Distressed consumers with debt could get more help under the proposed new rules.

The financial regulator is about to crack down on companies that refer troubled customers to debt solution providers.

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Debt-conditioning companies accused of manipulating customer detailsCredit: Getty

The Financial Conduct Authority (FCA) said there was evidence that loan companies were manipulating customer details to increase their own rewards – while potentially costing customers thousands of pounds.

Loan companies are regulated firms that provide advice on debt matters.

Currently, these companies may charge a referral fee for passing a debtor customer to another debt management solution provider.

The amount they receive can be even higher if they refer the client 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 best interest of the client and making a recommendation that earns more money for the referrer.

Now the regulator is proposing a ban on debt referral fees in an effort to protect consumers.

Under the potential new rules, companies could no longer be paid for referring customers to other debt relief providers.

The FCA said the current model “exposes consumers to considerable risk from inappropriate debt advice.”

He said there was evidence that some debt packers manipulated customer details to meet the criteria for an IVA and “used persuasive language to promote products without explaining the risks involved.”

Sheldon Mills, Executive Director of Consumer and Competition at FCA, said: “Too often people who contact debt providers for help receive advice that could do them harm.

“This is unacceptable, especially since people who seek debt advice are often in vulnerable circumstances.”

What is an IVA?

An IVA is a way to avoid bankruptcy because you make an agreement with companies to repay the money you owe to different companies (called creditors) over a set period of time (usually five years).

Your debts are frozen and any amount outstanding at the end of the plan is written off.

But people in debt can often agree to a repayment plan with their lender without entering into this type of agreement which will negatively affect their credit score. IVA companies will also add fees to your debt for their services.

The Sun reported in 2018 that thousands of people may have been mis-sold with expensive debt repayment plans.

It has been found that some clients have been charged unfair fees by companies offering IVAs and received bad debt advice.

James Andrews of Money.co.uk said: “In theory, a lender company should help you weigh your options and help you find the best solution to pay off what you owe.

“In some cases, these companies may give you the right path to debt relief, but you need to make sure that the path you choose is the best for you, rather than the one that’s easiest or most profitable for them.”

If you enter an IVA or PTD without properly meeting the criteria, there can be serious consequences.

A person switching to an IVA when a debt relief order would have been more appropriate could face additional costs of £ 4,710 and take an additional five years to free themselves from their debts, according to the FCA.

He estimates that 54,000 people sought advice from a debt specialist in the year to March 2020, and the demand for debt advice is only increasing.

The regulator’s consultation on the new rules will be open until December 22.

If approved, they could go into effect in April 2022.

How Can I Get Debt Help?

If you’re worried about debt, don’t bury your head in the sand.

Citizens Advice says it’s important to budget and keep tabs on your bank balance.

Try to pay more than the minimum on credit cards each month and pay off your most expensive credit card first.

If you have multiple debts and can’t pay them all, it’s important to prioritize.

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 Money Advice Trust can help you manage your debt and negotiate with your creditors.

Andrews added, “Understanding what free options are available to manage debt is critical before you turn to a private company for help.

“There is also a specific government program to help manage debt called Breathing Space, which gives you the right to legal protection against creditors for up to 60 days.”

The FCA said consumers can get free, unbiased advice on the MoneyHelper website or by phone on 0800 138 7777, provided by the Money and Pensions service.

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