FCA unveils plans to ban debt advice firms charging referral fees
![](https://www.cityam.com/wp-content/uploads/2021/10/household-debt-corbis-1024x640-57ed895a50e33-57ed895a6ce12.jpg?w=742)
Debt packager firms will be banned from chasing commission to refer those in financial distress on to other providers of debt solutions, under new plans unveiled by the UK’s financial watchdog today.
The ban concerns debt advice firms that rely on income from referral fees paid by the other firms that they recommend – a much more lucrative activity than simply providing advice themselves.
In fact, the Financial Conduct Authority (FCA) said debt advisers can take home three times as much in commission when they recommend a client for an Individual Voluntary Arrangement (IVA) or Protected Trust Deed (PTD) with another firm, over providing it themselves.
“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 said in a statement this morning.
This business model puts consumers at risk of “considerable harm from unsuitable debt advice,” the watchdog warned.
“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,” said Sheldon Mills, executive director of consumers and competition at the FCA.
“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,” he added.
And the financial consequences of choosing a debt product that isn’t right can be huge. For example, a consumer that follows poor advice from a debt packager and is accepted onto and IVA when a Debt Relief Order would have been more appropriate could face an additional £4,710 in costs – meaning it could take them 5 years longer to become debt free, the FCA warned.
The call for reform comes after the FCA found evidence of debt advisers that had appeared to manipulate consumers’ details so that they met the criteria for these IVAs and PTDs, and used persuasive language to promote the debt solution options without explaining the risks involved.
“Particularly for debt packagers it seems almost impossible to address the conflict of interest inherent in giving advice in consumers’ best interest versus maximising the packagers’ revenue,” says Bill McCaffrey, head of consumer finance at CMS.
“The challenge of course is to ensure that through taking the proposed steps – essentially removing packagers from the market – debt advice is readily available to all,” he added.