The Financial Conduct Authority has published a new proposal to place a ban on debt packager firms being paid to refer customers on to other firms. Concerns around practices were first raised in 2018, but further research has led to the identification of issues the FCA feels could cause significant harm. The Regulator highlighted in particular that business models can lead to a conflict of interest where debt advice providers face a choice between giving advice that is in the customer’s best interests and giving customers a recommendation that will make the firm more money.
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The FCA is concerned about the risk of unsuitable debt advice and from some practices including the manipulation of customer data so that they meet the criteria for IVAs and PTDs, both of which can result in much higher referral fees for the debt packager firm. The FCA has noted that customers who enter into an IVA or PTD that is not right for them can face huge financial consequences, and can spend longer in debt than they would have with an alternative. Other practices that concern the regulator include the use of language to promote options and products without making the risks clear, the provision of advice that did not reflect the customer’s circumstances, and failure to take into account customer circumstances and vulnerabilities.
The proposals for new rules would ban debt packagers from accepting referral fees. Given the FCA’s estimates that around 55,000 people sought advice from a debt packager between March 2019 and March 2020 – and demand for debt advice is rising – this could mean a significant reduction in customers on unsuitable debt solutions. This is particularly the case given that many individuals who seek debt advice will be vulnerable, and all will be in financial difficulties.
The Consultation sets out the differences in referral fees which can present such a conflict of interest for the packager firm – IVAs and PTDs command average referral fees of between £930 and £1340, referrals to DMPs or DAS between £240 and £260. No referral fees are paid, however, for other solutions such as DROs or MAP. Many debt advice firms offer advice for free, but make income through these referral fees which creates a significant conflict of interest.
Other concerns highlighted by the Regulator’s most recent supervision work include that around 45% of debt packager customers did not appear to have received any advice prior to referral to not-for-profit advice providers, which suggests that non-profitable customers had been filtered so that the debt packager firm could prioritise revenue generating customers. The FCA also found that around 15% of customers are referred to DMP/DAS providers and that around half of those customers did not end up on a repayment solution with that provider, which indicates that the advice they received was not suitable for the customer’s circumstances.
The focus of the consultation is on guiding debt advice firms to provide the highest quality debt advice for consumers. The FCA state that current rules should help to protect customers vulnerable to harm due to being in financial difficulties, but the proposals for new rules should address the concern around the conflict of interest and any resulting non-compliance with the rules that state that advice given must have regard to the best interests of the customer is appropriate to their circumstances and is based on a sufficiently full assessment of the financial circumstances of the customer.
The ban on the debt packager business model will apply to firms providing regulated debt advice – also known as debt counselling – which does not also provide debt solutions. The ban also applies to any of the firm’s appointed representatives. The proposed rules will ban debt packagers from receiving any remuneration from debt solution providers, and any associate of debt solution providers, in connection with referring customers to them.
The proposals will not prevent firms from providing debt advice on a commercial basis, but the FCA will be observing any business models that might develop in this area, particularly if they carry the sort of conflict of interest between providing compliant advice and profit.
The ban will not be extended to debt management firms – this was considered, but the FCA found that referral fees are a relatively insignificant revenue stream and are therefore unlikely to create a significant conflict of interest.
The FCA suggest that the ban should impact minimally, but positively, on creditors. Although a relatively small number of customers are referred and accepted onto a solution by debt packagers, compliant debt advice increases the likelihood of successful repayment and lowers the risk of early termination.
The proposed rules would take the form of additions and amendments to CONC 8.3. An additional section at 8.3.10G will carry a reminder that firms referring customers to debt solution providers must comply with obligations under Principle 6 and the rule in CONC 8.3.2 to ensure all advice given and action taken is in the best interests of the customer, is appropriate to the customer’s circumstances, and is based on a sufficiently full assessment of the financial circumstances of the customer. The prohibition rule appears at 8.3.11R, and states that firms must not enter into an agreement to receive, solicit or accept any commission, fee or any other financial consideration, directly or indirectly, from a debt solution provider in connection with the referral of a customer to a debt solution provider. The full text of the amendments and additions to CONC can be read within the consultation, at page 46.
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