FCA to ban referral fees for debt packagers, effectively shutting down the market

Out of the 1.7m people who receive debt advice each year, around 54,000 start with a debt packager.

These companies make 90% of their income by referring people onto companies offering debt management services or IVAs, for which they’re paid a referral fee.

The referral fee is higher if they opt for an IVA, and the FCA is worried this means some of them are pushing IVAs.

29% of borrowers using these services are recommended an IVA and 15% a debt management plan.

The FCA proposes banning these fees altogether for these companies, and has launched a consultation: CP21/30: Debt packagers: proposals for new rules | FCA

Commercial debt management firms also make money from referral fees, but not such a large part of their income, so the FCA is not extending the ban to this market.

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown: “The FCA is effectively shutting down part of the debt advice market, because it’s worried that vulnerable customers are getting ripped off. This would be a useful step to protect consumers who are far 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. 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.

“If you opt for an IVA that doesn’t suit you, your debt problems could get even worse. If you can’t afford the payments and stop making them, not only will you get backdated interest and charges on your debts, but you could also end up in bankruptcy. Over a quarter of IVAs end within the first three years, and given they typically last 5-6 years, this is a strong sign that an enormous number were doomed to failure from the outset.

“The FCA isn’t worried about commercial firms which offer debt management services, and partially fund it with referrals. Not only do referrals make up less of these firm’s revenues, so there’s less of a conflict of interest, but they also have a commercial interest in these solutions working for the long term, so they’re less likely to recommend something with a higher chance of failure. As a result, it’s not banning referral fees for these companies.

“However, these companies will charge fees, which will add to the mountain of debt you already owe, and you don’t need to pay for advice. 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.”