February 2018

North Ayrshire CAB Closure Highlights Risk to Front Line Advice Services

2nd March 2018 0 comments

The announcement that North Ayrshire Citizen Advice Service (NACAS) is closing its doors at the end of this month, after twenty years, brings into sharp focus the critical issue of funding that advice agencies in Scotland are now facing.

It also urgently underlines the need for a national discussion on how front-line advice services are funded.

This year already we have heard from Peter Wyman with his Review of the funding of free money advice services, which highlighted the fact that services are already 50% under capacity. The Scottish Government also, only two weeks ago, published a review into the funding of advice services. Both of which miss the urgency and scale of the threat that free advice services are facing after 8 years of austerity and cuts.

Funding Cuts

The closure of NACAS also demonstrates how acute the problems are. The closure is the result of funding cuts, after it was revealed North Ayrshire Council would have to cut £30 million to balance its books in 2018/19. The recent Scottish Government budget also offers nothing for council’s like North Ayrshire, as it only matches the funding available in 2017/18, but allows nothing for inflation.

Speaking about the cuts, Councillor Leader Joe Cullinane said:

“The Council has had to cut £73million from its budget over the last six years as a result of austerity and financial projections suggest we face a further funding shortfall of approximately £70m over the next three years.
“We are facing an increased demand for our services despite the fact that our funding is expected to reduce significantly.
“Unless this situation changes, there is no escaping the fact that the services that Councils across the country deliver are going to change.

Failing Local Authorities

This raises the question, what do we do when local authorities can no longer afford to deliver the statutory services which they are required to?

Under section 12 (1) of the Social Work (Scotland) Act 1968 (the 1968 Act), It is the duty of every local authority to promote social welfare by making available advice, guidance, and assistance on such a scale as may be appropriate for their area,

At present the only other local authority-funded money advice service in North Ayrshire is the council’s own service and their Better off Partnerahip.

The Council Service is currently only available to clients of the social work department, but since NACAS has stopped providing money advice, arguably it wil now need to begin providing services to all North Ayrshire residents.

If not, there will be no local authority funded money advice service that all residents in North Ayrshire can access. The Better off Partnership only being able to provide services to certain vulnerable client groups.

This is important, as an effect of the Bankruptcy and Debt Advice (Scotland) Act 2014 (BADAS), is it is no longer possible for someone to access statutory debt relief remedies without seeking the advice of an approved money adviser or licenced insolvency practitioner.

The effect of this is unless a financially strapped consumer has sufficient income for a licenced insolvency practitioner to take on their case, or there is a free advice agency able to assist them, they will not be able to access the remedies.

It’s may be an inconvenient truth, but there is no doubt if a local authority allowed this situation to arise, it would be in breach of it’s statutory duties, as the obligation contained in the 1968 Act doesn’t say only certain clients. It says it is the legal duty of every local authority to promote social welfare by making available advice, guidance, and assistance.

The Perfect Storm

The irony of this, is it comes at a time when Universal Credit (UC) is being rolled out, with as many as 75% of UC claimants now in rent arrears. It also comes as at a time when personal debt is reaching pre-credit crunch levels and incomes continue to stagnate, even though cost of living is increasing by 3% and interest rates begin an upward trajectory.

It is also coming at pivotal time as the Scottish Government’s Social Security (Scotland) Bill continues through Parliament, with the aim of creating a new social security agency. This agency it is hoped will employ 400 front line advisers, who will advise on the new Scottish social security benefits. However, who will advise on the rest or deal with the multitude of other issues NACAS dealt with, from money advice to housing to consumer issues?

It is also happening at the beginning of 2018/19, a year that was supposed to be crucial for advice services, with the Financial Claims and Guidance Bill passing through the UK Parliament, which will see the devolution of the funds raised by the Financial Conduct Authority’s debt advice levy on the consumer credit industry. The next financial year was supposed to be a year of reflection and consideration as to what is the best way forward, but many services may not survive in the meantime.

There is an alternative

Lots has been said about agencies using different channels to deliver advice, from face to face to telephone to digital. That is fine where it is possible, but its also the same ideology that has taken grip in the Department of Works and Pensions, with the removing of front line advisers and the closure of job centres. It is also the same ideology that has been adopted by the banks and is resulting in the closures of local branches. Both of which the Scottish Government has opposed and is actively trying to mitigate with its plans to recruit 400 new advisers.

It would be ironic now, if the Scottish Government were to stand back and watch frontline advice services close and suffer further cuts.

