How debt advice and debt management firms are regulated

Debt advice and debt management are regulated activities in the UK. A firm that advises people on their debts, or negotiates and administers repayment plans on their behalf, needs permission from the Financial Conduct Authority (FCA) to do it, and once authorised it is bound by a dedicated chapter of the FCA's rulebook, CONC 8, covering how advice must be given, what can be charged and how a customer's money must be handled¹.

The rules bite hardest on fees and on the money itself. A firm cannot take a payment from your account unless you have specifically authorised it, cannot accept its fees by credit card or another form of credit, and cannot allocate more than half of the money you pay in any month, from the first month of the plan, to its own fees and charges¹. Before recommending anything it must carry out a reasonable and reliable assessment of your financial position and personal circumstances¹.

Free debt help exists alongside the fee-charging sector. Some companies charge a fee for debt management plans while others give their services for free, and official guidance is clear that you can get free and independent advice on debt management plans, or any kind of debt problem, before signing up with a provider².

What counts as regulated debt advice

Two regulated activities sit at the centre of this market. Debt counselling, under article 39E of the Regulated Activities Order, covers advising a debtor on how to liquidate or reschedule debts. Debt adjusting, under article 39D, covers negotiating with creditors on the debtor's behalf, including activities like administering a debt management plan⁴. The FCA's rulebook applies to every firm carrying on debt counselling, debt adjusting and, to a limited extent, providing credit information services, whether profit-seeking or not-for-profit¹.

The line between information and advice is what determines whether regulation applies. In general terms, simply giving balanced and neutral information, without any comment or value judgement on its relevance to decisions a debtor may make, is not advice. But any element of evaluation, value judgment or persuasion is likely to mean advice is being given⁵. The FCA's guidance gives concrete examples:

• Helping a debtor draw up a budget in a balanced and neutral way is providing information rather than advice. Budgetary help that goes further, and advises the debtor on how to match income and debts, is debt counselling⁴.
• Recommending that a debtor enter into a debt management plan is debt counselling, because it steers the debtor towards a particular solution⁶.
• Advising a debtor not to borrow more than they can afford is not debt counselling, because it concerns incurring debts rather than liquidating them⁶.
• A recommendation to obtain advice from a particular debt counselling firm is not debt counselling on its own, but it could be advice if the firm only offers one debt solution, such as a debt management plan⁴.

Debt counselling is not limited to advice about being released from paying a debt in full or rescheduling it⁶, and it relates to the particular debts of a particular debtor. Advice that does not relate to particular debts in this way is likely to be generic advice⁵. One boundary matters for homeowners: advice to consolidate unsecured consumer credit debts into a specific regulated mortgage contract is unlikely to be debt counselling because an exclusion in article 39J of the Regulated Activities Order is likely to apply, whereas advice to consolidate into a single regulated mortgage contract without recommending a particular contract or lender is debt counselling⁴.

The Regulated Activities Order provides for 10 credit-related regulated activities in total, of which debt counselling and debt adjusting are two⁷. The wider framework of consumer credit regulation, including what is regulated and what is not, is covered in what the FCA covers, and the rulebook itself is explained in the FCA Handbook.

Free or fee-charging: how debt management firms are paid

A debt management plan is an agreement between you and your creditors to make a set monthly payment, managed by companies known as debt management plan operators or providers, who negotiate with creditors and manage the payments². The provider must be licensed by the FCA².

Some companies charge a fee for debt management plans while others give their services for free². Most debt management companies do charge, which means you may have less money from your available income to pay your debts⁸. That difference is the single biggest practical reason to compare providers before signing up, and official guidance recommends getting advice before setting up a plan with any provider².

The FCA requires a debt management firm to state prominently, in its first written or oral communication with a customer, that free debt counselling, debt adjusting and providing of credit information services is available, and that the customer can find out more by contacting MoneyHelper¹. This rule exists precisely so that fee-charging firms cannot leave customers unaware that a free alternative exists.

