Thousands of people who are struggling in debt will save money under new rules introduced by the financial watchdog.
The Financial Conduct Authority (FCA) is banning certain providers of debt advice from receiving referral fees from debt solution providers.
Debt packager firms earn money from fees paid when people are referred to solution providers such as an insolvency practitioner for an individual voluntary arrangement (IVA).
But the FCA found some companies were recommending services that make them more money, rather than what is best for the customer.
For example, the FCA spoke to one person who was homeless and was recommended an IVA that cost them £6,000 - but they could have been debt-free in one year through a Debt Relief Order (DRO) for £90.
The new rules will save people money in unnecessary fees and mean they should receive better quality advice.
The ban comes into effect from today for new firms entering the debt packager market.
Existing debt packager firms will need to develop a new way of doing business by October 2 this year or face regulatory action.
Sheldon Mills, executive director of consumers and competition at the FCA, said: "Good quality debt advice is vital in helping people out of financial difficulty and poor advice can have a devastating impact on those who are already struggling.
"This ban will put a stop to the business model that incentivises bad advice and reduce harm for consumers.
"We are giving existing firms four months to help them adapt. Anyone struggling with debt can get free and impartial advice from MoneyHelper or other services."
Joanna Elson, chief executive of the Money Advice Trust, the charity that runs National Debtline and Business Debtline, said: "The FCA's ban on referral fees for debt packager firms is welcome and marks an important step in tackling the harm caused by this practice.
"Our advisers have seen the impact of this activity, with people saddled with high fees and a debt solution that simply isn't right for them - all of which can set back their route out of debt by many years."
Matthew Upton, acting executive director of advocacy and policy at Citizens Advice, said: "Banning referral fees is a big step towards tackling the way some firms prey on and profit from people struggling with debt.
"Inaccurate or misleading advice from providers promoting individual voluntary agreements can push people further into hardship and further away from a lasting solution to their problems."
Richard Lane, director of external affairs at StepChange Debt Charity, said: "With more people falling into financial difficulty amidst high inflation and interest rates, it's essential that consumers receive free and independent debt advice to determine the most appropriate solution for their needs.
"We expect this move to benefit thousands of consumers and reduce much of the misleading advertising for debt services online."
Get free debt advice
If you’re really struggling, get free debt advice as soon as possible - don’t ignore the problem.
Speak to one of the following organisations:
- Citizens Advice (0800 240 4420)
- StepChange (0800 138 1111)
- National Debtline (0808 808 4000)
