The UK financial watchdog has proposed banning debt packager firms from being paid to refer customers on to other firms.

Debt packagers are regulated providers of debt advice, who refer customers on to other providers of debt solutions. They rely on income from referral fees paid by these other firms.

The Financial Conduct Authority (FCA) said that these fees can be much higher when consumers are referred to an Insolvency Practitioner for an Individual Voluntary Arrangement (IVA) or Protected Trust Deed (PTD).

It claimed that this means debt packagers have a “conflict of interest between giving advice in the customer’s best interest, and making a recommendation that makes them more money.”

The authority warned that this business model can put consumers at risk of “considerable harm” from unsuitable debt advice.

“Debt advice needs to be good quality and meet the needs of consumers,” said Sheldon Mills, executive director of consumers and competition, FCA. “Too often people who contact debt packagers for help are being given advice that could cause them harm.

"This is unacceptable, especially as people seeking debt advice are often in vulnerable circumstances.

“Our proposals will address the inherent conflict of interest present in the debt packager business models. This will help protect consumers who need support managing their debts.”

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