Fees: no more than half of early payments can go to the firm

The fee rules in CONC 8 address a problem the FCA identified when it took over consumer credit regulation: set-up costs charged in the first months of a plan could consume a customer's money before any of it reached creditors. In its 2013 consultation the FCA proposed requiring debt management firms to spread their fees, so that consumers' money is not consumed by set-up costs in the early months of a plan but starts paying back creditors from the beginning⁹.

The rule that resulted is that a firm may not allocate more than half of the sums received from the customer in any one-month period, from the start of the debt management plan, to the discharge of its fees or charges¹. The Financial Ombudsman Service, which decides complaints about these firms, has stated that it would normally expect no more than half of any payment from a customer, from the first month of a debt management plan, to be allocated to the firm's fees and charges, and that firms should spread management fees payable for the administration or operation of a plan evenly over its duration¹⁰.

Alongside the allocation rule, CONC 8 prohibits a set of specific charging practices¹:

• Taking any payment from a customer's payment account unless the customer has specifically authorised it and has not cancelled that authorisation.
• Accepting payment for fees or charges by credit card or another form of credit, with a narrow exception where the firm does not know and cannot be expected to know that the customer's current account is in debit or would be taken into debit by the payment.
• Imposing unreasonable or disproportionate cancellation charges.
• Charging an additional fee for further or revised advice after giving incorrect advice.
• Directing customers seeking refunds to a premium rate telephone number.

The credit card prohibition is deliberately broad. The policy behind it is that a person already in financial difficulty should not be pushed into further borrowing to pay for the help itself. The exception for current account payments exists because a direct debit from an ordinary account is not treated as credit unless the account is, or will be, overdrawn and the firm should have known¹.

What a debt adviser must check before recommending anything

Before giving any advice or recommendation on a course of action in relation to a customer's debts, a firm must carry out a reasonable and reliable assessment of the customer's financial position, personal circumstances and any other relevant factors¹. The verification steps the rulebook sets out include taking reasonable steps to verify the customer's identity, income and outgoings, and seeking explanations where a customer indicates expenditure that is particularly high or low¹. Estimates of expenditure are treated as reasonable where precise figures are not readily available¹.

The advice itself must be provided in a durable medium, and it must make clear which debts will be included in any debt solution and which will be excluded, the advantages, disadvantages, costs and risks of each option, and warnings about the consequences of non-payment and of ignoring lenders' correspondence¹.

The stages a regulated debt adviser must go through before and after recommending a solution.

The financial statement the firm sends to lenders on the customer's behalf should be uniform and logically structured, in a way that encourages consistent responses from lenders and reduces queries and delays¹. The FCA points firms to the Standard Financial Statement facilitated by MoneyHelper, the Common Financial Statement formerly facilitated by the Money Advice Trust, or an equivalent or similar statement¹. Where a firm uses a statement that includes expenditure guidelines, the use of those guidelines must take into account the individual circumstances of the customer¹.

Similar assessment duties apply in the statutory debt solutions. A debt advice provider considering an application for a mental health crisis moratorium must assess whether the debts in the application are qualifying debts and obtain information relevant to the debtor's financial standing from at least one credit reference agency¹¹. In Scotland, a debtor must take the advice of a money adviser before applying for a debt payment programme¹⁴, and is not entitled to apply for or vary a programme without having obtained advice on their financial circumstances, the effect of the proposed programme and the preparation of the application¹⁵. Scottish Government guidance likewise requires advice from an approved money adviser before applying for certain debt solutions¹⁶, and a review for the Scottish Government recommended mandating that people receive independent debt advice from an FCA authorised or otherwise exempt provider before entering any formal debt solution¹⁷.

Repayment offers must be realistic and sustainable

A repayment offer put to a customer's creditors must be realistic and sustainable, and must have regard to the best interests of the customer¹. The rulebook defines what sustainable means: an offer should enable the customer to meet repayments in full when they are due, out of the customer's disposable income, for the whole duration of the repayment proposal¹.

