Debt management firms play a vital role in helping individuals manage their debts effectively, particularly when facing financial difficulties. Operating under the Financial Conduct Authority (“FCA”) regulations in the UK, these firms offer debt counselling and debt adjusting. This article will explore what debt management firms do and their regulatory framework under the FCA.
What are Debt Management Firms?
FCA’s definition of a firm offering debt management is “debt counselling and/or debt adjusting activities carried on in relation to any scheme, arrangement or process for liquidating debts. Therefore, depending on the situation / business model, a firm engaging in debt adjusting and/or debt counselling will often be undertaking debt management activity.”
Debt management firms specialise in assisting individuals and businesses to manage and reduce their debt obligations. Their services typically include negotiating with creditors, offering debt counselling and adjusting repayment terms. Whilst some firms provide these services as their primary business, there are some limitations to consider, which are further explained below.
Debt Management Permissions
Firms that fall under this category conduct debt-related activities as their primary business, are subject to stricter regulations, and must meet higher threshold conditions, as their services directly involve managing consumer credit agreements. Debt management activities, such as debt adjusting, debt counselling and debt administration, fall under s145 of the Consumer Credit Act (1974) because they involve assisting individuals in handling their credit obligations, which are regulated by the FCA to ensure consumer protection. These activities include:
- Debt Adjusting: Negotiating with creditors to adjust repayment plans or reduce the amount owed. This could be particularly beneficial for individuals who have defaulted on their loans or are struggling to meet repayment terms.
- Debt Counselling: Offering guidance and support to consumers on how to manage and repay their debts is another key consumer credit activity. This falls under the consumer credit category because it directly influences how consumers handle their credit obligations. Debt counselling involves advising on how to prioritise debts, budget effectively and select appropriate financial products, all of which relate to the management of credit and debt regulated by the FCA to protect consumers from misleading or harmful advice.
Finally, debt management authorised firms can apply interest and additional charges to debt agreements, such as late fees and default penalties, giving them a more active role in managing debt processes.
FCA’s New Debt Management Limitations
If a firm operates under the ‘no debt management’ limitation, it means that although they may engage in certain debt counselling and debt adjusting activities, this limitation specifically restricts them from performing debt management services.
The new limitations are as follows:
- For firms involved in asset finance (e.g. equipment broking):
- Debt adjusting and debt counselling are limited to the full or partial settlement of credit agreements related to the sale of goods.
- For firms involved in vehicle finance:
- Debt adjusting and debt counselling are limited to the full or partial settlement of credit agreements specifically for vehicle finance.
- For firms not involved in asset or vehicle finance:
- Debt adjusting and debt counselling are limited and specifically exclude the establishment or administration of debt management plans. A “debt management plan” is defined as a non-statutory agreement between a customer and one or more of their lenders, aimed at discharging or reducing debts by making regular payments to a third party responsible for distributing the funds to the lenders.
These limitations mean that firms do not hold FCA authorisation to provide debt management services. They cannot offer advice on repaying, consolidating or managing debts, nor can they negotiate with creditors on behalf of clients. Additionally, they are prohibited from offering debt management plans or assisting clients in restructuring their debts.
The Consumer Duty
Under the Consumer Duty and FCA’s Principle 12, debt management firms must also ensure that their practices are aligned with achieving good consumer outcomes, particularly around affordability and forbearance. This can be achieved by conducting thorough affordability assessments and offering the appropriate options to customers in financial distress. Firms must maintain robust compliance and monitoring systems, ensuring they act transparently and fairly in all their dealings, whilst also protecting the rights and financial health of their customers.
Conclusion
Debt management firms are essential for consumers struggling with debt, offering various services to help manage, adjust and repay outstanding obligations. Understanding the requirements under the FCA’s regulatory framework, will enable firms to make informed decisions on which specific permissions they need to apply for. Consumers can verify a firm’s FCA authorisation status through the FCA’s Financial Services Register, to understand the scope of services the company offers, and ensure they receive the most appropriate debt management assistance from an FCA regulated entity.
How Can Complyport Help?
As experienced regulatory consultants, Complyport can assist firms in understanding the permissions they require if they wish to offer debt management related activities. We offer tailored support to ensure firms navigate the complexities of the regulatory environment.
Contact our dedicated team of Authorisation Consultants for guidance and support.
Complete the form below to book a FREE consultation.
Ask ViCA, your Virtual Compliance Assistant. Claim your complimentary 20 queries today!
