Guidance to the Financial Conduct Authority Policy Statement on ‘Debt Packagers: Feedback to CP23/5 and Final Rules’
8 August 2023
View the Financial Conduct Authority Policy Statement here.
This guidance considers the implications of the Financial Conduct Authority (FCA) announcement to place a ban on debt packagers receiving remuneration from debt solution providers and, for debt packagers existing prior to 2 June 2023, covers the transition period to 2 October 2023. This guidance sets out the best practice Insolvency Practitioners (IPs) should follow when they are seeking an appointment for an Individual Voluntary Arrangement (IVA) or Protected Trust Deed (PTD). The IPA will be closely monitoring legacy debt packager referrals and reviewing how the sector evolves following the ban. IPs need to be aware of the requirements of the Insolvency Ethics Code (the Ethics Code) and of SIPs 3.1 and 3.3 to ensure that each appointment complies with the requirements.
- Debt Packagers – IPs need to review evidence of all a debt packager’s engagement with a debtor, including all relevant advertising, call records and existing agreements to ensure compliance with the SIPs and the Ethics Code.
- Lead Introducers – Paragraph R340.4 of the Ethics Code prohibits an IP, or their firm, from making (or offering to make) any payment or commission for the introduction of an insolvency appointment.
- Marketing – all marketing, advertising and other promotional activities should follow the Ethics Code, relevant codes of practice and guidance (such as the ASA guidance). If such activity is undertaken by a third party, then the IP is responsible for ensuring the third party complies with the IP’s obligations.
- IP Exclusion – IPs and their firms need to carefully consider the implications of the IP exclusion from FCA regulation and how this impacts on advertising an IP’s services in respect of an IVA or PTD. Equally they should be mindful of the implications, risks and restrictions around the FCA’s Appointed Representative regime.
In Consultation Paper CP23/5, the FCA set out proposals to ban referral fees and other forms of commission or remuneration, paid by debt solution providers to debt packagers, following the previous consultation (Consultation Paper 21/30).
On 2 June 2023, the FCA published Policy Statement PS23/5: Debt Packagers: Feedback to CP23/5 and final rules (fca.org.uk): Debt packagers: feedback to CP23/5 and final rules (PS23/5).
Debt packagers are commercial debt advice providers which do not provide any debt solutions themselves. The debt packager business model relies entirely, or largely, on referral fees from debt solution providers, primarily providers of IVAs and PTDs.
In CP21/30 and CP23/5, the FCA presented evidence which showed debt packager firms were not complying with the FCA rules. In particular, the FCA identified concerns that some debt packager firms appear to have:
- manipulated customers’ income and expenditure (I&E) information to meet the criteria for an IVA or PTD
- not presented the risks and benefits of different solutions in a balanced way
- provided advice that did not accurately reflect their conversations with customers or information that customers had given.
There were also concerns that debt packagers’ mismanagement of the conflict of interest between the need to have regard to the best interests of customers (as the FCA rules require) and the provision of advice which maximises revenue for the debt packager firm leads them to not comply with the FCA’s rules which puts consumers at risk of harm.
Ban on debt packager remuneration from debt solution providers
For debt packagers existing prior to 2 June 2023, the ban will come into force on 2 October 2023 after an implementation period. From 2 October 2023, existing debt packagers (and their appointed representatives) are banned from receiving remuneration (including any fee or other financial consideration) directly or indirectly from debt solution providers in connection with referring customers to a debt solution provider, or any other related service. No debt packagers can start or restart carrying out debt packager activities during the transition period.
The ban will not apply to not-for-profit debt advice firms or to regulated providers of debt solutions with different business models to debt packagers. Further, the ban will not apply to debt management firms, however, the FCA would consider unacceptable any attempt by debt packagers to become appointed representatives of a debt management firm in order to circumvent the ban. The FCA’s rules require principal firms (including debt management firms) to take all reasonable steps to ensure that their appointed representatives do not receive any remuneration from debt solution providers unless the appointed representative is itself genuinely acting as a debt management firm.
