FCA proposes ban on debt packager referral fees

17th November 2021

The Financial Conduct Authority (FCA) has proposed banning debt packager firms from being paid to refer customers to other firms.

Debt packagers are regulated providers of debt advice, who refer customers to other providers of debt solutions. They rely on income from referral fees paid by these other firms. These fees can be many times higher when consumers are referred to an Insolvency Practitioner for an Individual Voluntary Arrangement (IVA) or Protected Trust Deed (PTD). This means that debt packagers have a conflict of interest between giving advice in the customer’s best interest, and making a recommendation that makes them more money.

The FCA says that the business model puts consumers at risk of considerable harm from unsuitable debt advice. The regulator says it has seen evidence of debt packagers appearing to have manipulated customers’ details so that they meet the criteria for IVAs/PTDs, and used persuasive language to promote products without explaining the risks involved.

The FCA’s proposals would protect consumers by banning debt packagers from accepting referral fees, eliminating the current business model for these firms.

Sheldon Mills, Executive Director of Consumers and Competition at the FCA, said “Debt advice needs to be good quality and meet the needs of consumers. Too often people who contact debt packagers for help are being given advice that could cause them harm. This is unacceptable, especially as people seeking debt advice are often in vulnerable circumstances.”

“Our proposals will address the inherent conflict of interest present in the debt packager business models. This will help protect consumers who need support managing their debts.”

Consumers who enter into an IVA or PTD that isn’t right for them can face serious consequences. For example, if a consumer is accepted onto an IVA following poor advice from a debt packager when a Debt Relief Order would have been more suitable, this could cost them an additional £4,710, and could mean that it takes them 5 years longer to become debt free.

The FCA says that 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.

The regulator estimates that 54,000 people sought advice from a debt packager in the year to March 2020, and demand for debt advice is rising.

Commenting on the proposal Peter Tutton, Head of Policy, research and public affairs at StepChange Debt Charity, said “We have been campaigning for more than two years now for action to stop the bad practices we have been seeing. We have spoken to clients and to people who thought they were StepChange clients who realised they had been duped into handing over money to unscrupulous firms trying to sell them the wrong debt solutions for their needs. So we wholeheartedly welcome the FCA’s robust proposals to ban referral fees for debt packager firms, and urge the Insolvency Service to move forward with the regulation of volume IVA providers to end the harm caused by unregulated lead generators in the debt advice market.”

“If we could also see scam advertising brought within the scope of the Online Safety Bill, as well as reform of the insolvency market to ensure that it is fit for purpose, together that would all help to minimise the failure rate of IVAs, where the overall market failure rate is unacceptably high.”

Joanna Elson CBE, Chief Executive of the Money Advice Trust, said “Today’s figures, which show inflation at its highest level for a decade, are a growing concern with many households already struggling to cover essential bills. Rising energy costs, surges in fuel prices and increasing costs across the board, are contributing to a further squeeze on budgets, many of which are already at breaking point.”

“At National Debtline nearly four in ten callers do not have enough coming in to cover essential outgoings. As the cost of living continues to increase, our concern is that more people will be pushed into difficulty.”

Caroline Siarkiewicz, Chief Executive at the Money and Pensions Service said “There are lots of different debt solutions and so getting free impartial debt advice will get people to the right solution for them. Debt packager firms have the potential to refer people to a debt solution that may not be suitable for their circumstances. It’s really important that people know that help is available and where they can find it.”

“Free debt advice can be life-changing – our research shows that 63% of customers with debts are reducing or clearing them within three to six months after receiving impartial debt advice.”

Sarah Coles, Senior Personal Finance Analyst, Hargreaves Lansdown said “The FCA is effectively shutting down part of the debt advice market, because it’s worried that vulnerable customers are getting ripped off. This would be a useful step to protect consumers who are far better off approaching a debt charity for free advice.”

“In theory, debt packaging firms assess your problems, and then refer you on to either a debt management company or a firm offering IVAs, whichever is most suitable for your circumstances. However, they get an average of £930 for recommending an IVA and nothing for suggesting a debt relief order, giving them a financial incentive to favour this approach.”

“The FCA is worried that some debt packager firms are pushing customers down the IVA route regardless of their needs, without fully explaining the risks. Some ignore the vulnerabilities of customers including mental health issues and economic abuse. And some have gone as far as manipulating information about income and spending, so borrowers meet the criteria.”

The FCA isn’t worried about commercial firms which offer debt management services, and partially fund it with referrals. Not only do referrals make up less of these firm’s revenues, so there’s less of a conflict of interest, but they also have a commercial interest in these solutions working for the long term, so they’re less likely to recommend something with a higher chance of failure. As a result, it’s not banning referral fees for these companies.”

“However, these companies will charge fees, which will add to the mountain of debt you already owe, and you don’t need to pay for advice. If you need help with your debts, your first port of call should be debt charities like StepChange and National Debtline, which will be able to explain all your options, and help you with whatever route you choose. They have nothing at all to gain from pushing you one way or the other, so you can get free and impartial advice.”