The Financial Conduct Authority (FCA) has announced plans to ban referral fees for debt packagers, essentially shutting down this market.

Of the 1.7 million people in the UK who receive debt advice each year, an estimated 54,000 start this process with a debt packager.

These debt packaging companies make 90% of their income by referring customers to companies offering debt management services, Individual Voluntary Arrangements (IVAs) or Protected Trust Deeds (PTDs). They are currently paid a referral fee.

Because the referral fee is higher if the customer is recommended for an IVA, the FCA is concerned about a financial incentive for packagers to push this debt management option.

The data suggests that debt packagers lead customers to the higher commission paying IVA option, with 29% of borrowers using these services recommended an IVA, and just 15% recommended a debt management plan.

Now, the FCA wants to ban these referral fees entirely, following a period of consultation.

Read more from the FCA here

The FCA would not extend the ban to commercial debt management firms, making money from referral fees, as their income is not so reliant on these referrals.

Sheldon Mills, Executive Director of Consumers and Competition at the FCA, said:

“Debt advice needs to be good quality and meet the needs of consumers. Too often people who contact debt packagers for help are being given advice that could cause them harm. This is unacceptable, especially as people seeking debt advice are often in vulnerable circumstances.

“Our proposals will address the inherent conflict of interest present in the debt packager business models. This will help protect consumers who need support managing their debts.”

The ban on referral fees that could lead customers to an IVA or PTD is especially important because they can face severe consequences if the recommendations are not suitable for them.

For example, the FCA explains that if a consumer is accepted onto an IVA following poor advice from a debt packager when a Debt Relief Order would have been more suitable, this could cost them an additional £4,710, and could mean that it takes them 5 years longer to become debt free.