Debt Advice Firms Banned from Receiving Referral Fees

The Financial Conduct Authority (FCA) has announced new rules for debt packagers, regulated providers of advice, aimed at saving consumers money on "unnecessary fees" and improving guidance for those struggling with debt.

The ban on referral fees from debt solution providers comes into effect on Friday for new entrants to the market, with existing firms given a deadline of 2 October to "develop new ways of doing business".

The FCA highlighted concerns that companies were incentivized to recommend debt management options that made them money, rather than what was in the best interests of indebted consumers.

For example, a homeless person 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 that cost £6,000.

Debt packager firms earn money from referral fees paid when individuals are referred to solution providers, such as an insolvency practitioner for an individual voluntary arrangement (IVA).

This can result in costs of £3,650 or more over a lifetime.

The FCA also stated that alternative options, such as debt relief orders (DROs), could be more suitable if a person was eligible and cost less than £100.

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 incentivizes bad advice and reduce harm for consumers." Matthew Upton, from Citizens Advice, also welcomed the move and stated that it would "benefit thousands of consumers." StepChange Debt Charity also expressed support for the ban, stating that it would "make a real difference to people's lives." In other news, the US government has fined British Airways $1.1 million for violating rules related to the transport of hazardous materials.

Trains in the UK are also expected to be affected by strikes this week