The Financial Conduct Authority (FCA) has revealed plans to ban providers of debt advice from receiving referral fees from debt solution providers.

According to the regulator, the move could save consumers struggling with debt thousands of pounds in “unnecessary” fees as well as make sure they receive better quality advice.

The ban will put a stop to the business model which incentivises debt packagers to recommend certain options that make them more money, rather than what is in the customer’s best interest.

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, in Scotland, a Protected Trust Deed (PTD).

By contrast, 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.

Fees for IVAs or PTDs can cost consumers £3,650 or more over their lifetime. This compares to less than £100 for options such as DROs and MAPs, if eligible.

The FCA reported that it has seen evidence of debt packagers appearing to manipulate customers’ details so that they meet the criteria for IVAs or PTDs and using persuasive language to promote products without explaining the risks involved.

“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,” said executive director of consumers and competition at the FCA, Sheldon Mills.

“This ban will put a stop to the business model that incentivises bad advice and reduce harm for consumers. We are giving existing firms four months to help them adapt.

“Anyone struggling with debt can get free and impartial advice from MoneyHelper or other services.”

Existing debt packager firms will need to develop a new way of doing business by 2 October this year or face regulatory action, the FCA warned. The ban comes into effect today for new entrants to the debt packager market.

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