FCA to ban debt packager referral fees

The FCA has announced that it will push ahead with plans to ban debt packager firms from receiving referral fees from debt solution providers.

The FCA initially consulted on a ban in November 2021 after identifying a lack of adequate management of the conflict of interest between giving advice in the customer’s best interests and recommending an option that makes the firms more money.

Following analysis of the feedback the FCA received to that consultation, it decided to gather additional evidence from the debt packager market.

A further consultation will give stakeholders the opportunity to comment on the proposed ban of referral fees and provide insight on any new developments in the market. If the proposals are implemented, the measures would end the current debt packager business model and may come in after a short implementation period.

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.

The FCA also proposes to clarify how unauthorised businesses, who source potential customers and recommend a particular debt solution provider to them for advice, may need to be authorised by the FCA.

Consumers who enter a debt solution which is not right for them, such as an Individual Voluntary Arrangement or Protected Trust Deed, can face dire 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 extra £4,710 and take five years longer to become debt free.

Sheldon Mills, executive director of consumers and competition at the FCA, said: "Many people are facing pressures on their finances due to the rising the cost of living, so it’s crucial they get good quality debt advice.

"Unsuitable or poor advice can really harm people’s financial lives. We want to stop this harm by removing the conflict of interest between firms giving advice in the customer’s best interest and recommending an option that makes firms more money."

Richard Lane, director of external affairs and operating subsidiaries at StepChange, commented: “With the cost of living crisis leaving so many people vulnerable to problem debt, the FCA’s move to stamp out poor debt advice practices is extremely welcome. In particular, with proposals for the ban on fees to go ahead after a short implementation period, we can expect to see swift, much-needed action that will benefit thousands of consumers.

“It’s also encouraging that the FCA is improving its guidance on the regulated debt advice boundary in relation to referrals to an Insolvency Practitioner or their firm. However further clarification is needed to ensure consumers seeking advice about debt solutions would have the protection of the standards set by the FCA.”