Concerns that some debt packager firms may have been profiting from advice which could put consumers at risk of significant harm have been raised by the City regulator.
Some firms appear to have manipulated consumers’ incomes and outgoings to meet criteria for going financially insolvent, the Financial Conduct Authority (FCA) said.
Debt packager firms advise people on how to deal with their debts, often referring them to an insolvency practitioner or debt management firm, for which they receive referral fees.
In some cases, the regulator said it believes firms failed to sufficiently take into account consumers’ circumstances and vulnerabilities, including mental health issues and economic abuse.
Firms may also have used persuasive language to promote products without fully explaining the risks and provided advice that did not accurately reflect their conversations with consumers, according to the regulator.
The FCA identified concerns that some firms may have manipulated consumers’ incomes and spending for them to enter into an IVA (individual voluntary arrangement) or a PTD (protected trust deed) used in Scotland.
Fees can be many times higher when the firms refer consumers to an insolvency practitioner to potentially enter into an IVA or a PTD, than for other debt solutions.
The regulator said it has made very clear to firms that it expects them to manage this conflict of interest to ensure that their advice is right for consumers, not just firms’ financial interests.
People who are wrongly advised to sign up to an IVA or PTD may suffer significant harm. They may struggle to keep up the repayments, meaning their debt solution may fail.
If it fails at an early stage, the money they have already paid may be largely swallowed up by the fees for taking out the debt solution, rather than paying down the debts. They may have backdated interest and charges added to outstanding balances by creditors – and they may risk being made bankrupt.
The regulator said it is considering policy changes to address the significant potential for harm through poor advice that the debt packager business model poses. If it decides that changes are needed, the FCA will consult on proposals later this year.
Following its review, the FCA wrote to five firms identifying significant concerns over their practices.
It said the firms later applied for voluntary requirements to be imposed, meaning that they can no longer provide regulated advice services until the FCA is satisfied that they can comply with the rules. The FCA emphasised that it is not attributing any of the specific practices found in its review of the debt packager market to any of these individual firms.
Sheldon Mills, executive director, consumers and competition at the FCA, said: “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.”
Craig Simmons, head of debt policy and strategy at the Government-backed Money and Pensions Service, said: “We have significantly increased free debt advice capacity ahead of an expected rise in the need for advice due to the financial impact of the pandemic.
“Many people will be seeking support for the first time and may not know where to begin. Anyone who is worried about debt should visit the debt advice locator tool on the MoneyHelper website to find a qualified free adviser to help you get back on track.
“Free debt advice can be life-changing for people in difficulty. Our research shows that 63% of customers with debts are reducing or clearing them within three to six months after receiving impartial debt advice.”