New debt packaging rules could come into force

The Financial Conduct Authority (FCA) has published CP21/30: Debt packagers: proposals for new rules, which sets out proposals to ban referral fees for debt packaging firms¹. The consultation opened on 17 November 2021 and closed on 22 December 2021¹. Subject to the consultation, the FCA expects that new rules could come into force in April 2022¹.

Debt packagers are regulated providers of debt advice who refer customers on to other providers of debt solutions, and they rely on income from referral fees paid by those other firms¹. The FCA says fees can be many times higher when consumers are referred to an Insolvency Practitioner for an Individual Voluntary Arrangement (IVA) or Protected Trust Deed (PTD)¹. The regulator has compiled evidence of debt packagers appearing to have manipulated customers' details so that they meet the criteria for IVAs or PTDs, and used persuasive language to promote products without explaining the risks involved¹.

The proposal would protect consumers by banning debt packagers from accepting referral fees¹. The FCA notes this would end the debt packaging model, but it does not prevent firms from providing debt advice on a commercial basis, nor does it affect their eligibility to apply for commissioning funds from the Money and Pensions Service (MaPS)¹. Annex 1 of the consultation poses seven questions related to the FCA's proposals¹.

The FCA has also published an exchange of letters with the Insolvency Service setting out a range of actions for greater collaboration on insolvency solutions¹. Sheldon Mills' letter outlines the FCA's interest in contributing to the Insolvency Service's upcoming review of the personal insolvency framework, as well as further formal sharing of information between the regulators¹. In response, Dean Beale, chief executive of the Insolvency Service, agreed to advance formal information sharing between the two bodies and noted that the Insolvency Service expects to release a Call for Evidence on the personal insolvency framework later in 2021¹.

Why it matters for households

People who contact a debt packager for advice about problem debt are the group directly affected. Under the proposal, a packager would no longer be able to take a fee for passing a customer to another firm, which the FCA says removes the conflict between advising in the customer's best interest and recommending a solution that pays the packager more¹. The FLA notes that improper advice for an IVA can make a customer worse off and take them significantly longer to become debt free¹. The change would not stop firms giving debt advice commercially, and would not affect their eligibility for MaPS commissioning funds¹. The rules are not yet in force: they depend on the consultation outcome, with April 2022 given as the expected date¹. The ban on debt packager referral fees sits alongside wider regulation of debt advice and debt management firms.

What happens next

The consultation closed on 22 December 2021, with responses requested through the FCA's online form¹. Subject to the consultation, the FCA expects the new rules could come into force in April 2022¹. Separately, the Insolvency Service expected to release a Call for Evidence on the personal insolvency framework later in 2021¹. No further dates for either process have been reported.