Huge change to debt rules to save struggling Brits £1,000s – what it means

STRUGGLING Brits in debt could save thousands of pounds in fees under new rules.
The Financial Conduct Authority (FCA) is banning debt packager firms from receiving referral fees from debt solution providers.

1

Struggling Brits could save thousands of pounds thanks to a ban on debt packager referral feesCredit: Getty

The move is expected to save struggling Brits thousands of pounds and will help them receive better quality debt advice.
It will put a stop to a business model which incentivises debt packagers to recommend certain options that make them more money, rather than what is in the customer’s best interest.
Debt packager firms are regulated businesses that provide debt advice.
Currently, these companies can take a referral fee for passing on a customer in debt to another debt solutions provider.

They earn considerable money when people are referred to solution providers such as an insolvency practitioner for an individual voluntary arrangement (IVA).
But other debt solutions may be more suitable for some people in debt – some of which do not earn debt packagers any fees, the FCA said.
Government schemes such as debt relief orders (DRO) are cheaper alternative options for the consumer.
Fees for IVAs can cost consumers £3,650 or more over their lifetime compared with less than £100 for options such as DROs and, if the person is eligible, the FCA said.

Most read in Money

The City regulator first consulted on a ban in November 2021 after finding evidence the firms were manipulating customers’ details to boost their own rewards – while potentially costing hard-up Brits thousands.
In some of the worst cases identified, the FCA found evidence of customers in financial hardship who were recommended solutions which caused greater harm.
One person, who was homeless, was recommended an IVA, costing them £6,000, when they could have been debt-free in one year via a DRO for just £90.
In another case, someone was recommended an IVA by a debt packager when a different solution would have been more suitable.

This cost them an extra £4,710 compared with a DRO and meant it would take five years longer to become debt free, the FCA said.
Existing debt packager firms will now need to develop a new way of doing business by October 2 or face regulatory action, according to the FCA.
The ban comes into effect from Friday, June 2 for new entrants to the debt packager market.
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 to consumers.
“We are giving existing firms four months to help them adapt.”
Matthew Upton, acting executive director of advocacy and policy at 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 problem …
Read more…….