Referral fee ban for debt packagers

Published: 25/11/2021 By Hannah McCormack

Last week the FCA announced it has proposed to ban debt packager firms from being paid to refer their clients onto others such as Insolvency Practitioners (IP)and other providers of debt management solutions.
Although they are regulated to provide debt advice, these debt packager firms still rely on the referral fees they get paid when passing on their clients to IPs or debt management agencies. A fee for an IVA referral for example, can make these debt packagers a substantial amount of money. Because of this, there is a conflict of interest between the debt packagers giving the correct advice that is in the best interest of their clients to making a referral that can make themselves more money.

The FCA is concerned with the conduct of some of these firms and has stated they have seen examples of debt packagers appearing to have “manipulated customers’ details” so that they meet the conditions for an IVA or other unsuitable debt solutions. This unfair advice is given using “persuasive language” without providing the customer a full explanation of the debt solution and risks of the IVA process or other insolvency process.

The new rules being proposed would mean a ban for the debt packagers to accept the referral fees for passing on their clients to other debt solutions providers; hence removing the element of pushing a customer down a specific more lucrative route.
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.”

The FCA is committed to ensuring consumers are provided with an expert debt advice service which helps them manage their debts and ensures they have access to a suitable debt solution when needed. The FCA are working with regulators of IVA’s and other debt solution providers and have suggested that the new rules could come into force by April 2022.