FCA bans referral fees for debt packagers firms

2nd June 2023

The Financial Conduct Authority (FCA) has announced a ban on referral fees for debt packager firms.

The ban applies to all new debt packager firms and will come into play for existing firms in October 2023, and follows a review that found 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.

Debt packager firms earn money from fees paid when consumers 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). 

By contrast, some other solutions may be more suitable for some consumers such as Debt Relief Orders (DRO) in England, Wales and Northern Ireland, or Minimal Asset Process (MAP) in Scotland which do not earn debt packagers any fees.   

Fees for IVAs or PTDs can cost consumers £3,650 or more over their lifetime compared to less than £100 for options such as DROs and MAPs, if eligible.  

The FCA 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, for example:  

One consumer, 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. 
Another consumer 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 to a DRO and meant it would take five years longer to become debt free. 

Existing debt packager firms will need to develop a new way of doing business by 2 October this year or face regulatory action. The ban comes into effect today 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 says it will continue to make sure that credit markets work well for borrowers and firms. It 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.  

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.  

Responding to the decision, Joanna Elson, Chief Executive of the Money Advice Trust 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.”

“With budgets under ever increasing strain, ensuring anyone in financial difficulty can access free, and independent debt advice is more important than ever.”

“The Insolvency Service need to now match this action, by ending the practice of Insolvency Practitioners paying lead generator firms to direct people in financial difficulty toward potentially unsuitable debt solutions.”

“You should never have to pay for debt advice.  I would urge anyone worried about their finances to contact a free debt service like National Debtline as soon as possible”  

Richard Lane, Director of External Affairs at StepChange Debt Charity, said “After campaigning for several years to raise the alarm about these poor debt advice practices, we’re pleased to see the FCA take firm action in this area. 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.”