STRUGGLING Brits in debt could save thousands of pounds in fees under new rules being proposed.
The financial regulator plans to crack down on firms that refer hard-up customers to providers of debt solutions.
GettyStruggling Brits in debt could get more help under new rules being proposed[/caption]
The Financial Conduct Authority (FCA) is to press ahead with proposals to ban debt packager firms from receiving referral fees from debt solution providers.
It first consulted on a ban after finding there was evidence the firms were manipulating customers’ details to boost their own rewards – while potentially costing users thousands.
The FCA found going into an IVA (Individual Voluntary Arrangement) unnecessarily could cost individuals almost £5,000 – and mean it takes them an extra five years to become debt-free.
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.
The amount they get paid can be even higher if they refer the customer to an Insolvency Practitioner for an IVA or Protected Trust Deed (PTD), than a government scheme such as a debt relief order, the FCA said.
The watchdog said a further short consultation will allow it to update its analysis of the market.
It comes as firms representing two-thirds of the market in customer numbers have either left or suspended their activities since the FCA first raised concerns in July 2021.
Sheldon Mills at the FCA said: “Many people are facing pressures on their finances due to the rising the cost of living, so it’s crucial they get good quality debt advice.
“Unsuitable or poor advice can really harm people’s financial lives.
“We want to stop this harm by removing the conflict of interest between firms giving advice in the customer’s best interest and recommending an option that makes firms more money.”
Consumers who enter a debt solution which is not right for them can face dire consequences, the regulator said.
For example, if someone is accepted to one form of personal insolvency when another would have been more suitable, this could cost them more money and take them longer to become debt-free.
Debt support charity StepChange has welcomed the proposals.
Richard Lane, director of external affairs and operating subsidiaries, said: “With the cost of living crisis leaving so many people vulnerable to problem debt, the FCA’s move to stamp out poor debt advice practices is extremely welcome.
“In particular, with proposals for the ban on fees to go ahead after a short implementation period, we can expect to see swift, much-needed action that will benefit thousands of consumers.
“It’s also encouraging that the FCA is improving its guidance on the regulated debt advice boundary in relation to referrals to an Insolvency Practitioner or their firm.
“However further clarification is needed to ensure consumers seeking advice about debt solutions would have the protection of the standards set by the FCA.”
The consultation is open until March 2.
What is an IVA?
An IVA is a way to avoid bankruptcy, as you set up an agreement with firms to pay back the money you owe to different companies (known as creditors) over a set period of time (usually five years).
Your debts are frozen and any amount not repaid at the end of the plan is written off.
But people who are in debt can often agree on a repayment plan with their lender without taking out this type of agreement, which will negatively affect their credit score.
IVA firms will also add a fee onto your debt for their service, adding potentially thousands of pounds to the amount you end up repaying.
For many people, a Debt Relief Order will be a more appropriate way of managing debt.
These can be used to tackle a range of debts up to £30,000 – the limit was upped from £20,000 in 2021.
Debts covered include credit cards, overdrafts and loans, and arrears with rent or bills among others.
The Sun reported in 2018 that thousands of people may have been mis-sold expensive debt repayment plans.
It was found that some customers have been charged unfair fees by firms offering IVAs, and given poor debt advice.
James Andrews of Money.co.uk, previously told The Sun: “In theory, a debt packager firm should help you assess your options and assist you in finding the best solution for paying back what you owe.
“In some cases, these firms can offer you the right path to getting out of debt, however you need to make sure the route you choose is the best for you, rather than what’s easiest or most profitable for them.”
If you enter an IVA or PTD without properly meeting the criteria, there can be serious consequences.
How can I get debt help?
If you’re concerned about debt, don’t bury your head in the sand.
Citizens Advice says it’s important to work out a budget and keep an eye on your bank balance.
Try and pay off more than the minimum on credit cards each month, and pay your most expensive credit card first.
If you’ve got several debts and can’t pay them all, it’s important to prioritise.
Your rent, mortgage, council tax and energy bills should be paid first because the consequences can be more serious if you don’t pay.
Groups like Citizens Advice, StepChange and National Debtline can help you manage your debt and negotiate with your creditors.
You should always have a look at what free options are available for managing debt before you turn to a private firm for support.
There’s also a specific government scheme to help manage debt called Breathing Space, which gives you the right to legal protection from creditors for up to 60 days.
The FCA said consumers can get free and impartial advice from the MoneyHelper website or by telephone on 0800 138 7777.
Do you have a money problem that needs sorting? Get in touch by emailing [email protected]