Posted January 14, 2022
You only have to Google “debt advice” to be hit with a barrage of adverts about “government-backed” advice or promises to “write off 85% of your debt”. These adverts – often by lead generation or debt packager firms – can lead people away from genuine, free, independent debt advice and put them at risk of being pushed towards a certain type of debt solution, regardless of whether this is the best option for them.
It’s an issue we’ve been raising for a long time and it’s why we are pleased to see the FCA’s proposals to ban receipt of remuneration for referrals by debt packager firms. In our view, this is the only effective remedy available within the regulator’s current powers, for tackling the consumer harm we see in the Individual Voluntary Arrangements (IVA) market. You can read our response to the FCA’s consultation here.
Currently, lead generation and debt packager firms work by identifying people who may need help with their debts, passing these onto firms who offer IVAs and, in some cases, paid-for Debt Management Plans. Lead generation firms rely on the willingness of the Insolvency Practitioner (IP) market to pay large fees for access to these people who might be persuaded to enter into an IVA - or protected trust deed in Scotland – as a way of managing their financial difficulties. These solutions can offer large fees for the IP firms who administer them.
The problem with this is it risks people in problem debt being encouraged to access debt solutions that aren’t suitable for their circumstances, based on the financial incentives for firms.
More intervention is needed
Whilst the FCA’s proposals are welcome, without further intervention our concern is that the market will simply adapt into a new model that continues to provide leads to insolvency practitioners (IPs) in return for fees.
There are a range of other potential remedies that need to be considered by government, the FCA and the Insolvency Service to help deal with the issue of firms providing unsuitable leads to IPs resulting in people ending up in the wrong debt solution.
One way the Insolvency Service could complement the FCA’s proposals is by changing the rules to ban IP firms from making payments for referrals in all cases – a move that we would strongly encourage them to take.
The ASA and misleading debt websites
Regulators also need to take action to stop the “debt advice” adverts we see on search engines and social media from firms posing as debt advice charities. These typically offer “government-backed” advice by taking a “30 second test”. A recent decision from the ASA found that online adverts from Financial Support Systems, trading as National Debt Service, misled consumers by suggesting that they were affiliated with National Debtline – our free debt advice service - and was endorsed by the UK Government.
It’s vital that the Insolvency Service ensures that these online adverts and websites that IP firms use to advertise their services are not misleading and do not, under any circumstances, masquerade as debt charities. IP firms should be required to take responsibility for adverts and websites that they are associated with that are put out by lead generation and debt packager services.
A gap in regulation
The reason that IPs and lead generation firms are able to act in this way may be in large part explained by the gaps in the FCA’s scope to regulate some of the associated activities. The issue appears complex, but there are solutions.
We regularly see websites advertising “information only” or a “model of non-advice” whilst maintaining they do not have to be authorised by the FCA. This includes both lead generation firms and IP firms. The definition of advice is open to misinterpretation, allowing some firms to avoid any regulatory scrutiny. We would suggest that the definition of “advice” within PERG 17 (the relevant bit of the FCA’s rules) be looked at again.
There is also a regulatory gap between IP regulation and lead generator firm authorisations that lies between the FCA and the Insolvency Service. This is where government action is needed to give responsibility to the FCA to regulate the activities of lead generators in relation to debt advice, through the creation of a new regulated activity of “effecting introductions to debt advice”.
Finally, IPs giving debt advice ‘in reasonable contemplation of that person’s appointment as an insolvency practitioner’ (PERG 2.9.26 G) are not required to seek FCA authorisation as they were successful in arguing that they are already covered by their professional bodies.
We would, strongly urge HM Treasury to review this exemption so that IPs fall under FCA authorisation.
More to come
There is a lot going on in this area and due to take place this year, all of which is linked to the issues I have highlighted. These include:
- The Insolvency Service’s call for evidence on the regulation of IPs, which proposes a new single regulator for IPs to replace the existing regulatory structure.
- The Joint Insolvency Committee recent consultation about amending the Statements of Insolvency Practice (the rules IPs must follow when setting up an IVA).
- The Insolvency Service’s forthcoming insolvency options review, which needs to look at how debt advice can be built into the process to protect people in debt from harm.
- And finally, the FCA’s consultation looking to change the appointed representatives regime.
So, there is potential progress in sight – but to fully tackle the problem, we need more than is currently being proposed. We hope the government, Insolvency Service and FCA will act to ensure no one is pushed towards a debt solution that isn’t right for them.
Meg is the Money Advice Trust's Policy Lead and has more than 35 years' experience in the debt advice sector. She is on the Quarterly Account editorial board and a range of other forums. View all posts from Meg van Rooyen.