APDSI 2015 STRATEGIC BULLETIN

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1 Introduction Welcome to another APDSI strategic member bulletin that is designed to cover a number of the strategic compliance issues facing our sector in Many of our members holding interim permissions have submitted their applications for full permissions to the Financial Conduct Authority (FCA) or will be doing so in the near future. This has presented a number of strategic challenges as the FCA has clearly set out its agenda and is following this through in the Application, Supervisory and Enforcement teams. They have recently issued consultation papers around complaint handling and financial crime. The findings of the FCA Thematic Review into the quality of debt advice is also likely to be published in the first quarter of 2015, which may have a major influence on future conduct. Standard Financial Statement APDSI has also been active in responding to regulator consultation papers and this has recently included the Money Advice Service (MAS) consultation on the Standard Financial Statement. The Standard Financial Statement is likely to be implemented through the course of 2015 and will have an impact on all regulated firms engaged in the provision of debt advice, debt adjustment and debt recovery. The impact on lenders and their collectors may be more significant than it is to the debt management sector, where internal policies may be overtaken by industry best practice. For example, the Lending Code is currently being independently assessed. A consultation proposing a redesign of the trade body landscape in banking has been launched in January The consultation proposes the creation of a single, new trade association that represents the whole UK retail banking sector including consumer finance, wealth and commercial banking. The consultation can be found at Financial Services Trade Association. There has also been media coverage of the proposed merger of the Debt Managers Standards Association (DEMSA) and the Debt Resolution Forum (DRF) following closer collaboration on liaison with regulators, notably the FCA. At a grassroots level, we wanted to ensure that all members are aware of their conduct obligations under the new regulatory regime both whilst in interim permissions and once fully authorised. It is disappointing that the Debt Management Plan Protocol (DMPP) has been a casualty of the regulatory transition. In particular, the creditor obligations set out were of value to firms engaged in commercial debt adjustment with regard to adopting best practices in engaging with creditors. The ICO and the FCA have been investigating lender practices that may cause consumer detriment and is reflected in the ICO activities in 2014 and FCA enforcement action, together with a consultation around complaint handling practices in December Focus on vulnerability issues Link: Through our affiliate partners, APDSI has tried to keep members up-to-date on a wider range of regulatory and best practice topics that relate to our day-to-day conduct. We have continued our membership of the Money Advice Liaison Group (MALG) into 2015 and will continue to communicate key topics raised in their forums and conferences. We expect further updates to the Page 1

2 Debt & Mental Health Guidance early in 2015 and the Debt and Mental Health Evidence Form (DMHEF). APDSI will then look to update its own guidance notes to members around vulnerable client policies and identifying vulnerability with the assistance of affiliate members. We hope that this will align with the on-going FCA research, more generally, into vulnerability and linkage to serious financial management and hardship issues. APDSI s training includes reference to the FCA research published in April 2014 and the latest version of the 12 steps for treating potentially vulnerable customers fairly, which affiliate member Colin Trend was a co-author. The latest version was published in November 2014 and announced at the MALG Annual Conference. EU Data Protection regulation on the radar As set out in the 2014 Strategic Bulletin, the Information Commissioner (ICO) is taking an active role in the EU Data Protection Regulations. I am pleased that we have been able to continue our collaboration with Regulatory Strategies in providing regular Data Protection updates looks like a year where we need to again closely monitor the impact of EU activity on UK working practices. Regulators are recommending businesses act now to assess the likely impact on their organisations, particularly where changes may have a future impact on product and process developments currently underway. More generally, Data Protection matters are closely linked with compliance matters for the FCA regime. We have seen increased demand for Data Protection Health-checks, Business Continuity Plans (PCP), Incident Management Policies and increased focus on Data Security in respect of compliance with Financial Crime policies and procedures. Our affiliate partners have very current experience of supporting firms in meeting these compliance requirements as part of a firm s core systems & controls. Training Services, CPD, webinars and E-learning During the course of 2014, APDSI launched the CPD Academy platform. CPD Academy is a learning management platform that provides a range of member support services, including access to APDSI webinars, bulletins and blogs. It is an e-learning platform for associates of member firms and has been widely taken up by a number of members through the course of We have run member webinars throughout 2014 on a live and pre-recorded basis. We will continue to do this through Topics covered have largely been driven by member demand and the requirements of the changes in the regulatory landscape. We are continuing to develop new training content for a range of audiences, from controlled functions in a member firm to courses suited to client facing staff. In all instances we are mindful to reference content to the prevailing regulatory regime and the need to align to TCF obligations and delivering positive outcomes for consumers. The majority of courses are available as face-to-face courses, webinar content and e-learning courses. Some courses remain better suited to face-to-face delivery, for example, Dealing with vulnerability in the workplace delivered by Anthony Sharp of Affiliate Member, Anthony Sharp Associates. Page 2

