Companies that provide guidance for those with money problems are to be banned from receiving referral fees from debt solution providers.
The Financial Conduct Authority (FCA) said the new rules for debt packagers, which are regulated providers of advice, would save consumers money in “unnecessary fees” and improve guidance for those struggling.
There have been concerns that companies are incentivised to recommend debt management options which make them money – rather than what is in an indebted customer’s best interests.
The FCA highlighted the case of a homeless person who could have had their debt frozen and then discharged after 12 months by paying a one-off £90 fee.
But instead, they were recommended an alternative arrangement which cost £6,000.
The ban comes into effect on Friday for new entrants to the market, while existing firms have been given a deadline of 2 October to “develop new ways of doing business”, the FCA said.
Debt packager firms earn money from fees paid when individuals are referred to solution providers, such as an insolvency practitioner for an individual voluntary arrangement (IVA). They can end up costing £3,650 or more over a lifetime.
But alternative options, such as debt relief orders (DROs), can be more suitable, if a person is eligible, and cost less than £100.
The FCA said it had seen evidence of advice firms manipulating customers’ details so that they meet the criteria for IVAs, while also promoting products without explaining the risks involved.
‘Thousands to benefit’
Sheldon Mills, executive director of consumers and competition at the FCA, said: “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 incentivises bad advice and reduce harm for consumers.”
Matthew Upton, from Citizens Advice, said: “Banning referral fees is a big step towards tackling the way some firms prey on and profit from people struggling with debt.
“Inaccurate or misleading advice from providers promoting individual voluntary agreements can push people further into hardship and further away from a lasting solution to their problems.”
StepChange Debt Charity also welcomed the move and said it would “benefit thousands of consumers”.