Setting the offer must take full account of the customer's obligations to pay taxes, fines, child support payments and those debts which could result in loss of access to essential goods or services, or repossession of, or eviction from, the customer's home¹. What counts as essential depends on the person: for disabled persons, debts for telecommunications services are likely to be essential¹.

The concept of sustainable repayment runs through consumer credit regulation more widely. The Financial Ombudsman Service describes being able to sustainably repay credit as doing so without undue difficulty, while being able to meet other commitments and without having to borrow further¹⁸. On the lending side, firms must monitor a customer's repayment record and take appropriate and proactive action where there are signs of actual or potential repayment difficulties¹⁹, and where a customer makes a reasonable offer of repayment, a firm must give it due consideration²⁰. In mortgages, a firm whose contract's purpose is debt consolidation for a credit-impaired customer must take reasonable steps to ensure the debts are actually repaid on completion, and must have robust systems and controls to monitor the effectiveness of its affordability assessments²¹.

Comparable expectations apply outside financial services. Water companies are expected to set repayment levels which are realistic and sustainable given the customer's circumstances, taking into account all outgoings, and customers should not be pressured into paying the debt in full or in unreasonably large payments²². Water companies should also offer a reasonable repayment plan to allow repayments to be spread²³.

When a firm may advise you to reduce or stop payments

The FCA expects that it will generally be in a customer's best interests to maintain regular payments to lenders, even if the repayment is less than the full sum due¹. But there are circumstances where paying less, or stopping, is the right course, and the rules set conditions for when a firm can say so.

A firm must only advise a customer to make repayments at a rate lower than the rate necessary to meet the interest and charges accruing where it is in the customer's best interests, and it must be able to demonstrate that the advice is in the customer's best interests¹. Where withdrawing from the debt management plan altogether may be in the customer's best interests, the firm should advise the customer of the possibility of withdrawing¹. Two duties attach to such advice: the firm must warn the customer of the actual or potential consequences of taking that course of action, and it must advise the customer that if they adopt the advice they should notify their lenders without delay and explain that they are following the firm's advice¹. The firm must also advise the customer if it becomes clear that the course of action is not producing effects in the customer's best interests, so the customer can take action¹.

A specific prohibition applies to firms that do not themselves provide debt solutions, such as pure advice or referral firms. A firm is treated as not itself providing debt solutions where it provides them only on a single or occasional basis, or receives only an insignificant amount of its total annual revenue from providing them¹. Related rules elsewhere in the consumer credit rulebook reinforce the same principle: firms must not pressurise a customer to pay a debt in one single or very few repayments, in unreasonably large amounts, within an unreasonably short period, or by selling property, borrowing or increasing existing borrowing²⁴. A firm must not continue to demand payment from a customer after the customer has stated they will not be paying the debt because it is statute barred²⁵.

In the statutory solutions, the draft Statutory Debt Repayment Plan regulations allowed a debtor on a final plan to apply to the debt advice provider for a payment break of up to one month²⁷, and the scheme's consultation document set an administration fee of 10% of the debtor's repayments into a plan²⁸.

What a debt management firm must do while your plan runs

A debt management plan is a voluntary arrangement, and that shapes what a firm can and cannot achieve. Creditors do not have to enter into a debt management plan, and may still contact you asking for immediate repayment². Debt management plans are voluntary agreements between a debtor and some or all their creditors to repay debts over an extended period²⁹.

Once a plan is running, the firm's obligations continue. It must adapt the debt management plan to take into account relevant changes in your financial position and circumstances³⁰, and it must maintain adequate records relating to each plan it has administered for you until the contract between you and the firm is completed or terminated³⁰. The terms and conditions should be made clear, including how much you will be expected to pay each month and for how long, and the reasons the provider might stop operating the plan, for example missed payments².

The firm must also set out clearly at the start how much it will cost to arrange the plan and who will pay that cost². If circumstances change, or the plan stops producing effects in the customer's best interests, the firm must advise the customer of this so they can take action in their own best interests¹.