3 The interpreting a credit report course is also best delivered as a workshop and has been delivered a number of times through This is designed to align with the recent ICO publication of Filing defaults with credit reference agencies. This is an important guide for debt managers when undertaking debt adjustment activities and as part of explaining the consequences of each debt solution to a consumer. During 2014 the ICO undertook reviews at Callcredit, Equifax and Experian, the three main UK credit reference agencies (CRAs), to get a better understanding of the processing they undertake and how they operate. The reviews were designed to help organisations who may be experiencing particular issues. APDSI also delivered Bailiff Reform Training in conjunction with John Kruse in This remains available as a face-to-face training course. John has worked as an adviser, trainer and consultant for the last 30 years. He has had a specialised interest in enforcement law for the last 26 years and founded the Bailiff Studies Centre in September The staggered implementation of the Tribunals, Courts and Enforcement Act 2007 is having a continued impact on the debt management sector in relation to enforcement approaches used by creditors and their agents. Changes to bankruptcy criteria in late 2015 may also influence the path that creditors take to recover monies owed. We have updated the APDSI website and the training prospectus is now available from the home page under CPD Guide to learn more about APDSI training services. Popular courses in 2014 were: Introduction to Approved Persons for business owners, directors and senior management The FCA application process for controlled functions and compliance officers TCF in practice for senior management and client facing staff The Consumer Credit Sourcebook (CONC) Part 1 (pre-contractual) and Part 2 (postcontractual) for senior management and client facing staff The perimeter guidance (PERG) and your responsibilities to monitor introducers Complaint handling and dispute resolution (DISP) under the FCA regime Practical adoption of key aspects of data protection policies & procedures Interpreting a credit report Managing conflicts of interest for senior management and client facing staff APDSI LinkedIn Forum We are keen to gather feedback from our members and use the expertise amongst our members to discuss key challenges and share best practices. We now have 426 individuals registered on the forum representing an excellent cross-section of the industry, including many senior executives directly impacted by the FCA transition. MAS quality framework for individual debt advisers progression into 2015 In December 2013, the Money Advice Service Debt Quality Framework for Individuals was published. This followed the MAS Quality Framework for Organisations published in June The Framework is intended to enable debt advice training and qualification providers to apply to be mapped against the requirements of the Framework and, where they evidence compliance, to be accredited by the Money Advice Service. During the course of 2014 a number of courses were Page 3

4 announced as accredited will be an important year in trying to determine whether there is a suitable course for smaller member firms that reflects both the core debt advice competency requirements and the knowledge of the regulatory regime in which we now operate. One of the core challenges for firms subject to FCA regulation is to be able to demonstrate positive consumer outcomes in line with Principle 6 of the Principles for Businesses and the 15 outcomes set out by MAS. The 6 TCF outcomes represent the foundation for the management information requirements for all firms offering regulated debt advice. TCF is about treating customers fairly not all the same All member firms involved in regulated activities need to have visible controls in place to achieve the six TCF outcomes: Outcomes Description 1 Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture. 2 Products and services marketed and sold in the retail (B2C) market are designed to meet the needs of identified consumer groups and are targeted accordingly. 3 Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sales. 4 Where consumers receive advice, the advice is suitable and takes account of their circumstances. 5 Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect. 6 Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint. The FCA s expectation is that we will know our customers and treat them individually, based upon their specific circumstances. For example; when a customer, who ordinarily adheres to a regular monthly payment, has a temporary change in circumstances, the FCA expects us to respond appropriately. This includes considering whether their fees should be reduced to reflect the limited disposable income the client may have during this period. For a DMP client, this would include reprojecting the duration of the plan, including any additional fees payable. FCA does not regard differing fees across DMPs, where these reflect specific client circumstances, to be a breach of Principle 6. TCF reviews in 2015 will become more commonplace and will include: 1. Member firms strategy and culture 2. Debt solution product design and on-going supervision 3. Financial promotions & introducer channels (e.g. compliance with PERG) 4. Sales and debt advice processes, managing potential conflicts of interest 5. Information provided after point of sale, notably on-going advice and reviews 6. Dealing with vulnerable clients 7. Complaints handling Page 4

