Financial Conduct Authority announces ban on debt packager firms receiving referral fees from debt solution providers

Ban designed to put a stop to the business model that incentivises bad advice and reduce harm for consumers

The Financial Conduct Authority (FCA) has announced a ban on debt packager firms receiving referral fees from debt solution providers.

Introducing the ban, the FCA highlights that, while debt packager firms earn money from fees paid when consumers are referred to solution providers such as an Insolvency Practitioner for an Individual Voluntary Arrangement (IVA) in England, Wales and Northern Ireland, or a Protected Trust Deed (PTD) in Scotland –

'… some other solutions may be more suitable for some consumers such as Debt Relief Orders (DRO) in England, Wales and Northern Ireland, or Minimal Asset Process (MAP) in Scotland which do not earn debt packagers any fees.' 

Noting that the median referral fee to debt packagers in 2019/2020 was £940 for IVAs and £1,340 for Scottish PTD, the FCA says that it has seen evidence of debt packagers appearing to manipulate customers’ details so that they meet the criteria for IVAs/PTDs, and that some customers are recommended solutions which cause greater harm, including –

• one consumer who was homeless and was recommended an IVA costing them £6,000 when they could have been debt free in one year via a DRO costing £90; and
• another consumer who was recommended an IVA by a debt packager which cost them an extra £4,710 compared to a DRO and meant that it would take them five years longer to become debt free.

The FCA outlines that the ban comes into effect today for new entrants to the debt packager market, and that existing debt packager firms will need to develop a new way of doing business by 2 October 2023 or face regulatory action.

FCA Executive Director of Consumers and Competition Sheldon Mills said today –

'Good quality debt advice is vital in helping people out of financial difficulty and poor advice can have a devastating impact on those who are already struggling.

This ban will put a stop to the business model that incentivises bad advice and reduce harm for consumers.

We are giving firms four months to help them adapt. Anyone struggling with debt can get free and impartial advice from MoneyHelper or other services.'

For more information, see Financial watchdog bans referral fees for debt packagers to help struggling consumers from fca.org.uk