However, there is an alternative, at least for money advice services. In 2016/17 over £81 million was distributed to creditors through formal debt solutions in Scotland. That is £81 million after those private firms involved took their fees and the Scottish Government took £12 million in its fees. How much of this, however, was returned to the advice agencies that were significant providers of advice on these solutions and who assisted many of the clients to access the remedies?

The answer: none.

However, if even 5% of this sum was raised to help recover the costs of advice agencies in providing these solutions (both the Scottish Government and creditors being great believers in full-cost recovery), then £4 million could be raised for advice agencies across Scotland.

If £400,000 of this was set aside, debtor bankruptcy fees could be waived, so that the poorest of consumers could still access bankruptcy if they couldn’t afford it.

The remaining £3.6 million would represent a 30% increase in local authority funded money advice services, with the total expenditure last year being only £11.72 million (down 5% on the previous year). If the Scottish Government’s Accountant in Bankruptcy in Kilwinning can raise £12 million from cases to fund its services, why can a third of that amount not be raised from those cases to allow a 30% increase in funding for all of Scotland’s 32 local authority funded money advice services?

One of the biggest beneficiaries of these services are after all the creditors themselves, who it is estimated recovered between £400 million to £1 billion last year because of the work of free money advice services. If we were to extrapolate what those benefits mean for Scotland, based on population size, that means between £40 million to £100 million was recovered from Scotland (the £81 million on record that was recovered via formal debt solutions makes these estimates ring true). Against those figures, what is unreasonable about an additional £4 million being provided to support front line free money advice services? Particularly when a recent report on the Economic Impact of Debt Advice found that creditors actually benefit from the provision of free money advice.

As Sheila Wheeler, Director of Debt Advice at the Money Advice Service said of the report:

“This report clearly provides more evidence of what those of us working in the sector have known for a long time – investing in debt advice pays. Not only does debt advice contribute to health benefits – and in particular mental health benefits – for those receiving it, but it benefits employers through increased productivity. Crucially, it pays off for creditors too, reducing their costs by up to £237 million a year and increasing debt recovery of up to £360 million annually across the UK.

It is believed North Ayrshire Citizen Advice Service will close its doors on the 30th March. For more information, see here.

FCA fine Vanquis £1.96 million and orders them to pay compensation

27th February 2018 0 comments

The Financial Conduct Authority have fined Provident Group, credit card lender, Vanquis, £1.96 million and ordered them to pay compensation.

The FCA found that Vanquis mis-sold its customers, from 2003, an add-on product for its credit cards, called a Repayment Option Plan (ROP).

The product was intended to give Vanquis customers the option of an annual payment holiday, without fees or charges, for the cost of the ROP.

However, Vanquis failed to alert it’s customers to the fact the ROP fee attracted interest and this wasn’t cleared until the balance was cleared at the end of each month.

The FCA Fine has ordered Vanquis to pay compensation to all its customers affected from the 1st April 2014, when they took over regulation of the consumer credit market; however Vanquis has voluntarily agreed to pay it to customers who bought the product between 2003 to the 31st March 2014.

Customer affected by the product do not need to do anything, as Vanquis has offered to identify and contact all affected customers.

For more information, see here.

Money Advice Update – February 2018

26th February 2018 0 comments

With the next financial year likely to be a pivotal one for the money advice sector, in the UK and in Scotland, Alan McIntosh looks at a growing theme of whether a UK or Scottish approach should be adopted.

The big issues in money advice in the coming year will relate to funding and whether policy in this area should diverge across the regions or be brought together in a UK wide approach.

This is largely being driven by the Financial Guidance and Claims Bill, which will see the creation of a new UK-wide, Single Financial Guidance Body which will replace the current Money Advice Service. It will also see the funds, currently raised by the Financial Conduct Authority for debt advice, being devolved to the Scottish Government.

However, the new Single Financial Guidance body will, retain a strategic role over how debt advice in the UK is delivered and developed.

Policy Over-Reach?

What the parameters of this new role will be, waits to be seen, but the risks of policy over-reach by the body must be high, particularly when you consider most of the law that relates to debt recovery and formal debt solutions in Scotland are distinct from the rest of the UK and already devolved.

Also, with most debt advices services in Scotland being local authority funded, it is difficult to imagine that the historical problems of a post code lottery in services will disappear any time soon.

An example of the risks of policy over-reach, were recently highlighted by the Money Advice Service with its report: Debt Solutions in the UK: Recommendations for Change. One of the recommendations of the report was the re-introduction of fee remissions for debtor bankruptcy applications across the UK.

