FCA bans referral fees to protect struggling consumers


The Financial Conduct Authority (FCA) has implemented a ban on referral fees for certain debt advice providers in an effort to support consumers facing financial difficulties.

The ban aims to eliminate unnecessary fees and ensure that consumers receive higher quality advice that is in their best interest. By prohibiting the business model that incentivizes debt packagers to recommend options based on financial gain rather than customer welfare, the FCA is striving to save consumers thousands of pounds and improve their overall debt management experience.

The ban specifically targets debt packager firms that earn money through referral fees when consumers are directed to solution providers such as Insolvency Practitioners for an Individual Voluntary Arrangement (IVA) or a Protected Trust Deed (PTD) in Scotland. The FCA has identified that some debt solutions, such as Debt Relief Orders (DROs) or Minimal Asset Process (MAP) in Scotland, are more suitable for certain consumers but do not generate any fees for debt packagers.

According to the FCA’s evidence, the median referral fee for IVAs in 2019-2020 was £940, while Scottish PTDs commanded a fee of £1,340. In contrast, DROs only cost consumers £90 upfront in fees, and MAPs require a fee of £50, subject to eligibility. This stark contrast highlights the potential savings for consumers who opt for alternative debt solutions.

The FCA has also uncovered instances where debt packagers manipulated customers’ details to qualify them for IVAs/PTDs and used persuasive language to promote these options without adequately explaining the associated risks. This unethical practice has led to cases where consumers in dire financial situations were recommended solutions that resulted in greater harm and financial burden.

Sheldon Mills, Executive Director of Consumers and Competition at the FCA, emphasized the importance of quality debt advice and the negative consequences of poor guidance. He stated, “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 incentivizes bad advice and reduce harm for consumers.”

Existing debt packager firms will be required to adopt a new way of conducting business by 2 October this year. Failure to comply may result in regulatory action. However, the ban is effective immediately for new entrants into the debt packager market.

The FCA’s focus on protecting consumers extends beyond the ban on referral fees. The regulatory body intends to ensure that credit markets function well for both borrowers and firms. It urges debt advice firms to provide high-quality services to help consumers manage their debts and access suitable debt solutions.

Consumers in need of debt assistance can access free and impartial advice from MoneyHelper or other similar services. The FCA also plans to issue guidance regarding the authorization requirements for unlicensed businesses that refer potential customers to debt solution providers offering only one debt solution.

The FCA will be among the 13 international regulators so far taking part in the first-ever Greenwashing TechSprint that will launch on 5 June this year.

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