Debt packagers and commission: what must be disclosed

Some firms do not provide debt solutions themselves but refer customers to other providers, in return for commission. These are commonly called debt packagers, and the rules on what they must disclose draw on a longer history of commission disclosure in consumer credit.

Under the Consumer Credit Act 1974, an intermediary must secure that any financial consideration payable to it by the debtor for its activity is disclosed to the debtor and then agreed in writing before the regulated consumer credit agreement is concluded³¹. The Consumer Credit (EU Directive) Regulations 2010 imposed requirements on credit intermediaries to disclose their links to creditors, to disclose and agree with the consumer any fee for the intermediary's services, and to inform the creditor of any fee³². Directive 2014/17/EU, on credit agreements relating to residential property, required credit intermediaries to disclose their identity, their links with creditors and any commission or inducement payable, before carrying out credit intermediation activities³³.

For debt packagers specifically, the FCA's rules in CONC 8 apply to firms with respect to debt counselling where the firm does not itself provide debt solutions¹, which captures the packager model. The practical protections for a consumer are that the advice must be based on a proper assessment of their circumstances, must set out the options with their advantages, disadvantages, costs and risks, and must be given in a durable medium¹. A referral to a single-solution provider can itself amount to advice, as the FCA's guidance on referrals makes clear⁴.

Your money held by a debt firm: client money and capital rules

When a firm collects your monthly payment and passes it to creditors, it is holding your money. Client money requirements apply to debt management firms and not-for-profit debt advice bodies holding clients' money, with additional requirements for larger firms¹⁰. The FCA also extended its client asset operational oversight function to debt management firms and not-for-profit debt advice bodies holding £1 million or more of client money¹⁰, and proposed requiring debt management firms and some large not-for-profit debt advice firms to hold a certain minimum amount of capital⁹.

The payment itself can only be requested from your account with your specific authorisation, which you can cancel¹. Combined with the fee allocation rule, the flow of money in a plan is tightly constrained.

The path your money takes in a debt management plan, and the rules at each stage.

Protection if things go wrong comes through the Financial Services Compensation Scheme. FSCS protection for debt management is subject to conditions: the firm must be authorised by the FCA and hold client money, and the firm or its principals must be unable to meet claims for compensation³⁴. The FSCS's own list of what is covered excludes debt advice as a category³⁴, so the protection centres on money held, not on the quality of the advice itself.

If a firm breaks the rules or closes

If a firm breaches the rules, the complaint route is the firm first and then the Financial Ombudsman Service. The ombudsman follows the FCA's Dispute Resolution Rules when deciding complaints³, and its stated expectations on fee allocation and fee spreading are what it applies when a customer complains about how a plan's payments were divided¹⁰. The ombudsman's approach to unaffordable lending, including its definition of sustainable repayment, is also part of the framework it applies¹⁸. The choice between the ombudsman and the courts is covered in Financial Ombudsman or court.

The FCA also has supervisory tools. It has stated that in some cases it will consider asking firms to stop lending where it sees poor customer outcomes³⁶, and its guidance on customers in temporary financial difficulty includes expectations that firms should not reduce a credit limit or suspend an overdraft facility where that would cause financial hardship to a customer entitled to help³⁷. Where compensation is due on a loan or credit card in arrears, the ombudsman notes the regulator's guidance that the business may use the compensation to reduce the balance if it has the contractual right to do so³⁸.

If a firm closes, your plan does not end automatically, but the firm's record-keeping duty helps: it must maintain adequate records relating to each plan until the contract is completed or terminated³⁰. Your debts remain owed, and creditors may resume direct contact, since they were never obliged to accept the plan². If the firm was authorised and held client money and cannot meet claims, FSCS protection may apply³⁴. Free advice on what to do next is available through MoneyHelper¹ and, in Northern Ireland, organisations like Advice NI².

For context on the wider regulatory landscape, who regulates what explains the division of responsibilities between the FCA and other bodies, and the FCA page covers the regulator's role in more detail. The debt section covers the solutions themselves, from debt management plans to statutory options.