The power to set such fees and introduce fee waivers is a devolved matter and with the Scottish Government and the Accountant in Bankruptcy recently having made it clear they have no intentions of re-introducing fee remissions, it would appear the only significant recommendation made for Scotland, will not be accepted.

It can also only be imagined that the overlapping role of the new Single Financial Guidance Body, with that of the policy independence of the Scottish Government, will only lead to further accusations of policy over-reach in years to come.

Rising Indebtedness

The UK is again on the crest of a rising tide of personal indebtedness, with personal borrowing levels again reaching pre-credit crunch levels.

This has seen a deluge of new reports since the beginning of the new year, looking at rising levels of personal debt.

There is widespread agreement that where personal debt levels are rising fastest is in relation to car finance agreements, personal loans and credit card borrowing. Where there is no agreement, however, is whether this new surge of borrowing, which began in 2015, represents a problem or not. Many have been arguing it doesn’t, as most of the borrowing has been by higher paid individuals and individuals with more disposable income, who can afford it. Default levels are low.

However, even the reports which are most bullish about personal borrowing, all base their relaxed approach on one primary factor remaining the same: that is interest rates remain low.
So, providing nothing changes, it should be okay.

Wyman Review

The Peter Wyman review into the funding of free money advice services in the UK was published in January after much anticipation as to what its recommendations would be.

With many services aware of the rising demand for free money advice, which is occurring against a background of funding cuts, the hope was Peter Wyman would call for increased capacity driven by more funding, which would herald a new era for money advice services. It didn’t happen.

Peter Wyman instead called for a two-year funding increase for debt advice services, paid via a short-term increase in the Financial Conduct Authority’s levy for debt advice. However, he also called for a 20% efficiency saving by free advice services over the next two-years. Peter Wyman believes this is achievable by shifting clients away from the more expensive channels of delivering advice to less expensive channels. So, from face to face, to less expensive channels, such as telephone and digital advice services.

Whether a UK approach to funding debt advice services can be found will be interesting to see. With the proceeds of the the debt advice levy being devolved to the Scottish Government in the autumn, it is clear there are some who are hoping they will continue to influence how this money is spent.

It seems unlikely, however, the Scottish Government, in these times of financial restraint, will happily just leave the spending decisions to those who previously held them, so it’s feels inevitable there will be a divergence across the UK in service delivery.

The Wyman approach is also predicated on driving people from one delivery channel to another simply based on costs. This is very similar to the approach that has been taken by the banks themselves, with the closure of local branches, and by the Department of Works and Pensions, with the closure of job centres and the driving of claimants onto online services.

Both are approaches opposed by the Scottish Government and with the creation of the new Social Security Agency, it will try and reverse of by employing 400 new front-line advisers. Could such an approach as to how front-line debt advices services are delivered be addressed through a Scottish funding review? If this was to lead to a further divergence in policy across the UK, would this be desirable? If it wasn’t, it would be hard to see how much influence the new UK wide Single Financial Guidance body could exercise in a devolved Scotland.

Accountant in Bankruptcy Funding Review

Money is clearly an issue in everyone’s mind and the Accountant in Bankruptcy are no different. With the withdrawal of their Bankruptcy Fees (Scotland) Regulations 2017, after evidence was led by Govan Law Centre, and the Institute of Chartered Accountants, they have undertaking a consultation, as promised by the Minister Paul Wheelhouse.

The consultation ends on the 12th March 2018 and does not look at the issue of debtor application fees for sequestration but does ask the big question of who should pay, the public purse, the creditors, or the debtor?

Single Financial Statement

The theme of what is the correct approach to take, a UK or Scottish one, continues to raise its head and does so in relation to the Common Financial Tool (CFT), that was introduced by the Bankruptcy and Debt Advice (Scotland) Act 2014. The Tool is used to calculate debtor contributions in sequestrations, protected trust deeds and the Debt Arrangement Scheme. The current Common Financial Tool of choice is the Common Financial Statement (CFS), owned by the Money Advice Trust.

However, the Money Advice Service has now created the Single Financial Statement which it wishes to roll out across the UK, and with the CFS unlikely to be maintained beyond 2018/19, the Scottish Government are proposing laying new regulations proposing the adoption of the SFS as the new CFT.

However, with fears rising that the SFS may be less favourable to Scottish Consumers, and that the lack of openness and transparency surrounding these tools prevents any proper scrutiny or discussion, there is every possibility that the question of whether Scotland will have its own approach will raise its head.