The ban came into force from 2 June 2023 for debt packagers firms which started or restarted carrying out debt packager business on or after 2 June 2023 and for representatives of existing debt packagers appointed on or after 2 June 2023. There is no implementation period for such firms or representatives.
The IPA and the other Recognised Professional Bodies have been concerned about the risks from the debt packager sector for a while. Paragraph 12 to SIP 3.1 (effective from 1 March 2023) provides:
”An insolvency practitioner should undertake sufficient due diligence on any referrer to identify whether they have advised the debtor and, if so, whether they are required to be authorised by the Financial Conduct Authority (FCA) for debt counselling or are able to rely on an exclusion or exemption in relation to the debt advice. The referrer’s authorisation status should be evidenced, or details sufficiently documented and retained in each case. In each case where advice was given by the referrer any contractual arrangement between them and the insolvency practitioner should extend to the insolvency practitioner maintaining access to all the referrer’s communications with the debtor, including call recordings or detailed written notes where calls were not recorded and transcripts of webchats or other communications where undertaken. Any shortcomings in the advice, including in relation to the referrer’s authorisation, should be remedied by the insolvency practitioner giving appropriate advice themselves.”
Summary of next steps
- Debt packager firms existing prior to 2 June 2023 (where CONC 8.3.11R applies) must ensure they do not receive any commission, fee or any other financial consideration from a debt solution provider for any referral or related service conducted after 2 October 2023.
- Any firms acting as principal to appointed representatives who would fall under the scope of the ban (if they were an authorised person) must take all reasonable steps to ensure their appointed representatives comply with the ban by 2 October 2023 (CONC 8.3.16R, subject to CONC 8.3.11R(2)).
- The ban already applies (without any implementation period) to:
- “New” debt packager firms that started, or restarted, carrying out debt packager business on or after 2 June 2023
- Principals of any appointed representatives who were appointed on or after 2 June 2023 and are carrying out debt packager activity.
- Lead generators and insolvency practitioners should consider the new guidance in PERG and apply for authorisation where appropriate.
IPA action during the Implementation Period for existing Debt Packagers until 2 October 2023
Given the IPA’s view that there are continued threats posed by the Debt Packager market, during the transition period the IPA will be focusing on existing agreements between IPs and Debt Packagers. IPs must ensure that every appointment complies with the requirements of SIP 3.1 and the Ethics Code.
IPs must be able to demonstrate all communications with the debtor in each case. IPs should be paying particular attention to the requirements around advertising and make sure they can demonstrate they have followed the ASA Guidance and Ethical Code and in particular R 360.7.
Lead Generators and other referrers
Whilst the FCA Debt Packager reform addresses one area of risk, the IPA remains concerned about lead generators, which may or may not be FCA regulated. In recent months, the IPA has seen repeated instances in this sector of inappropriate advertising that breaches the ASA guidance. In addition to this, there are concerns that early engagement may involve advice being given where the correct FCA permissions are not held. These concerns were further outlined in the Insolvency Service’s guidance on advertising debt advice and IPs must consider R340.4 of the Ethics Code, which sets out the requirements that ’An insolvency practitioner, the firm or an associate shall not make or offer to make any payment or commission for the introduction of an insolvency appointment’.
The word “shall” in the Ethics Code imposes a positive obligation on an IP to comply, so payments to Lead Generators for referrals are not permissible.
IPs also need to consider the FCA’s guidance in PERG 17 and be aware that Lead Generators passing on leads to firms which only provide a limited number of debt solutions could constitute regulated debt advice and therefore require appropriate authorisation.
R360 of the Ethics Code sets out the requirements in respect of advertising, marketing and other promotional activities. Paragraph 360.7 A1 states ‘when obtaining work via a third party or using a third party to conduct marketing activities insolvency practitioners have a responsibility to ascertain that a referral manner is in accordance with this Code because insolvency practitioners cannot do, or be seen to do, through others what they cannot not do themselves’.
