Financial watchdog proposes to ban debt packager referral fees to protect consumers

The Financial Conduct Authority (FCA) is to push ahead with proposals to ban debt packager firms from receiving referral fees from debt solution providers, following further analysis of the market.

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 some additional evidence from the debt packager market to supplement its existing evidence base.

A further short consultation will allow the FCA to update its analysis of the market, by giving stakeholders the opportunity to comment on the proposed ban on 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.

Sheldon Mills, Executive Director of Consumers and Competition at the FCA, said:

‘Many people are facing pressures on their finances due to the rising 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.’

Consumers who enter a debt solution that 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.

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

The FCA continues to prioritize its work to make sure that credit markets work well for borrowers and firms. It wants debt advice firms to provide a high-quality debt advice service to consumers, helping them to manage their debts and to access a suitable debt solution where appropriate.

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