STRUGGLING Brits in debt could save thousands of pounds in fees under new proposed rules.
The financial regulator is cracking down after customers were given poor debt advice and charged unfair fees by firms offering Individual Voluntary Agreements (IVAs).
The proposals by the Financial Conduct Authority (FCA) would ban debt packager firms from receiving referral fees from debt solution providers.
Debt packager firms are regulated businesses that provide debt advice.
Currently, these companies can take a referral fee for passing on a customer in debt to another debt solutions provider.
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The FCA first consulted on a ban in November 2021 after finding evidence the firms were manipulating customers' details to boost their own rewards - while potentially costing hard-up Brits thousands.
It's now launched an additional consultation with the aim to gather extra evidence.
The FCA has found going into an IVA unnecessarily could cost individuals almost £5,000 - and mean it takes them an extra five years to become debt-free.
The firms are often paid more if they refer customers to an Insolvency Practitioner for an IVA or Protected Trust Deed (PTD), than a government scheme such as a debt relief order, the FCA said.
Since the FCA first raised concerns in July 2021, firms representing two-thirds of the market in customer numbers have either left or suspended their activities.
Some 54,000 people sought advice from a debt packager in the year to March 2020, according to estimates.
Sheldon Mills at the FCA said: “Unsuitable or poor advice can really harm people’s financial lives.
"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.”
Richard Lane, director of external affairs and operating subsidiaries at debt support charity StepChange, added: “With the cost of living crisis leaving so many people vulnerable to problem debt, the FCA’s move to stamp out poor debt advice practices is extremely welcome.
"In particular, with proposals for the ban on fees to go ahead after a short implementation period, we can expect to see swift, much-needed action that will benefit thousands of consumers."
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The consultation is open until March 2.
The Sun first reported in 2018 that thousands of people may have been mis-sold expensive debt repayment plans.
Types of debt solutions
Individual Voluntary Agreements
An IVA is a way to avoid bankruptcy, as you set up an agreement with firms to pay back the money you owe to different companies (known as creditors) over a set period of time (usually five years).
Your debts are frozen and any amount not repaid at the end of the plan is written off.
But people who are in debt can often agree on a repayment plan with their lender without taking out this type of agreement, which will negatively affect their credit score.
IVA firms will also add a fee onto your debt for their service, adding potentially thousands of pounds to the amount you end up repaying.
Debt Relief Order
For many people, a debt relief order (DRO) will be a more appropriate way of managing debt.
These can be used to tackle a range of debts up to £30,000 - the limit was upped from £20,000 in 2021.
Debts covered include credit cards, overdrafts and loans, and arrears with rent or bills among others.
A DRO means you don't have to repay debts for an agreed period of time, usually a year, and creditors can't take action against you.
It will stay on your credit record for six years, however, and this could make it more difficult to get credit in the future.
Bankruptcy
If you’re in severe financial difficulty you can consider going bankrupt, which will clear your debts.
It works differently depending on where you live in the UK.
You can apply for bankruptcy, or a company or person you owe money to may petition on your behalf (if you owe them at least £5,000).
When you’re declared bankrupt, your bank account may be frozen immediately and any items of value that you own, such as a house or car, may be taken away from you.
A person called an Official Receiver or Trustee is put in charge of your assets.
You will have to ask them before you spend money and you will only be given basic living expenses during the period of bankruptcy.
You are usually discharged from bankruptcy after 12 months - but sometimes this can last longer.
How can I get debt help?
If you're concerned about debt, don't bury your head in the sand.
Citizens Advice says it's important to work out a budget and keep an eye on your bank balance.
Try and pay off more than the minimum on credit cards each month, and pay your most expensive credit card first.
If you've got several debts and can't pay them all, it's important to prioritise.
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 National Debtline can help you manage your debt and negotiate with your creditors.
You should always have a look at what free options are available for managing debt before you turn to a private firm for support.
There's also a specific government scheme to help manage debt called Breathing Space, which gives you the right to legal protection from creditors for up to 60 days.
The FCA said consumers can get free and impartial advice from the MoneyHelper website or by telephone on 0800 138 7777.
Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk
