A major change to debt rules has been put forward which could save those struggling thousands of pounds in "unfair" fees.
The proposals by the financial regulator would ban debt packager firms from receiving referral fees from debt solution providers.
Debt packagers are "regulated" providers of debt advice, who refer people to debt solution providers.
Currently, these companies can take a referral fee for passing on a customer to another debt solutions advisor and the Financial Conduct Authority (FCA) wants to ban this practice.
The FCA, which keeps an eye on the financial services industry in the UK, began its discussions on a ban in November 2021 and is pushing on with another consultation which will close in March this year.
The FCA explained how the debt packager firms charge these fees when those seeking debt advice are referred to an insolvency practitioner for an individual voluntary arrangement (IVA) or a protected trust deed (PTD).
An IVA is an agreement between you and the people you owe money to, your creditors, to pay all or part of your debts and you agree to make regular payments to the insolvency practitioner, who then splits the money between your creditors.
A protected trust deed is where you agree to pay a regular amount of money towards your debts and at the end of a fixed time, the rest of your debts will be written off.
The FCA say that these fees are usually much higher than the fees which are charged when the person in debt is referred to a government scheme such as a debt relief order.
Consumers who enter a debt solution which is not right for them can face dire consequences.
The regulator said going into an IVA unnecessarily could cost you almost £5,000 and could mean you spend an extra five years paying off your debt before becoming debt-free.
Some 54,000 people sought advice from a debt packager in the year to March 2020, according to estimates.
Sheldon Mills, executive director of consumers and competition at the FCA, said: “Many people are facing pressures on their finances due to the rising the cost of living, so it’s crucial they get good quality debt advice.
“Unsuitable or poor advice can really harm people’s financial lives. We want to stop this harm by removing the conflict of interest between firms giving advice in the customer’s best interest and recommending an option that makes firms more money.”
