The Financial Conduct Authority (FCA) has proposed a ban on debt packager referral fees in a bid to protect consumers.
The UK watchdog said on Wednesday that debt packagers – who are regulated providers of debt advice and refer customers on to other providers of debt solutions – should not be allowed to be paid a commission.
Under the current setup, they rely on 90% of their income from referral fees paid by these other firms. These fees can be significantly higher when consumers are referred to an Insolvency Practitioner for an Individual Voluntary Arrangement (IVA) or Protected Trust Deed (PTD).
However, the FCA said this business model often presents a conflict of interest between giving advice in the customer’s best interest, and making a recommendation that makes them more money.
“They get an average of £930 ($1,252) for recommending an IVA and nothing for suggesting a debt relief order, giving them a financial incentive to favour this approach,” Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said.
Out of the 1.7 million people who receive debt advice each year, around 54,000 start with a debt packager. Consumers are therefore “at risk of considerable harm” from unsuitable debt advice, the FCA said.
Some 29% of borrowers using these services are recommended an IVA, and 15% a debt management plan.
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The FCA pointed to evidence of debt packagers appearing to have manipulated customers’ details, including their income and expenditure, so that they meet the criteria for IVAs/PTDs.
They also used persuasive language to promote products without explaining the risks involved, and provided advice that did not reflect their conversations with consumers or information that consumers had given.
“In some cases, the FCA’s view is that firms failed to sufficiently take into account consumers’ circumstances and vulnerabilities, including mental health issues and economic abuse,” it said.
Those who enter into an IVA or PTD that does not suit their needs 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 ($6,342), and could mean that it takes them five years longer to become debt free.
“Debt advice needs to be good quality and meet the needs of consumers,” Sheldon Mills, executive director of consumers and competition at the FCA, said.
“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.”
Commercial debt management firms also make money from these referral fees, however, as it is not such a large part of their income, the FCA is not extending the ban to this market.
The FCA estimates that 54,000 people sought advice from a debt packager in the year to March 2020, and that demand for debt advice is rising. It is working closely with the regulators responsible for insolvency practitioners, who set up and administer IVAs and PTDs.
The consultation is open until 22 December. Subject to the consultation, the FCA expects that new rules could come into force in April 2022.
Coles added: “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.”
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