ICAS comments on FCA’s proposed ban on debt packager referral fees
By David Menzies, Director of Practice
29 November 2021
The Financial Conduct Authority (FCA) has proposed banning 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 on to other providers of debt solutions. The FCA, who regulate “debt counselling” activities, report that debt packagers rely on income from referral fees paid by these other firms. The FCA note 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 warning to the sector, the FCA has now 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 have concluded 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.
The FCA’s proposals are intended to protect consumers by banning debt packagers from accepting referral fees – eliminating the current business model for these firms.
View are being sought on the FCA’s proposals via an associated consultation.
Comment
ICAS is fully supportive of both the sentiment and ultimate aim of this proposal. However, there are some areas of concern once the finer points of the proposals are considered in more detail:
- Paragraph 1.12 of the consultation concludes that the proposed new rules "will end the debt packager business model." If that is the case then it can reasonably be expected that debt packagers will largely cease to exist. The most obvious concern arising as a result of this is where does the displaced debt advice demand end up? The clear indications from the consultation are that the FCA preference is for debt advice to be provided by the free debt advice sector. However, that sector is already short of resources, struggling to meet demand and has called clearly and loudly on repeated occasions for additional funding.
- While there are rightly many concerns with the debt packager operating model, one positive it has brought has been to highlight the available options to those in problem debt through large scale advertising. Without this type of advertising in the market, how does that same messaging reach those who need advice? If the wider profile of debt advice and debt solutions isn't replaced it will mean that people who should be obtaining debt advice won't come forward. This can lead to a significant number of non-financial consequences for those individuals, including a substantial impact on their mental health and general wellbeing.
- The FCA acknowledge that their current rules are ineffective. Paragraph 1.10 of the consultation states: “Consumers who seek debt advice are more vulnerable to harm due to being in financial difficulties. They need protection from non-compliant, biased advice which could cause them to enter debt solutions which are not in their best interests. Our existing rules, when complied with, should help provide this protection”. Not only are the current rules ineffective, but there is also a lack of enforcement by the FCA. If the rules were enforced, then those not complying would already be unable to operate.
- The consultation goes on to state “The implementation of these proposals would reduce the amount of supervisory resource required to prevent and mitigate harm associated with the debt packager business model”. The question this raises is who will end up supervising and enforcing the new rules? One of the major unresolved issues is that "lead generators" are unregulated but it is often questionable whether the firms in question are truly "lead generators" or in fact "debt packagers".
On a more positive note, the FCA proposals do highlight that the concerns in this area lie primarily with the debt packagers.
While IPs have an obligation to, and do, make their own assessment and recommendation to individuals, it is often difficult to change a mindset which has been set before the IP even speaks to the debtor.
An IVA/PTD will not always be the wrong solution, it’s likely to be one of a number of options, but given that individuals in problem debt are more likely to suffer anxiety, adverse effects on their feelings and emotions as well as difficulty in decision making, it is not unreasonable to assume that initial debt advice has a significant bearing on the choice that will end up being made.
Overall, this proposal is welcomed but it is not going to be a panacea. This market is one widely known to "adapt". Much wider and co-ordinated action by FCA, Advertising Standards, Insolvency Service and Recognised Professional Bodies is still required.
Responses and expected timescales
The consultation is open until 22 December and ICAS will publish its full response before that date. Subject to the outcome of the consultation, the FCA expects that new rules could come into force in April 2022.
Respond to the consultation.