FCA ban on debt packager referral fees
By Steven Wood, Practice Support Specialist (Insolvency)
9 June 2023
The Financial Conduct Authority (FCA) has announced a ban on debt packager firms from being paid to refer customers on to other firms.
Debt packagers and the FCA
Debt packagers are regulated providers of debt advice, who refer customers to other providers of debt solutions. The FCA, who regulates “debt counselling” activities, report that debt packagers rely on income from referral fees paid by these other firms. The FCA notes that these fees can be many times higher when consumers are referred to an insolvency practitioner (IP) for an individual voluntary arrangement (IVA) or protected trust deed (PTD).
Following previous warnings to the sector, the FCA has concluded 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. The FCA has determined that the conflict of interest, while it could be managed, is so strong that the debt packager business model leads these firms to not comply with FCA rules.
The FCA considers that 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.
Consultations
In November 2021, the FCA consulted on a proposal to ban debt packagers from receiving referral fees. You can read our response to that consultation here.
In February 2023 the FCA published feedback on the original consultation and a further consultation on new rules and perimeter guidance.
The aim of the short re-consultation was to find out whether the market had changed and to give stakeholders the opportunity to comment on the proposed ban on referral fees and give any further information about any new developments in the market.
Policy statement and new rules
The FCA has now published a policy statement which sets out feedback to the re-consultation and its final rules.
The statement confirms that the FCA is placing a ban on debt packagers receiving remuneration from debt solution providers.
The ban covers any commission, fee or any other financial consideration, received by a debt packager firm, directly or indirectly, from a debt solution provider in connection with the firm referring customers to a debt solution provider, or any other related services.
The ban does not apply to not-for-profit debt advice firms or to regulated providers of debt solutions (including debt management plans) who have a different business model to debt packagers, where the conflict of interest from referral fees is considered less acute. An exclusion also exists for payments in relation to the administration by a ‘money adviser’ approved under the Debt Arrangement Scheme (Scotland) Regulations 2011 of a customer’s application for a Debt Arrangement Scheme as well as payments made pursuant to any other enactment.
Various anti-avoidance provisions have been made as part of the rules to ensure that the ban cannot be circumvented through arrangements such as becoming appointed representatives or being part of a group.
Referring customers to debt solution providers who only offer one solution could fall under the regulated activity of debt counselling meaning persons who operate as lead generators for IVA/PTD providers must consider carefully if they are carrying out activities which require authorisation. For these purposes, a firm which offers only IVAs in England and Wales or Northern Ireland, and only offers PTDs in Scotland is considered to be only offering a single debt solution.
Lead generation
In order to clarify activity which may require FCA permissions, the perimeter guidance manual (PERG) is updated with the following entry:
Examples of what is and is not debt counselling | |
Example | Explanation |
(13A) A person recommends that a debtor obtains advice from a particular insolvency practitioner or their firm. | Taken on its own it is not debt counselling because the adviser is advising the debtor to obtain advice from another adviser. However, where the insolvency practitioner or their firm only offers advice in relation to a particular debt solution (e.g. an individual voluntary arrangement or a protected trust deed), the referral could constitute a recommendation intended to implicitly steer the debtor in the direction of that particular debt solution and, therefore, could be advice (in which case it would be debt counselling). Consequently, whether or not debt counselling is involved will depend on the individual circumstances in each case and is likely to involve a consideration of the process as a whole. |
Commencement
Existing debt packager firms must ensure they do not receive any commission, fee or any other financial consideration from a debt solution provider for any referral or related service conducted after 2 October 2023.
Any firms who act as principal to appointed representatives who would fall under the scope of the ban if they were an authorised person must take all reasonable steps to ensure that these appointed representatives also comply with the ban by 2 October 2023.
Firms who start, or restart, carrying out debt packager business from 2 June 2023 will be subject to the ban and will not benefit from the implementation period. The rules also apply with immediate effect to principals with respect to any appointed representatives carrying out debt packager activity who are appointed on or after 2 June 2023.
Comment
ICAS is fully supportive of both the sentiment and aim of the ban on debt packager referral fees. However, we retain some concerns about the impact of the change, as outlined in a previous article on this subject.
We also point out again that the market is one widely known to “adapt”. Much wider and co-ordinated action by FCA, Advertising Standards, Insolvency Service and Recognised Professional Bodies remains a priority.