The payment for referring clients to debt solution businesses will no longer be permitted for debt advisors.
After discovering that some businesses were prioritizing the fees over the interests of their customers, the Financial Conduct Authority (FCA) outlawed the fees.
In 2019–2020, the typical fee advisors were paid for referring an individual voluntary arrangement (IVA) was £940.
The FCA discovered that a client who was homeless was recommended an IVA that would have cost £6,000 but could have been debt-free for just £90.
The Citizens Advice organization referred to the prohibition of referral fees as "a big step towards tackling the way some firms prey on and profit from people struggling with debt.".
According to the FCA, the ban applied to "debt packagers," who are authorized debt advice providers but typically do not provide debt solutions themselves. They won't be eligible for referral payments from debt relief organizations any longer.
Some people may have to think about declaring themselves bankrupt because they have little to no chance of paying their debts off.
A debt payment agreement with creditors is known as an individual voluntary arrangement (IVA).
The debtor consents to pay an insolvency professional on time and in an affordable amount, who will then distribute the funds among the creditors. Any remaining unsecured debt at the conclusion of an IVA is forgiven.
If the debt is less than £30,000 and the person does not own a home, a debt relief order (DRO) can be used to put a 12-month freeze on interest and repayment payments. During that time, creditors are prohibited from obtaining money without the court's approval. The debt is written off at the end of the 12-month period.
A typical IVA can cost up to £3,600 over the course of a customer's lifetime, whereas DROs can cost as little as £100.
The regulator claimed that this business model "incentivizes bad advice" and that companies are more likely to recommend options that will increase their own profits than those that are best for their clients.
The FCA claimed that it had observed evidence of debt packagers allegedly manipulating customer information so that they would qualify for IVAs and employing persuasive language to market products without outlining the associated risks.
The FCA discovered evidence of financially struggling customers who were given recommendations for solutions that only made matters worse in some of the worst cases that were identified.
A debt packager suggested an IVA to one client when another option would have been preferable. According to the FCA, this increased their costs by £4,710 over a DRO and extended their time until debt freedom by five years.
Citizens Advice's interim executive director of advocacy and policy, Matthew Upton, stated: "Inaccurate or deceptive advice from providers promoting Individual Voluntary Agreements can drive people deeper into hardship and further away from a long-term solution to their problems. ".
The government should regulate all pre-IVA advice, he demanded, "so that people can be sure it's the right solution for them.".
According to Sheldon Mills, executive director of consumers and competition at the FCA, "poor advice can have a devastating effect on those who are already struggling and good quality debt advice is vital in helping people out of financial difficulty.". ".
Existing debt packager companies must create a new operating model by October of this year or risk regulatory action, the regulator warned.
For newcomers to the debt packager market, the ban is effective right away.
