Debt packager firms: A ban on their referral fees seems likely and it can’t come soon enough

In the post-Christmas period, it's vital that people struggling with debt problems are protected from exploitative firms

It’s a new year, and I would love to tell you that 2022 will be a brighter time for our finances. Sadly, positive financial news is a bit thin on the ground, and I concede iMoney doesn’t always make for a relaxing, cheery read these days.

To be fair, public interest journalism shouldn’t feel comfortable. It’s meant to hold powerful interests to account, whether they be policymakers or pension funds. Otherwise, we’d end up with Peter O’Hanraha-hanrahan, the credulous journalist from cult TV comedy The Day Today who takes slimy politicians at face value.

Besides, it’s ugly out there. Inflation is back; so are questionable tax rises. The energy market has blown up, home ownership remains a pipe dream for too many young people, and in the race to net zero, industrial levels of financial greenwashing are becoming harder to unpick.

Still, there are glimmers of hope. The Financial Conduct Authority has just wrapped up a consultation on outlawing referral fees for debt packager firms. It seems likely a ban will be introduced in the coming months.

It cannot come soon enough. Christmas is an exceptionally pressured time of year, prompting and exacerbating debt problems. Many borrowers will naturally go online after the festive break to see if they can get help.

They’ll be bombarded by sponsored adverts that look like a dream come true. “Reduce your debts by 85 per cent a month!” “Here’s a secret the debt collectors don’t want YOU to know about,” and so on. Social media is littered with promoted posts promising to wipe out debts at knock-down prices. Eye-catching celebrity memes and targeting of vulnerable demographics, such as single mums, are commonplace.

This marketing comes from debt packager firms, which look like qualified debt advisers, but are in fact glorified lead generators. They earn most or all of their income by referring borrowers to a debt management company or a firm offering individual voluntary arrangements (IVA) – in Scotland, the equivalent is a protected trust deed (PTD).

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Debt packagers typically get paid £930 and £1,340 for every client they channel towards an IVA or PTD respectively. But they get nothing for recommending a debt relief order (DRO) costing £90, or in Scotland, a minimal asset process (MAP) costing £50. No prizes for guessing which options get recommended more often.

Sara Williams, an experienced debt adviser and founder of the Debt Camel blog, says IVAs and PTDs can work for anyone with stable finances and assets to protect, like a house with equity. However, they are sold too often to those who would be better off with other solutions, such as a DRO.

The FCA has found ample evidence that debt packagers massage information like income to meet the criteria for IVAs. Some people shouldn’t even be looking at full-blown insolvency when they may qualify for breathing space. This is where debt costs and collection proceedings are frozen to give the borrower time to work out a plan (the Scottish version of this is a Statutory Moratorium).

Mis-sold IVAs and PTDs can make your life hell. If you don’t keep up with the payments, you’re whacked with backdated interest and charges: you could still end up bankrupt. More than a quarter of IVAs fail in three years, making little impact on the debt.

Sara is hopeful the FCA ban will be a step forward. “They won’t stop the whole problem – that will require the Insolvency Service [the sector’s regulator] to take action, but it will remove the cloak of respectability from these firms when they cannot say they are FCA-authorised debt advisers.”

The changes, if properly enforced, would mean most debt packagers going out of business. Good riddance. I only wish I could wave a magic wand and stop these predatory firms doing any more harm this January when demand for debt advice will be even greater than usual.

But now for the really bad news. Commercial debt advisers will continue charging fees, upping what their clients owe. Better alternatives are debt charities, such as Stepchange, and non-profit organisations offering the same service for free.

But as I have previously reported, free debt advice is in crisis. Its primary funder – the Government’s Money and Pensions Service – is restructuring contracts in a way that is already leading to redundancies within regional debt organisations and clients being turned away, according to campaigners.

Yes, overall funding is increasing, but less is going towards face-to-face advice, a crucial gateway for clients with complex needs and “priority” debts (such as council tax arrears) who need a hands-on, knowledgeable adviser with deep local connections.

As taxes and living costs grow, millions more will fall behind on basic bills and require the right kind of debt advice. As things stand, it is far from clear that they will receive it. And the consequences could be devastating. Sometimes, you just can’t wrap it up.

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