5 MAS outcomes embedded in core debt management processes set out in CONC 15 client outcomes The client got the advice or information they wanted The client is aware of the possible different ways of dealing with Recognising and framing 2 their debt problem debt problems The client better understands that debtors and creditors have 3 rights and obligations and has some idea what these are The client has a clear idea about the steps required to try and 4 sort out their debt problems Action to resolve debt The client takes the steps they should to sort out their debt 5 problems problems If a referral is made, the client follows it up and receives help 6 from another organisation 7 The client increases their household income The client is able to plan how they use their money and sticks to 8 the plan Money Management 9 The client reduces their outgoings The client pays priority bills first before non-priority (such as 10 consumer credit) 11 The client's financial situation is brought under control The client knows to review their situation if their circumstances 12 change Towards debt resolution 13 The client's outstanding debt is reducing 14 The client has appropriate contact with his/her creditors 15 The client's wellbeing improves Improved help for people struggling with problem debt In January 2015, plans to enable easier access to debt relief for financially vulnerable people were announced by Business Minister Jo Swinson, who was the minister that announced the DMPP in February As previously reported by APDSI, The Insolvency Service sought views from industry, debt charities and other interested parties on the operation of DROs and bankruptcy debt thresholds in There have been 140,861 DROs since Though still subject to Parliamentary scrutiny, the changes are likely to come into force in October The announcement was widely supported by MAT, Citizens Advice, Christians Against Poverty and R3. Key changes in 2015 for debt managers include: DRO limits raised to 20,000 enabling an estimated 3,600 more consumers to use DROs instead of the bankruptcy process or potentially other debt solutions DRO asset limits raised to 1,000, plus a vehicle (worth not more than 1,000) Maximum surplus income a person can have to qualify for a DRO will remain at 50 per month Bankruptcy creditor petition level to be increased to 5,000 from 750 A light touch monitoring of the intermediaries to maintain consistency Page 5

6 2004Q3 2005Q3 2006Q3 2007Q3 2008Q3 2009Q3 2010Q3 2011Q3 2012Q3 2013Q3 2014Q3 APDSI 2015 STRATEGIC BULLETIN Strategic issues for 2015 and key APDSI challenges: 1. Supporting the member transition to full FCA permissions and meeting regulatory requirements on an on-going basis, acting as a conduit where applicable 2. Focus on member training support with regard to adopting the Standard Financial Statement, embedding TCF and delivering consumer outcomes 3. Focus on member engagement and communication through CPD Academy, webinars and other media (e.g. LinkedIn) based around key topics identified by members 4. Monitoring the impact of the FCA regime on creditor and collector practices, including correct reporting of DMPs and improvements in complaint handling processes 5. Guidance on financial promotions, website compliance and implementing effective perimeter monitoring, including IP exemptions and how this works in practice with regard to what is regulated income 6. Monitoring Insolvency reforms, notably changes in criteria for bankruptcy and DROs 7. Guidance on emerging best practices for firms operating in both the Debt Management sector 8. Guidance on EU Data Protection rules impacting the UK business practices As stated above, we are keen to gather member feedback on these challenges and any others that members feel are important issues. Thank you to those that have already responded. Individual insolvency in England and Wales Reporting of the personal insolvency statistics moved to gov.uk in Full year information is not available at the time of publication of this document. 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Total Individual Insolvencies Bankruptcy Orders Individual Voluntary Arrangements Debt Relief Orders 0 Source: Insolvency Service Page 6

