as the new ‘fitness tests’ now hold debt management business directors more accountable for their practices.
It ought to be the case that the new guidelines will be treated not as a trap, but as an opportunity to showcase experience and expertise within organisations.
For instance, the Approved Persons regime evidences the credibility of those in key positions of responsibility. This distances the sector from the spam scammers that provoke consumer scepticism of the financial services sector.
It is this protection from misconceptions of the industry that will benefit legitimate debt advisors.
The Prudential Requirements insurance policy against the worst-case scenario will further improve customer confidence by keeping a percentage of the relevant debts under management aside as a safeguard should a debt management company fail.
The prospect of the drawing of fees restricted will require self-assessment from all debt management providers, so reluctance from some is understandable.
However, it could be argued that rather than being a harsh stipulation, the Prudential Requirements might still be insufficient protection from those rogue operators that have closed and are currently under investigation.
The ideal outcome is that the new requirements will serve as a deterrent to inadequate or unprincipled directors, whilst paving the way for cases of this nature to receive stronger support in the future.
Only time will tell if the latest rules will provide enough protection, but we might anticipate that tightening regulations will reap long-term benefits for businesses and their customers.
On a more positive note, it is encouraging to see the FCA signposting to the free advice sector.
Although this has been part of the OFT debt management guidance for some time, in my experience this has been treated by other fee-charging companies as an opportunity to pay lip service rather than to form stable, successful business partnerships.
We have now been presented with the chance to build lasting relationships with the free sector service, enabling us to provide the most appropriate services for customers.
There is enough resource between the free and fee-charging sectors to service the needs of the 8.8 million people identified by the Money Advice Service as struggling with debt, so supporting a network across different parts of the sector is a promising step.
Developing partnerships where we can identify those who are genuinely struggling to pay creditors, assist them in gathering information and handhold them across to a free advice service, is a sustainable and diligent long-term solution.
It will prevent situations where a client continues to bury their head in the sand after being given the contact details of a free-advice service and has been expected to contact them directly.
Incoming changes can be unsettling, but are necessary for debt management services to evolve with the economic recovery.
What is now important is that debt professionals take the new regulations seriously, rather than simply moving the goalposts.
We may expect to see some continued reduction of the criteria for insolvency solutions and a shift away from traditional debt management plans, but this need not be the case for those serious about providing high quality customer service.
As we enter a new phase for debt management services, it is important to keep the intended model for the industry, when it was formed in the early nineties, in mind.
The purpose of debt management was to provide short term solutions for those that had fallen on hard times, an ethos that has not always been practised by those happy to charge ongoing fees for decades.
The FCA compliance requirements will hopefully encourage firms to remember the sector’s origins and find suitable solutions for the 21st century customer. This will bring about a conclusion to financial hardships for consumers in a much shorter timescale, and offer a higher standard of professional service to those that need it.