Child Maintenance: whose money is It?

18th February 2018 0 comments

In the 1970s, Margaret Thatcher was accused of being a “milk snatcher” when she attempted to end free milk in schools for all over sevens. It was a name that haunted her for the rest of her career.

It would be a sad indictment on the Scottish Government, so soon after they passed the Child Poverty (Scotland) Act 2017, if they were now to acquire a new moniker of being the “Maintenance Snatchers”, but the recent approach of the Accountant in Bankruptcy (AiB) to child maintenance appears to make this inevitable.

It appears the Accountant in Bankruptcy has recently received legal advice that when assessing how a debtor’s contribution in bankruptcy is calculated any maintenance for a Child must not only be used in making that calculation, but is also available to take a contribution from.

This is despite Scottish and UK legislation clearly stating otherwise, but as legal opinions are never made public, it’s unclear how the AiB are reaching the conclusions they are.

Debtor Contributions in Bankruptcy

In Scotland when you apply to enter a formal debt remedy, like sequestration (bankruptcy), a Protected Trust Deed or a Debt Payment Programme under the Debt Arrangement Scheme, the first step you must take is to complete a Financial Statement.

A financial statement has two parts to it, the first shows your income and expenditure, the second part shows your assets and liabilities .

The reason for this is both parts perform two separate solvency tests. The first, is known as the “pay your debts as they fall due” test. This looks at whether, once all your essential expenditure has been allowed for, you have sufficient disposable income left to make the minimum contractual payments due on your debts. If you don’t, this is known as “practical insolvency” and basically means you cannot pay your debts as they fall due.

The second part is known as the “balance sheet test” and compares all your assets with your liabilities. This is to see if your liabilities outweigh you assets, and can be useful to see if you have any non-essential assets that could be used to pay off your debts.

If your assets are outweighed by your liabilities, then this known as “absolute insolvency” (you owe more than you own).

Where you fail the practical solvency test, this allows the AiB to see what you can pay. In the case of a bankruptcy this payment, known as a contribution, then has to be paid for 48 months.

However, in drafting a financial statement, the AiB will look at all the income coming into a household, including child maintenance money, which is reasonable as child maintenance money is supposed to pay for the maintenance of a child, so should contribute to the costs of feeding them, housing them and clothing them.

However, what happens when there are funds left over after the household expenditure and some of this can be identified to being made up of some of the child’s maintenance money? The current view of the AiB is that can be used to pay the parent’s contribution towards their debts

Example:
Take the case of a single parent. She is in receipt of Employment Support Allowance, Child Benefit and Child Tax Credits. She also receives child maintenance from her child’s absent Father.
It is not disputed that no contribution can be taken from the Mother’s benefits, as these are “inalienable” in law. However, if there is a surplus left over once all the family’s reasonable expenditure has been calculated, can this be taken?

It would appear the AiB’s legal advice states they can, providing it is equal to or less than the total amount the Mother received in child maintenance (as, therefore, it cannot be coming from her benefits).

Whose Income is It?

Section 1 (1) of the Family Law (Scotland) Act 1985 (Obligation of Aliment) states:

(1)From the commencement of this Act, an obligation of aliment shall be owed by, and only by—
(c)a father or mother to his or her child;

It is, therefore, clear the obligation to pay maintenance is one owed by the absent parent to the child, not to the guardian parent.

Likewise, in terms of the Child Support Act 1991:

Section 1: For the purposes of this Act, each parent of a qualifying child is responsible for maintaining him.

Again this clearly suggests the obligation to pay maintenance is owed by the absent parent to the child, not to the other parent.

Furthermore, if you consider section 7 of the Child Support Act it states:

Right of child in Scotland to apply for assessment
(1) A qualifying child who has attained the age of 12 years and who is habitually resident in Scotland may apply to the Secretary of State for a maintenance assessment to be made with respect to him if—

This further suggest that child maintenance income belongs to the Child and not the parent, if they themselves can request a maintenance assessment when they turn 12.

Contributions from Income of Children

It is clearly wrong the idea that where a child is paid an income, even if that income is paid to their parent as their guardian, that income should be considered to be available by a government agency to pay the parent’s debts.

It is one thing to say it can be used in drafting a financial statement for the household, as clearly many of the expenditure items in the financial statement will relate to the child’s maintenance, which is clearly the purpose of the income. However, to say where there are surplus funds and some of those funds are identifiable as child maintenance, a contribution can be taken from it, does not only appear to be legally wrong, but morally akin to being a “milk snatcher”.

