The FCA’s expectation of debt packager firms – what you need to know if you are a debt advice firm and/or have debt packer firms as appointed representatives.
On 5th October 2018 the FCA published a ‘Dear CEO’ letter aimed at debt packer firms that provide debt advice services. The FCA published the ‘Dear CEO’ letter on the back of conducting a review of a small sample of debt advice provided by debt packager firms and found concerns in the following areas:
- Quality of debt advice;
- The identification and treatment of vulnerable customers;
- Financial promotions and communications being clear, fair and not misleading; and
- The adequacy of systems and controls.
Systems and controls
The FCA found that some debt packager firms’ remuneration model consists of receiving higher fees from third party providers based on the debt solution recommended. The FCA remind debt packager firms that it should ensure that its remuneration model does not undermine its ability to place the fair treatment of customers at the core of their business. In this context the fair treatment of customers would call for the operation of effective systems and controls to ensure that recommendations to debt solutions are purely based on a full assessment of customers’ financial and non-financial circumstances and not influenced by referral fees. Practical systems and controls that can be put in place to deliver this outcome includes:
- Providing debt advisers with appropriate training (upon induction and on an ongoing basis);
- Conduct quality assurance checks on fact find calls and the subsequent debt advice;
- Subject the provision of adviser commission or bonuses to satisfactory quality assurance results; and
- Commission an external assurance check periodically to review the effectiveness of your systems and controls.
Conduct Risk Management
A good tool to use to make sure that firms identify all of the key conduct risks that exists in their business model is conducting a risk assessment. This consists of mapping out all of the consumer risks that may exist in your business model. For example, (1) communicating misleading financial promotions, (2) communicating misleading information when on the phone to customers, (3) not carrying out a full assessment of customers’ circumstances prior to recommending a debt solution. Following this you can map out practical ways to control the risks you identify. For example, (1) ensure that financial promotions go through a compliance review, internally or externally, prior to publication, (2) implement call scripts and guidance documents to assist advisers communicate accurate information, (3) implement fact find forms that advisers can use to capture all relevant information. Firms can document this conduct risk assessment exercise in a Conduct Risk Register to evidence the adequacy of its systems and controls to the FCA.
This exercise will ensure that firms’ conduct risk management is actually aligned to the conduct risks in the firm’s business model, is not a template approach but bespoke and proportionate vis-à-vis its conduct risk profile.
The FCA reiterate that customers who are struggling to repay their debts are amongst the most vulnerable in society and that debt advice firms should acknowledge this in their treatment of this group of consumers.
Debt packager firms are reminded to have effective policies to assist in the identification and treatment of vulnerable customers. To supplement this, it is recommended that firms provide customer facing staff with vulnerable customers’ training and make provision to flag vulnerable customers on its systems to ensure a consistent treatment of such customers.
Principals and appointment representatives
The FCA reminds firms that act as Principals for debt packager firms that they will be held vicariously liable in the event that their appointed representative operates in breach of the rules and principles and/or deliver poor customer outcomes.
Principals are required to have appropriate systems and controls to manage the conduct risks of firms that provide debt advice in the capacity of being their appointed representatives. In practice, these systems and controls should consist of:
- Conducting pre-appointment due diligence to assess prospective appointed representatives against the threshold conditions;
- Contractually agree the controls that will be put in place to control any conduct risks identified during the due diligence process; and
- Implement a compliance monitoring programme that monitors the outcomes delivered by the controls.
The FCA re-emphasised the importance of firms maintaining adequate records to demonstrate its systems and controls. Another way of looking at this is that the FCA require firms to maintain a record of its ‘working out’ to show a link between the conduct risks it identifies as part of its risk assessment, the controls it puts in place and its compliance monitoring programme.
Client Relationship Manager
Consumer Credit Compliance
T: 01423 522599