STRUGGLING Brits in debt could save thousands of pounds in fees under new rules.
The Financial Conduct Authority (FCA) is banning debt packager firms from receiving referral fees from debt solution providers.
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The move is expected to save struggling Brits thousands of pounds and will help them receive better quality debt advice.
It will put a stop to a business model which incentivises debt packagers to recommend certain options that make them more money, rather than what is in the customer’s best interest.
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.
They earn considerable money when people are referred to solution providers such as an insolvency practitioner for an individual voluntary arrangement (IVA).
But other debt solutions may be more suitable for some people in debt – some of which do not earn debt packagers any fees, the FCA said.
Government schemes such as debt relief orders (DRO) are cheaper alternative options for the consumer.
Fees for IVAs can cost consumers £3,650 or more over their lifetime compared with less than £100 for options such as DROs and, if the person is eligible, the FCA said.
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The City regulator first consulted on a ban in November 2021 after finding evidence the firms were manipulating customers’ details to boost their own rewards – while potentially costing hard-up Brits thousands.
In some of the worst cases identified, the FCA found evidence of customers in financial hardship who were recommended solutions which caused greater harm.
One person, who was homeless, was recommended an IVA, costing them £6,000, when they could have been debt-free in one year via a DRO for just £90.
In another case, someone was recommended an IVA by a debt packager when a different solution would have been more suitable.
This cost them an extra £4,710 compared with a DRO and meant it would take five years longer to become debt free, the FCA said.
Existing debt packager firms will now need to develop a new way of doing business by October 2 or face regulatory action, according to the FCA.
The ban comes into effect from Friday, June 2 for new entrants to the debt packager market.
Sheldon Mills, executive director of consumers and competition at the FCA, said: “Good quality debt advice is vital in helping people out of financial difficulty and poor advice can have a devastating impact on those who are already struggling.
“This ban will put a stop to the business model that incentivises bad advice and reduce harm to consumers.
“We are giving existing firms four months to help them adapt.”
Matthew Upton, acting executive director of advocacy and policy at Citizens Advice, said: “Banning referral fees is a big step towards tackling the way some firms prey on and profit from people struggling with debt.
“Inaccurate or misleading advice from providers promoting individual voluntary agreements can push people further into hardship and further away from a lasting solution to their problems.”
The Sun first reported in 2018 that thousands of people may have been mis-sold expensive debt repayment plans.
We’ve listed the different types of debt solutions available to consumers and included advice on how to get free and impartial help below.
Types of debt solutions
There are three main types of debt solutions available to consumers in England and we’ve explained how they work in detail.
Individual voluntary agreements
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.
Debt relief order
For many people, a debt relief order (DRO) 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.
A DRO means you don’t have to repay debts for an agreed period of time, usually a year, and creditors can’t take action against you.
It will stay on your credit record for six years, however, and this could make it more difficult to get credit in the future.
Bankruptcy
If you’re in severe financial difficulty you can consider going bankrupt, which will clear your debts.
It works differently depending on where you live in the UK.
You can apply for bankruptcy, or a company or person you owe money to may petition on your behalf (if you owe them at least £5,000).
When you’re declared bankrupt, your bank account may be frozen immediately and any items of value that you own, such as a house or car, may be taken away from you.
A person called an Official Receiver or Trustee is put in charge of your assets.
You will have to ask them before you spend money and you will only be given basic living expenses during the period of bankruptcy.
You are usually discharged from bankruptcy after 12 months – but sometimes this can last longer.
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.
Consumers can get free and impartial advice on the MoneyHelper website or by calling 0800 138 7777.
It’s also worth using a benefits calculator to help you work out if you might be entitled to any extra cash that can help pay off some of your debts.
