Debt advice referral fees to be banned

Referral fees from debt solution providers will be banned under new rules announced by the Financial Conduct Authority (FCA).

The regulator said that the fees can incentivise debt packager firms to recommend certain options that make them more money rather than what is in the customer’s best interest.

Debt packagers — regulated providers of advice — earn money from fees paid when consumers are referred to an insolvency practitioner for an individual voluntary arrangement (IVA). Such arrangements can end up costing consumers £3,650 or more.

The average fee advisers received for an IVA referral in 2019-2020 was £940.

Alternative options, such as debt relief orders (DROs), can be more suitable for some consumers, and cost less than £100. However, they do not earn debt packagers any fees.

In one case cited by the FCA, a homeless client was recommended an IVA costing £6,000, but could have been debt-free for just £90 under a DRO.

“This ban will put a stop to the business model that incentivises bad advice and reduce harm for consumers,” said Sheldon Mills, executive director of Consumers and Competition at the FCA.

The change in the rules is effective immediately for new entrants to the market, while existing firms have been given a deadline of 2 October to “develop new ways of doing business”.