UK watchdog proposes banning referral fees for debt advice firms

By Huw Jones

LONDON (Reuters) -Britain's financial watchdog said on Thursday it proposes to ban firms who give advice on debt from receiving referral fees from other related firms in the sector, citing an acute conflict of interest which can harm customers.

Consumer finances are coming under heavy strain during a cost of living crisis hitting Britain, piling pressure on banks and others to rearrange loan repayment schedules.

Consumers who enter into "unsuitable" arrangements to repay a debt can face dire consequences by having to pay far more money back over a longer period, the Financial Conduct Authority said.

It has estimated that around 52,000 of the 1.7 million people who seek debt advice every year begin with a debt packager, a figure which has likely increased due to the cost of living crisis.

Debt packagers are regulated providers of debt advice, who refer indebted customers to debt solution providers - in return for a referral fee - which make formal arrangements to repay debt.

"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," FCA executive director of consumers and competition, Sheldon Mills, said in a statement.

The FCA initially consulted on a proposed ban in November 2021 and based on feedback, it has now decided to hold a further, short public consultation until March to take into account new developments in the market.

Firms representing two-thirds of the market in customer numbers have either left or suspended their activities since the FCA first raised concerns in July 2021, the watchdog added.

If the proposals are implemented, the measures would end the current debt packager business model, and may come in after a short implementation period, the FCA said.

The FCA said it also proposes to clarify how unauthorised businesses, who source potential customers and recommend a particular debt solution provider to them for advice, may need to be authorised by the watchdog.

(Reporting by Huw Jones;Editing by Alison Williams and Emelia Sithole-Matarise)