Detailed below is guidance on how IPs should meet the regulatory standards for marketing.
Compliance with the Ethics Code:
- IPs must ensure that any work obtained, or marketing activities conducted through third parties comply with the Ethics Code.
- IPs cannot engage in or appear to engage in activities through others that would be prohibited if done directly.
- It is crucial to assess whether referral methods align with the Ethics Code and follow the ASA guidance.
- In cases where the IP or their firm lacks FCA permissions, advertising should clearly specify that it pertains to an IVA or a PTD.
- IPs must ensure there is no ambiguity regarding the debt solution offered, especially if IVAs and PTDs are the only options available.
Responsibility for Third Parties:
- When obtaining work through or conducting marketing activities via a third party, IPs are responsible for ensuring that the third party adheres to the Ethics Code and relevant guidance.
Adherence to Search Engine Advertising:
- IPs should be cautious when advertising on search engines, particularly when creating ads based on search terms and keywords.
- Advertising must not mislead individuals by imitating names associated with the free/charitable debt sector or enticing them to click on links for services that the IP cannot provide under the FCA exclusion.
- IPs should avoid creating confusion or misleading individuals seeking services related to Debt Relief Orders or assistance with bankruptcy if those services are not within the scope of the IP’s offerings.
IPs should regularly review their marketing strategies, monitor third-party activities, and make necessary adjustments to align with regulatory requirements and ethical standards.
FCA’s IP Exclusion, use of Appointed Representative Regime and trading names
Understanding the FCA’s IP Exclusion:
- The FCA’s IP Exclusion (PERG 2.9.25-27) applies individually to each IP and it is not transferable to or between other IPs (but does include anything done by the person’s firm in connection with that person so acting).
- Advice can only be given in reasonable contemplation of the personal appointment as an IP (within the meaning of s.388 Insolvency Act 1986) which would include cases where the IP acts in reasonable contemplation of their appointment as Nominee or Supervisor of an IVA or a PTD but would not extend to Debt Relief Orders.
- IPs should carefully consider the restrictions imposed by the IP Exclusion when advertising their services.
Compliance with Advertising Standards and Ethics Code:
- IPs should be aware of the Advertising Standards Authority (ASA) Enforcement notice regarding debt management, the FCA’s IP Exclusion and the Ethics Code.
- Advertising should not encourage individuals to contact an IP acting under the IP Exclusion for discussion of Bankruptcy and Debt Relief Orders if the firm only offers IVAs and PTDs.
- Advice should adhere to the Ethics Code and meet the requirements of the relevant Statement of Insolvency Practice (SIP) (IVAs SIP 3.1 or PTDs SIP 3.3).
Understanding the FCA’s Appointed Representative (AR) Regime:
- IPs should consider the restrictions of the FCA’s AR Regime, especially in light of the Debt Packager announcements.
- The use of the AR regime primarily for advertising on Google and targeting individuals seeking alternative debt solutions is a concern.
- IPs should assess the potential conflicts of interest and ensure compliance with this guidance, while documenting their risk assessment and the consumer journey as required by SIP 3.1 and SIP 3.3.
Risk Associated with Trading Names and Styles:
- Prior to the FCA’s Debt Packager announcement, the FCA was concerned that FCA-regulated entities might register multiple trading names without proper evidence of ownership or control of them.
- The FCA has issued warnings about such practices, and the IPA shares concerns about the risks associated with trading names.
- IPs must adhere to the Ethics Code and avoid anything that could bring the profession into disrepute related to trading names and styles.
IPs should carefully consider this guidance, ensuring compliance with regulatory requirements, ethical standards, and the SIPs. IPs should be able to provide evidence of their risk assessments, compliance with the regulations, and adherence during the entirety of the consumer’s journey. By doing so, IPs can maintain professional integrity and mitigate potential risks to the reputation of the insolvency profession.