The FCA are cracking down on the business model that incentivises debt packagers to recommend certain options that make them more money rather than what is in the customer’s best interest. This is one of the key issues that raises suspicions about the credibility of the personal solution / volume provider industry, when we should be focusing instead upon the terrific work most of those in the sector do to almost literally save the lives of so many people caught up in a vortex of debt.
On Friday 2 June the FCA announced a ban on certain providers of debt advice from receiving referral fees from debt solution providers. The debt packager firms earn money from fees paid when consumers are referred to solution providers such as an Insolvency Practitioner for an Individual Voluntary Arrangement in England, Wales and Northern Ireland or, in Scotland, a Protected Trust Deed.
All of us who know anything about personal insolvency solutions know there are times when a Debt Relief Order in England & Wales or the Minimum Asset Process in Scotland would make more sense to the debtor ... the only flaw being they don't earn the darker shadow of the profession any fees.
FCA evidence states that the median referral fee to debt packagers for IVAs in 2019-2020 was £940, and £1,340 for Scottish PTDs. IVA or PTD fees can cost consumers £3,650 or more over their lifetime, whereas DROs cost £90 upfront in fees and MAPs cost £50, subject to eligibility. The FCA reports it has seen evidence of debt packagers appearing to manipulate customers’ details so that they meet the criteria for IVAs/PTDs and using persuasive language to promote products without explaining the risks involved.
Existing debt packager firms will need to develop a new way of doing business by 2 October this year or face regulatory action. The ban comes into effect today for new entrants to the debt packager market. Sheldon Mills who is Executive Director of Consumers and Competition at the FCA, said that such debt packagers are being given four months to get their act together. Thereafter we can expect to see yet more disruption in the market, following the demise of The IVA Advisor and QIS last year.