"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."
Debt packagers refer customers on to other providers of debt solutions and rely on income from referral fees paid by these other firms. The FCA says these fees are usually many times higher when consumers are referred to an Insolvency Practitioner for an IVA or Protected Trust Deed. 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 regulator says 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 FCA’s proposals would protect consumers by banning debt packagers from accepting referral fees – eliminating the current business model for these firms.
The consultation is open until 22nd December and the FCA expects that new rules could come into force in April 2022.
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.”
Peter Tutton, head of policy, research and public affairs at StepChange Debt Charity, commented: “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.”