7 Key findings in Q Total individual insolvencies decreased compared to the same quarter last year Bankruptcy Orders at their lowest level since Q IVAs decrease and DROs increase on the same quarter last year The rate of insolvency decreased and remains at a stable trend The number of people who became insolvent in England and Wales was 24,837 in Q3 2014, a 4.6% decrease on the same quarter last year. This was a return to the generally decreasing trend. There were 4,886 bankruptcy orders in Q3 2014, a decrease of 18.7% compared with the same period in 2013 and the lowest level since Q The number of individual voluntary arrangements (IVAs) decreased by 1.9% on the same quarter last year, having increased year-on-year in the previous 5 quarters. The number of people granted a debt relief order (DRO) increased by 2.7% compared to Q In the 12 months ending Q3 2014, 1 in 446 adults (just over 0.2% of the adult population) became insolvent. This is a decrease in the individual insolvency rate after increasing in the previous quarter. In the 12 months ending Q3 2014, 1 in 446 adults (or less than 0.22% of the adult population) became insolvent. This is down from 1 in 440 in the twelve months ending Q and the lowest rate since Q This is a return to the decreasing trend after the rise in the last quarter. With one exception (Q2 2014), the individual insolvency rate had decreased each quarter since mid-2010, but it is still elevated compared with rates of less than 0.1% observed before The bankruptcy rate has decreased each quarter since the 12 months ending Q3 2009, while the DRO rate has increased for the first time since Q The IVA rate has decreased for the first time since Q The individual insolvency rate is related to levels of household debt and with economic growth. The expansion of credit in the early- to mid-2000s coincided with a large increase in the individual insolvency rate, which abated following the credit crunch in 2007 before increasing again during the recession. 10.3% of bankruptcy orders made in Q resulted in an IPA or IPO, an increase of 0.7 percentage points on the same quarter a year earlier. It is only possible to obtain an IPA or IPO if the bankrupt has surplus income. Official receivers have reported that the recent decrease in the percentage of bankruptcies resulting in an IPA or IPO can be explained by income growth being generally lower than increases in consumer prices, leading to a smaller percentage of bankrupts having surplus income. Page 7

8 2004Q3 2005Q3 2006Q3 2007Q3 2008Q3 2009Q3 2010Q3 2011Q3 2012Q3 2013Q3 2014Q3 APDSI 2015 STRATEGIC BULLETIN Individual insolvencies in Scotland 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Total Individual Insolvencies Sequestrations Protected trust deeds Source: Accountant in Bankruptcy (AiB), AiB Quarterly Statistics Q1 2014/15 The sequestration figures include LILA (Low Income, Low Assets) cases. These were introduced as a new route into bankruptcy under the Bankruptcy and Diligence (Scotland) Act 2007, with effect from 1 April The figures above do not include Debt Arrangement Schemes, also reported on by the AIB. In Q3 2014, there were 2,991 individual insolvencies in Scotland 12.5% lower than the total in Q and continuing the generally downwards trend seen since the beginning of The level of sequestrations has remained fairly level, fluctuating between 1,650 and 2,000 since Q A new route into sequestration was introduced in Q The Low Income Low Asset (LILA) route was aimed at widening access to debt relief, and resulted in a large increase in the number of sequestrations. Since then, sequestrations have shown a generally downwards trend since the beginning of 2008 and recent totals are now approaching those levels seen before the introduction of LILA. By comparison, the number of Protected Trust Deeds has been fairly stable since The small increase in personal insolvencies is due to the increase in Protected Trust Deeds, which have risen by 10.3 per cent in Q The general decline in personal insolvencies may be because of a corresponding increasing trend in the number of people instead entering Debt Payment Programmes (DPPs) under the Debt Arrangement Scheme. These are not formal insolvencies, but are binding agreements with creditors to repay debts in full over an agreed period. Page 8

