Moves to stamp out poor debt advice could protect thousands of consumers, says charity

If the proposals are implemented, the measures would end the current debt packager business model and may come in after a short implementation period, the FCA said.

In a statement, the debt charity StepChange said: “The Financial Conduct Authority’s renewed proposals to ban debt packaging firms from accepting referral fees are hugely welcome.

"With so many people currently in financial difficulty, the proposed rules will help to undermine the poor practices that can lead to consumers being preyed upon by unscrupulous firms and too often routed towards an unsuitable solution from a provider paying high referral fees.”

Richard Lane, Director of External Affairs and Operating Subsidiaries at StepChange, said: “With the cost of living crisis leaving so many people vulnerable to problem debt, the FCA’s move to stamp out poor debt advice practices is extremely welcome. In particular, with proposals for the ban on fees to go ahead after a short implementation period, we can expect to see swift, much-needed action that will benefit thousands of consumers.

“It’s also encouraging that the FCA is improving its guidance on the regulated debt advice boundary in relation to referrals to an Insolvency Practitioner or their firm. However further clarification is needed to ensure consumers seeking advice about debt solutions would have the protection of the standards set by the FCA.”

Debt packagers are regulated providers of debt advice, who refer people to debt solution providers. These firms earn money from referral fees paid by solution providers, which can be far higher when consumers are referred to an insolvency practitioner for an individual voluntary arrangement (IVA) or protected trust deed (PTD), than a government scheme such as a debt relief order, the FCA said.

The watchdog said a further short consultation will allow it to update its analysis of the market, by giving an opportunity to comment on the proposed ban of referral fees and provide insight on any new developments in the market. 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, the regulator said.

Sheldon Mills, executive director of consumers and competition at the FCA, said: “Many people are facing pressures on their finances due to the rising the 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.”