UK financial watchdog proposes banning referral fees for debt-advisory firms

Published Thu, Feb 2, 2023 · 08:53 PM

Consumer finances are under heavy strain during Britain's cost-of-living crisis, piling pressure on banks and other lenders to rearrange loan-repayment schedules. PHOTO: BLOOMBERG

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BRITAIN’S financial watchdog on Thursday (Feb 2) proposed banning debt-advisory companies from receiving referral fees from related businesses in the sector, citing an acute conflict of interest which could harm customers.

Consumer finances are under heavy strain during the country’s cost-of-living crisis, piling pressure on banks and other lenders to rearrange loan-repayment schedules.

The Financial Conduct Authority (FCA) said that consumers who enter into “unsuitable” arrangements to repay a debt could face dire consequences, such as having to pay far more money back over a longer period.

It estimated that 52,000 of the 1.7 million people who seek debt advice every year begin with debt packagers, which are regulated debt-advisory companies. This figure has likely increased due to the cost-of-living squeeze.

In return for a referral fee, debt packagers direct indebted customers to debt-solution providers, which make formal arrangements to repay their loans.

Sheldon Mills, FCA executive director of consumers and competition, said: “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.”

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The FCA initially consulted on the proposed ban in November 2021. Based on the feedback, it has decided to hold another public consultation, which will last until March, to take into account developments in the market.

Companies 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, the watchdog said.

It added that the measures, if implemented, would end the current debt-packager business model.