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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. These fees can be many times higher when consumers are referred to an Insolvency Practitioner for an Individual Voluntary Arrangement (IVA) or Protected Trust Deed (PTD). This means that 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.
This business model puts consumers at risk of considerable harm from unsuitable debt advice. The FCA has seen evidence of debt packagers appearing to have manipulated customers’ details so that they meet the criteria for IVAs/PTDs, and used persuasive language to promote products without explaining the risks involved.
The FCA’s proposals would protect consumers by banning debt packagers from accepting referral fees – eliminating the current business model for these firms.
Sheldon Mills, Executive Director of Consumers and Competition at the FCA, said:
“Debt advice needs to be good quality and meet the needs of consumers. 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.”
Consumers who enter into an IVA or PTD that isn’t right for them can face serious consequences. For example, if a consumer is accepted onto an IVA following poor advice from a debt packager when a Debt Relief Order would have been more suitable, this could cost them an additional £4,710, and could mean that it takes them 5 years longer to become debt free.
The FCA continues to prioritise its work to ensure that credit markets work well for borrowers and firms. It wants debt advice firms to provide a high-quality debt advice service to consumers, helping them to manage their debts and to access a suitable debt solution where appropriate. The FCA estimates that 54,000 people sought advice from a debt packager in the year to March 2020, and demand for debt advice is rising.
Consumers who need help with their debts can get free and impartial advice from the MoneyHelper website or by telephone on 0800 138 7777, provided by the Money and Pensions Service.
The FCA is working closely with the regulators responsible for insolvency practitioners, who set up and administer IVAs and PTDs, to address issues of mutual concern in these markets and share intelligence. An exchange of letters was published recently between Sheldon Mills and Dean Beale, CEO of the Insolvency Service, outlining respective actions and how both organisations are collaborating to reduce harm.
The consultation is open until 22 December. Subject to the consultation, the FCA expects that new rules could come into force in April 2022.
Notes to editors
- Read CP21/30: Debt packagers – proposals for new rules
- The Money and Pensions Service estimate that 1.7 million people received debt advice in 2020, implying debt packagers serve around 3% of the debt advice market.
- Read the press release on recent supervisory work and exchange of letters between the FCA and Insolvency Service.
- Letters sent to debt packager firms in 2018 and 2020
- Find out more information about the FCA.