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FCA proposes ban on debt packager referral fees

  • 17/11/2021
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FCA proposes ban on debt packager referral fees
The Financial Conduct Authority (FCA) has proposed banning debt packager firms from being paid to refer customers on to other firms, following conflict of interest concerns.

Consultation paper CP21/30 has been launched to tackle the fact debt packagers are regulated providers of debt advice, who refer customers on to other providers of debt solutions, relying on this income.

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).

The FCA said this business model puts consumers at risk of considerable harm from unsuitable debt advice.

The FCA 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 regulator’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: “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.”

In one example offered by the regulator, 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 five years longer to become debt free.

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

The consultation is open until 22 December. Subject to the consultation, the FCA expects that new rules could come into force in April 2022.

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