People struggling with debt will save money in unnecessary fees and receive better quality advice due to a new referral fees ban, according to the City regulator.
The Financial Conduct Authority (FCA) is banning certain providers of debt advice from receiving referral fees from debt solution providers.
It will put a stop to a business model which incentivises debt packagers to recommend certain options that make them more money, rather than what is in the customer’s best interest, the regulator said.
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) in England, Wales and Northern Ireland or, in Scotland, a protected trust deed (PTD).
Some other solutions may be more suitable for some people in debt which do not earn debt packagers any fees, the FCA said.
It highlighted debt relief orders (DRO) in England, Wales and Northern Ireland, or the minimal asset process (MAP) in Scotland as alternative options.
Fees for IVAs or PTDs can cost consumers £3,650 or more over their lifetime compared with less than £100 for options such as DROs and MAPs, if the person is eligible, the FCA said.
The FCA said it has seen evidence of debt packagers appearing to manipulate customers’ details so that they meet the criteria for IVAs/PTDs and using persuasive language to promote products without explaining the risks involved.
In some of the worst cases identified, the FCA found evidence of customers in financial hardship who were recommended solutions which caused greater harm.
One person, who was homeless, was recommended an IVA, costing them £6,000, when they could have been debt-free in one year via a DRO for £90.
In another case, someone was recommended an IVA by a debt packager when a different solution would have been more suitable. This cost them an extra £4,710 compared with a DRO and meant it would take five years longer to become debt free, the FCA said.
Existing debt packager firms will need to develop a new way of doing business by October 2 this year or face regulatory action, the regulator 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— Sheldon Mills, FCA
The ban comes into effect from Friday June 2 for new entrants to the debt packager market.
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.”
The FCA wants debt advice firms to provide a high-quality debt advice service to consumers, helping them to manage their debts and to access a suitable debt solution where appropriate.
It said firms representing two-thirds of the market in customer numbers have either left or suspended their activities since the FCA first raised concerns in July 2021.
People needing help with their debts can get free and impartial advice from the MoneyHelper website, provided by the Money and Pensions Service.
The FCA is also issuing guidance about how unauthorised businesses, who source potential customers and recommend them to debt solution providers who only offer one debt solution, may need to be authorised by the FCA.
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.”
