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It is now believed that up to a quarter of a fund that has been set up to help Scottish Debt Advice Services has already been earmarked for UK-wide debt charities, by the Scottish Government, giving them priority over locally-based, face to face money advice services.
The Scottish Debt Advice Levy, believed to be worth £3.96 million per year, is intended to help free debt advice services that help people struggling with their debts like credit cards, personal loans and other consumer credit borrowing.
However, despite there being very little Scottish demand on the UK National Debtlines and charities like Stepchange having self-funding business-like models, the Scottish Government, it is understood, has already allocated them up to a quarter of the entire Scottish Debt Advice Levy, leaving less for local face to face money advice services.
What is the Scottish Debt Advice Levy?
The fund that was previously managed by the Money Advice Service (now the Money and Pensions Service) is raised by the UK Financial Conduct Authority by applying a levy to UK Clearing banks and consumer credit businesses.
The fund was devolved to the Scottish Government in January 2019 under the Financial Claims and Guidance Act 2018.
To help with the transitioning of the fund into the hands of the Scottish Government, it was decided in 2019-20, the previous allocations of funding should continue, with a view to producing by September 2019, a new Debt Advice Route Map that would outline how funding would be spent in years to come in Scotland.
However, to-date the Scottish Government have failed to produce its Debt Advice Route Map and appears ready to honour pre-devolution arrangements of giving up to half a million of the funding to UK National Debt Lines and another half a million to the UK Debt Charity Stepchange.
No other organisation, such as a local authority or Citizen Advice Bureau is understood to have been given any commitment of funding next year.
UK National Debt Lines
The UK National Debt Lines are understood to be the Birmingham based National Debt Line and Business Debt Line, both of which are owned by the Money Advice Trust. It is also believed to include the national debt charity, Stepchange.
However, it is understood that neither the Money Advice Trust’s National Debtline or the Business Debt Line received many calls from Scotland, with the National Debtline reporting only 4,732 calls in 2017 and the Business Debtline only receiving 1,010.
To put that in context, many local authority money advice services or locally based Citizen Advice Bureaux will receive similar number of calls in a year.
In addition to this, neither the National Debtline or the Business Debtline actually provide face to face appointments to consumers, and often after giving initial advice, have to refer them back to locally based front line services.
Stepchange, also operates a national debtline, as do many large private sector debt advice firms.
Like these firms, Stepchange’s primary funding model is to raise funds from the cases of the clients they deal with.
So, in relation to Debt Management Plans, through a special arrangement they have with the Banks, known as the Fair Share Scheme, it is believed they collect between 11-12% of everything that is paid by a consumer in such a plan.
Across the UK this is believed to have raised them about £43 million in 2018.
They are also believed to have raised a further £3.7 million from insolvency services and a further £1.08 million from equity release services, (helping people release equity from their homes to pay their debts).
In addition to that it is also also believed in 2018 they raised a further £323,000 in commission from mortgage advisers and insolvency practitioners.
In Scotland, it is known they do generate fees from several insolvency practitioners, who they refer bankruptcy and protected trust deed clients onto.
It is also believed their Chief Executive, earned £167,675 in total remunerations in 2018 (more than the First Minister of Scotland)
Who Are The Winners?
Stepchange, it is believed, will also be one of the big “winners” from the Scottish Government’s Debt Arrangement Scheme (Scotland) Amendment Regulations 2019, which will see them increasing their fees on Scotland’s equivalent of a Debt Management Plan from 8% to 20% per case.
Despite this, Stepchange do not offer the same services to people struggling with debts, that other local money advice services do.
For example, those that are self-employed, it is understood, are told to go back to their local money advice service if they want to enter the Debt Arrangement Scheme, as it is believed they find their cases too difficult.
Also, if people don’t have enough money to allow them to be slotted into one of the solutions that Stepchange generate fees from, they are sent copies of letters that they can copy and send to their creditors themselves.
So self-help, if you are poor.
Local Authority Funded Money Advice Services
In contrast, it is understood local authority-funded money advice services, which include services such a law centres, Citizen Advice Bureaux and services provided by local authorities themselves, have seen cuts to their funding of over 45% since 2014.
These services are still the primary providers of both formal and informal debt solutions in Scotland, including solutions like Bankruptcies and Debt Payment Programmes under the Debt Arrangement Scheme.
These services also provide solutions to all clients, including those that don’t fit into traditional formal or informal solutions, or are self-employed or whose outgoings exceed their incomes (believed to be more than 40% of all their clients).
Scotland Needs a Debt Advice Route Map
If it is correct that the Scottish Government has decided to continue with pre-devolution funding arrangements, then this is disappointing.
It shows a complete lack of analysis and understanding and with the Debt Advice Route Map still not having been published, a lack of strategy by the Scottish Government to fund free money advice services in Scotland.
Prior to the funding being devolved, it was not known how much of the funding was being given to the Money Advice Trust and Stepchange, as the Money Advice Service was not subject to Freedom of Information requests, unlike the Scottish Government is.
However, now it is known, questions need to be asked.
The National Debtlines owned by the Money Advice Trust are not services high in demand in Scotland, and calls to many local advice services each year easily compete with the numbers they are doing.
Equally, Stepchange has a business model that is modeled in many ways on that of private sector firms, despite them being a charity and should easily be self-funded, with no requirement for them to have access to public funds.
They are also believed to have £21 million in reserves, whilst many local authorities are eating into theirs.
