The Financial Conduct Authority (FCA) today published its second thematic review of the debt management sector. I’ve read it through once. If you are managing a debt advice/solutions organisation or are affected by what the sector does (a creditor say) it deserves a lot more reading than that – so these comments are restricted to a small but vital section of the report: The quality of debt advice.
Let’s get one thing straight. I am not for one minute suggesting we should automate debt advice. Instead, I believe we should use technology to give real people more time to give advice.
Tech can help, but good advice is key
I’m about to suggest that using financial technology (fintech to its friends) can really help deal with this problem. But, let’s get one thing straight first. I am not for one minute suggesting we should automate debt advice. Instead, I believe we should use technology to give real people more time to give advice. And to hold people’s hands whilst they take it.
It’s an exciting time for fintech. But fintech has the feeling of the dotcom boom about it. It isn’t mature and it sure as hell isn’t yet artificial intelligence – and debt advice is far too subtle an area to rely on machines to handle a process that demands the human touch. Machine-based debt advice isn’t going to be anywhere near good enough to give debt advice until machines pass the Turing test. But fintech can make things an awful lot better.
The quality problem
All is not well, the FCA thinks. And that’s true in all the firms they visited – commercial or not-for-profit. When it comes to quality they say:
“We found that quality of advice had generally improved and that most firms were reaching the standards for most of their customers. Despite the improvements seen, we found inconsistencies in all firms’ practices that had caused, or could cause, harm. In all firms, we found some customers that had received poor advice and unsuitable recommendations. We saw this more often in the advice or suitability reviews for existing or acquired debt management plan customers. There were several common areas of inconsistency across firms:“(P.4, par 1.7; our bold).
The FCA have some pretty specific grouches about debt advice quality. It’s covered in pages nine to 26 of a 40-page report. Here’s a chunk from page 13.
4.2.4 is typical. The “Quality” section of the report refers throughout to income and expenditure being inaccurately assessed, causing client detriment. The fintech that is here and available now almost eliminates this. Open Banking data gives debt advisors accurate transaction data and can map it, pretty accurately onto key spending areas. A magic bullet it isn’t. It is the most accurate source of spending data. But it shouldn’t (we think) be manipulated into any sort of “advice engine”. It just gives advisors the information needed to make their advice more accurate and appropriate. It won’t list what people spend using cash. And it won’t get it right all the time. So someone needs to ask questions. More probingly but also more sensitively than a machine can do.
More time to advise
The benefit is that Fintech cuts the time it takes to gather data and thus leaves more time to give advice. The free-to-client advice agencies that work with us say using the free credit report services we provide cuts 40% off the duration of an advice session. The Open Banking data service we’ve launched for existing advisors this week. pulls data and categorises it in just a few seconds (admittedly getting the client’s’ consent and giving them control takes a little longer – a couple of minutes). But, using this kind of technology means advisors can increase their agency’s capacity to give advice and spend more time advising, on the basis of data that will show the FCA they are doing a proper job. It will also increase client engagement. Far fewer callbacks. Far fewer multiple face-to-face sessions. Far more evidence that the basis for advice is solid.
We will be making Open Banking available to new applicants from Monday 18 March. Get in touch here to find out more.
Keeping on keeping on.
It’s not just in the initial advice process that the FCA has quality concerns. They say:
“Our guidance… states that where a customer who has not previously missed a payment then misses payments this may be evidence of a material change in their financial circumstances. Firms had established strategies and policies for contacting customers, pausing payments or closing debt management plans where multiple payments had been missed. However, our review of case files found numerous examples where the firm’s need to reassess or readvise the customer due to a material change in circumstances was evident, but the firm failed to do so. We saw firms missing opportunities to review the appropriateness of the customer’s debt management plan, and therefore not acting in the customer’s best interests” (page 30, para 4.115/6; our bold)
Getting good advice is only the start of a client’s journey to financial capability. And it is in this area that Open Banking, in particular, will make a major contribution. I’d go as far as to say it will be irresponsible of debt solutions providers NOT to use it.. If your client trusts you enough to allow you to see their transaction data then there is no more waiting for missed payments in the debt plan. Instead, that is replaced by knowing that a client’s circumstances have changed. When they change. For everyone this means fewer cases failing. This means creditors will get more of what they are owed. Debt firms will be able to show the regulator they are on top of their job. Those that charge will need to do more to earn their fees. But, they will be earning their fees..
This isn’t likely to be the last time we write about the FCA’s debt management thematic review, but, this struck us as a big opportunity for fintech that is mature now to make a huge difference to effective, responsible debt advice. And to make debt solutions work better too.