The Financial Conduct Authority (FCA) has proposed a ban on debt packager referral fees to “protect consumers”.

If the measures are rolled out they would end the current debt packager business model

The move comes after the regulator initially consulted on a ban in November 2021, after it said it had found a lack of adequate management of the “conflict of interest between giving advice in the customer’s best interests and recommending an option that makes the firms more money”.

Since it first raised concerns in July 2021, firms representing two thirds of the market in customer numbers have either left or suspended their activities.

The FCA said that consumers who enter a debt solution which is not right for them can face "dire" consequences.

If a consumer is accepted onto an IVA following poor advice from a debt packager, for example, when a Debt Relief Order would have been more suitable - this could cost them an extra £4,710 and take them five years longer to become debt free.

“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,” said Sheldon Mills, executive director of consumers and competition, FCA. “Unsuitable or poor advice can really harm people’s financial lives."

Mills added: “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.”

After analysis of the feedback from the consultation, the FCA decided to gather further evidence from the debt packager market to supplement existing evidence.

The authority said that a further, shorter consultation will allow it to update its analysis of the market, by giving stakeholders the opportunity to comment on the proposed ban of referral fees and provide insight on any new developments in the market.

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