There financial position has also been strengthened in Scotland with the introduction of the Debt Arrangement Scheme (Scotland) Amendment Regulations 2019, as they can now more than double their fees from Debt Payment Programmes.
The Scottish Government, now have to decide how they will fund free money advice services in Scotland and how the Scottish Debt Advice Levy should be spent.
They must bring forward and publish their Debt Advice Route Map and ensure it will support Scotland’s varied and rich advice landscape of both statutory and third sector organisations , who have suffered most from austerity and remain in the greatest demand: face to face, local, money advice services.
A Consumer Credit Trade Body, the CCTA, that represents over 250 consumer lenders, including firms that specialise in log book loans, high-cost credit and guarantor loans, has come out and demanded greater protection for vulnerable consumers against over-zealous financial regulators who are capping interest rates, fixing prices and awarding mis-sold loan compensation.
The CCTA has expressed their concerns that UK financial regulators, the Financial Conduct Authority and the Financial Ombudsman Service are “squeezing out the middle”.
The CCTA is worried vulnerable UK consumers are now being denied the opportunity to borrow at usurious interest rates and are being encouraged by the Financial Ombudsman to claim against irresponsible lenders who burdened them with unaffordable loans and at interest rates that trapped them in a world of rolling over debt.
Such is the CCTA’s concern, it is now calling for:
“…balance and proportionality in…regulation… and to find some consensus with consumer voices as to what ultimately is the best, or least harmful, outcome for consumers who are going to need access to credit come what may”.
Presumably that “least harmful outcome” does not involve interest rate capping, as has been introduced by the Financial Conduct Authority for pay day lenders, or price capping that will soon be applied to rent to buy firms such as BrightHouse. Nor, no doubt, will it involve allowing the Financial Ombudsman Service to right the wrongs consumers suffered at the hands of the predatory lenders who sold nearly 60 million payment protection insurance policies to over 30 million consumers, and which has seen nearly £40 billion paid back in compensation.
Instead the over-arching message the CCTA wants to get over is:
“…the cascade of regulation in the past 4-5 years has reached a point where the powers-that-be risk harming consumers instead of protecting them…”
and presumably wants to see an end to the:
“over-regulation…and..claims racket of dubious legality that is targeting lenders with historic ‘affordability’ claims, seemingly aided and abetted by FOS”.
Thank god, the CCTA has now eventually found its consumer champion voice and is speaking out in the interests of consumers.
Only the most cynical would wonder why we didn’t hear that voice when these historic, unaffordable loans were being mis-sold; or when payday lenders were using business models that were based on rolling over loans for the most vulnerable multiple times over, whilst charging interest rates of 1,000’s of percent.
Only the most cynical would think the real reason the CCTA has found its consumer voice and is calling for greater protection for consumers against bureaucracy loving regulators is because
“.. the rate of business closure in.. [their]…own association..”
is now on the rise.
However, the CCTA have also expressed concern at the rising number of consumers now turning to family and friend for loans (presumably because they would prefer they took out loans with their members and got their family and friends to act as guarantors) and illegal loan sharks (whilst failing to recognise that many of those who are using illegal money lenders also previously used sub-prime lenders and cannot now access legal credit because the over-indebted mess they have been plunged into).
The brutal truth though is the CCTA are being delusional if they think they can find common cause with consumer protection voices, whilst attacking the increased regulation that we have seen over the last 4-5 years, which is finally bringing under control the Wild West lending environment that was allowed to flourish after the credit crunch.
They are also in a state of self-denial if they believe that unaffordable lending can ever have a role in creating a well-regulated, balanced consumer credit market (and before they begin complaining about the rise in unaffordability claims, they should remember tens of thousands will never see a penny of those claims as lenders like Wonga exit the market).
The problem is the reaction by the CCTA and their member to the financial regulation of the FCA is entirely predictable and foreseeable.
It also shows how much they really think of consumer protection voices, if they think some common ground can be found, that no doubt will be predicated on self-regulation and voluntary industry regulation (yep, cause that worked so well last time).
They also seem to be deluded in believing these bad practices, now being stamped out, previously served some social good.
Access to credit, particularly for the most vulnerable, is definitely a problem, but it has to be solved by providing people with access to affordable credit, not by leaving people vulnerable to predatory lenders, intent on mis-selling loans, whilst charging usury interest rates and leaving it for the lenders or the distressed borrowers themselves to subjectively define what constitutes affordable.
(This is a satirical blog and contains the personal views of the author. The full statement by the CCTA can be found here.)
New research by the Financial Conduct Authority (FCA) and the Bank of England, suggests the 10% increase in borrowing, which we have seen in recent years, is being driven, not by sub prime borrowers, but those with better than average credit ratings.
The research, which was carried out by the FCA, and was based on data provided by Credit Reference Agencies, for one in ten UK Consumers, also found consumer credit borrowing in the UK was being driven by borrowers without mortgages.
This suggests the increased borrowing is either being taken out by people who own their property outright, or by people who do not own their property at all, and rent instead.
Finally, the study also found that people were remaining in debt longer and although people may be clearing their balances on products sooner, their overall indebtedness was not falling, suggesting they were possibly switching to 0% interest products.
What the study suggests to me, is although the rise in debt may well be by those with above average credit ratings, the fact that borrowers were not clearing their debts, but switching them, means the long term affordability of their borrowing may be getting masked.
The fact the report did not decisively identify who the group were that did not have mortgages, also makes me suspect it may be younger, financially savvy borrowers, who know how to protect their credit ratings, but still lack the means to get on the property market or clear their debts.