If you want to share your experiences of how child maintenance has been treated in a formal debt solution in Scotland, you can contribute to our Forum.

The Home Owning Betrayal: Support for Mortgage Interest

11th February 2018 0 comments

After the home ownership revolution of the 1980s and 1990s, when millions of tenants were sold the dream of owning their own home, the UK Government is now rolling out the final chapter in that dream for many. The proposed changes to the Support for Mortgage Interest Scheme reads like an original Grimm Brothers fairy tale. Once you’ve read the contents of the new plan, it’s a bit hard to believe it’s appropriate for its intended audience.

Make no bones about it, the new dream is a cruel and barbaric one, which discriminates against the most vulnerable households, many of which have been at the blunt end of welfare reform for the last 8 years.

From the 6^th April 2018, those households currently in receipt of what is known as Support for Mortgage Interest (SMI) are being presented with a choice, if they want to continue to have the support, they must accept it will be in the form of an interest-bearing, secured loan. Alternatively, they need to work out themselves how they are going to keep the roof over their head.

Support for Mortgage Interest (SMI)

The Support for Mortgage Interest Scheme was introduced in 1948 by the Clement Atlee Government. It extended housing cost assistance to home-owners like housing benefit provided support for tenants for periods of unemployment, illness, or eventual retirement.

In its current form, to claim the benefit you must be in receipt of a qualifying benefit and it is only payable after 39 weeks (which is intended to encourage homeowners to save or take out payment protection insurance – in the case of those who are in receipt of pension credit, they become entitled immediately). It also only pays the first 2.6% of any monthly interest payment for loans up to £200,000 (or £100,000 where someone is a pensioner). Where interest rates are higher, the homeowner must make up the shortfall and nothing is contributed to the capital repayment of the mortgage.

The new scheme, it is argued, is necessary, as the current £205 million costs are unsustainable. This is even though people can still have their mortgage interest paid if they sign up to it and the Government will not save any money immediately. Also, if you consider the amounts involved, the current costs are less than 5% of what is being spent throughout the UK in other housing benefits.

It has also been argued, it is only fair, as otherwise people and their families will benefit from rising equity in their property and this will be at the expense of the taxpayer (obviously not a concern for many Members of Parliament who buy properties then rent them to other MPs at the expense of the taxpayer).

However, the truth is no-one has ever had their mortgage or home loans paid off by SMI (although plenty of private landlords do get theirs paid via Local Housing Allowance). Also, a significant number of those involved are pensioners and many are already facing other problems such as they still only have interest only or partial repayment mortgages, which means even when their mortgages mature, they will still be left with a substantial shortfall (one in five UK mortgages are currently believed to be interest only or on a partial repayment basis).

In addition to this, there are now rising concerns that the effect of the new scheme will be many households will not sign up, fearful they will get into more debt and will end up in arrears.

A recent freedom of information request by mutual insurer Royal London, found of the 124,000 currently receiving support, only 6,850 homeowners had signed up. As a result, they have called for the UK Government to delay the roll out of the Scheme.

The real fear is the Government will scare off tens of thousands from applying for support and the price of this will be thousands going into arrears and facing repossession.

The Final Chapter in a Grimm Tale

The truth is this is a betrayal. The final chapter in the Grimm Brother fairy-tale of home ownership that successive conservative governments sold in the past.

For many the other chapters involved them being enticed into buying their council and housing association homes in the 1980s and 1990s, often inappropriately. Subsequent chapters involved them being sold interest only mortgages, with inappropriate endowment policies which were never going to adequately pay off the capital amounts owed at the end of the mortgage terms. Then there were the home development loans for new driveways, double-glazing and kitchens, all secured over their properties.

Then there were the mis-sold payment protection policies that people took out in the belief they would provide adequate insurance against unemployment and illness.

Finally, there was the over-arching theme of the story that if you worked hard, paid your taxes and national insurance contributions, then the welfare state would protect you later in life if misfortune fell upon you.

But it was all a fraud.

For many the dream has been a story of being mis-sold, poorly advised and over-indebted.

Just like the fraud the UK Government is telling us now that this new scheme is a way of saving UK taxpayers money. It won’t.

If people do lose their homes or feel they must sell them, then it’s likely we will all pay more when we are paying their housing benefits or local housing allowances.

If you are affected by the changes to the Support for Mortgage Interest Scheme, it is important you seek advice.

Contact the Scottish Financial Health Service or Citizen Advice Scotland.