FCA goes after debt packager firms

Five debt packager firms voluntarily stopped providing regulated debt advice following a letter of concern issued by the FCA, while a sixth was forced to cease operations when the FCA removed its permission to provide debt advice.

The issue stems from the referral fees companies were receiving when passing consumers off to insolvency practitioners.

It’s common for a debt packaging firm to refer a consumer who has come to them seeking advice to an insolvency practitioner, for which they receive a fee. The fee a debt packager receives, however, is often higher when a customer then opts to enter into an Individual Voluntary Arrangement (IVA), or Protected Trust Deed (PTD) in Scotland, than for other debt solutions.

The FCA raised concerns that some firms were not managing the clear conflict of interest, leading consumers toward an IVA or PTD even if it was not their best option.

Consumers who sign up to an IVA or PTD when it’s not in their interest may struggle to keep up with repayments. If they default at an early stage, any repayments already made will have often been applied to the fees for the IVA/PTD rather than paying down the capital. The risk of bankruptcy in this situation is high. 

“The practices we’ve seen in this sector fall far short of the standards we expect from firms, let alone those claiming to offer help to people in need. We will not allow firms to profit from debt advice which puts their customers at risk of harm,” said Sheldon Mills, executive director of consumers and competition at the FCA.

Following the review of debt packager practices, the FCA contacted five firms with the concerns it had uncovered. The firms all subsequently applied for voluntary requirements to be imposed, meaning that they can no longer provide advice until the FCA is satisfied they are able to comply with the rules.

A sixth firm had its permission to provide debt advice removed due to a script it was using when communicating with consumers. The FCA believed it was weighted towards recommending a debt solution that would have generated a referral fee.