The FCA has proposed banning debt packager firms from being paid to refer customers on to other firms.

Debt packagers are regulated providers of debt advice, who refer customers on to other providers of debt solutions. They rely on income from referral fees paid by these other firms, and these fees can be far higher when consumers are referred to an insolvency practitioner for an individual voluntary arrangement (IVA) or protected trust deed (PTD).

According to the FCA, this means 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 regulator suggested this business model puts consumers at risk of “considerable harm” from unsuitable debt advice.

The FCA has seen evidence of debt packagers manipulating customer details so that they meet the criteria for IVAs and PTDs, and used persuasive language to promote products without explaining the risks involved. Its new proposals would protect consumers by banning debt packagers from accepting referral fees – eliminating the current business model for these firms. 

“Debt advice needs to be good quality and meet the needs of consumers,” said FCA executive director of consumers and competition, Sheldon Mills. “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.”

Commenting on the proposals, Hargreaves Lansdown senior personal finance analyst, Sarah Coles, said they would be a useful step to protect consumers who are better off approaching a debt charity for free advice.

"In theory, debt packaging firms assess your problems, and then refer you on to either a debt management company or a firm offering IVAs, whichever is most suitable for your circumstances,” she said. “However, they get an average of £930 for recommending an IVA and nothing for suggesting a debt relief order, giving them a financial incentive to favour this approach.

“The FCA is worried that some debt packager firms are pushing customers down the IVA route regardless of their needs, without fully explaining the risks. Some ignore the vulnerabilities of customers including mental health issues and economic abuse. And some have gone as far as manipulating information about income and spending, so borrowers meet the criteria.”

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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