STRUGGLING consumers in debt could get more help under new rules being proposed.
The financial regulator is set to crack down on firms that refer struggling customers on to providers of debt solutions.
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The Financial Conduct Authority (FCA) said there was evidence that debt packager firms were manipulating customers details to boost their own rewards – while potentially costing customers thousands of pounds.
The FCA said going into an IVA unnecessarily could cost individuals almost £5,000 – and mean it takes them an extra five years to get 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 Individual Voluntary Arrangement (IVA) or Protected Trust Deed (PTD).
The FCA said there was a conflict of interest between giving advice in the customer’s best interest and making a recommendation that earn the referrer more money.
Now the regulator is proposing a ban on debt packager referral fees in a bid to protect consumers.
Under the potential new rules, firms would no longer be able to get paid for referring on customers to other debt solutions providers.
The FCA said the current model “puts consumers at risk of considerable harm from unsuitable debt advice”.
It said there was evidence some debt packagers manipulated customers’ details so they meet the criteria for an IVA, and “used persuasive language to promote products without explaining the risks involved”.
Sheldon Mills, executive director of consumers and competition at the FCA, said: “Too often people who contact debt packagers for help are being given advice that could cause them harm.
“This is unacceptable, especially as people seeking debt advice are often in vulnerable circumstances.”
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 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 more appropriate way of maanging debt.
These can be used to tackle a range of debts up to £30,000 – the limit was upped from £20,000 this year.
Debts covered include credit cards, overdrafts and loans, and arrears with rents 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, said: “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.
It estimates that 54,000 people sought advice from a debt packager in the year to March 2020, and demand for debt advice is only increasing.
The regulator’s consultation on the new rules will be open until December 22.
If they are approved, they could come into force in April 2022.
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 you creditors.
Andrews added: “It’s essential to understand 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, provided by the Money and Pensions Service.
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This post first appeared on thesun.co.uk