9 The Financial Ombudsman s plans and budget for 2015/2016 At the beginning of January 2015, the Ombudsman opened public consultation on their plans and budget for the next financial year. In 2015/2016, they expect to: answer 1.4 million front-line consumer enquiries; sort out 250,000 complaints about PPI, 88,000 about banking, 33,000 about insurance and 17,000 about investments; and recruit 200 adjudicators and ombudsmen. In dealing with this workload, they plan to: reduce their cost to the financial services sector by 13%; and freeze the case fee at 550, and maintain the current group-account charging arrangement for the eight largest businesses that generate the most complaints. Complaint volumes other than PPI in 2015/2016 Looking at cases other than PPI, the number of complaints the Ombudsman is receiving is currently generally stable. Two exceptions are an increase in banking complaints mainly due to complaints about packaged bank accounts and in consumer credit, where case volumes may be more volatile. In conditions where consumers experience financial difficulties, the Ombudsman is likely to receive more complaints. This may be because there are more complaints involving debt and harderfought cases that are more likely to be appealed to an ombudsman. APDSI has already issued bulletins regarding the emergence of Claims Management Companies (CMCs) that are targeting Debt Management firms. This will remain a focal point for collaboration between the trade associations in Expected new cases 2015/2016 New cases 2013/2014 (actual) 2014/2015 (forecast) 2015/2016 (budget) Banking 57,419 66,500 74,000 Consumer credit 7,658 9,500 11,000 Insurance 31,213 33,000 31,000 PPI 399, , ,000 The budget document also states that businesses that transferred from the FOS consumer credit jurisdiction to the FOS compulsory jurisdiction have always been subject to their usual case fee arrangement. But the FCA has said that it will not apply a levy to consumer credit businesses until 2016/2017, when its full regulatory regime for consumer credit takes effect. This may need to be clarified when firms become fully authorised in Link: Page 9

10 The Ombudsman proposes to freeze the standard case fee at 550 for 2015/2016 and to maintain the number of free cases at 25 per regulated firm. Compulsory jurisdiction levy The levy payable by FCA-authorised businesses is set and collected by the FCA. The FCA will consult on the total amount of the levy and on how it should be allocated among industry blocks as part of its wider consultation on the Financial Services Compensation Scheme, Money Advice Service and FCA levies, which is expected to be published in March PS14/18: Credit broking and fees In December 2014, the FCA announced significant concerns about the practices of some credit brokers who charge upfront fees to consumers. Some 41% of all the complaints received since 1 April by the FCA s Consumer Credit Department related to credit broking and around 80% of these are about online brokers charging upfront fees. Link: The FCA introduced new rules from January 2015 to address those credit broking activities that they feel are putting consumers at risk. APDSI members with permissions for credit broking or taking referrals from credit brokers need to be mindful of these new regulations in their due diligence activities. This is particularly relevant where re-financing may be one of the debt solutions being considered either at the outset or as part of the solution (e.g. IVA) or on change in circumstance. The rules in brief: The rules ban credit brokers from charging fees to customers, and from requesting customers payment details for that purpose unless they meet FCA requirements Credit brokers must make sure customers are given clear information about who they are dealing with, what fee will be payable, and when and how the fee will be payable Fee-charging brokers will need to notify the FCA, quarterly, of the websites they operate All brokers will need to include their legal name (as it appears in the FCA Register) in all advertising and all correspondence with customers Advertising must clearly state that the firm is a credit broker and not a lender; if the firm is both a credit broker and a lender, the advertising will need to make clear that they are advertising their broking services, not their lending There are additional rules on cancellation rights for distance contracts (for example, online credit broking), including rights to a refund. This type of rapid action by the FCA is indicative of their intent to use their powers not only on financial promotions, but other business practices that could give rise to consumer detriment. Link: Page 10

11 Conclusions - changes to the approach Rather than a tick-box approach to compliance with rules and guidance, the FCA s threshold conditions and high level principles for businesses such as treating customers fairly seek to put the interests of customers at the heart of every member firm s business. Having good consumer outcomes at every stage of the credit journey is key. These include: in advertising, websites and financial promotions in product terms & conditions and fee illustrations at the debt advice & pre-contractual stage, including clear sign-posting obligations in customer service and suitability reviews during the life of the product post-sale problems, including complaints handling About the Association of Professional Debt Solution Intermediaries (APDSI) The Association of Professional Debt Solution Intermediaries Limited (APDSI) was incorporated in England & Wales as a company limited by guarantee on the 27 October It is a not-for-profit organisation established as a professional trade association representing FCA authorised intermediaries wanting to refer clients in financial hardship to authorised and competent debt solution providers approved by the trade association. The Mission of the Association is to: 1. represent the views of the members of the Association to regulators and others on matters of common interest regarding the regulation of the debt solution intermediary market 2. provide a forum for the continuing education and professional development of members and their employees and agents 3. provide a forum for the compliant promotion, development and diversification of the debt solution intermediary market 4. promote best practice in the debt solution intermediary market and to assist members in assisting their clients who may be facing financial difficulties Website: Code of conduct: kevin.still@apdsi.org.uk Page 11