Scottish Debt Policy is Broken

Scottish Debt Policy is Broken

Originally published in the Herald, as an Agenda piece, I make the argument that Scottish debt policy is broken, was explored.

Despite personal debt levels in the UK now having returned to pre-credit crunch levels, new figures released by the Improvement Service, reveal that free, local authority-funded debt advice services have now seen their funding cut by more than 44 per cent in the last three years. The latest figures paint a picture of services that are not only lacking capacity to deal with current demand, but should Scotland face another personal debt crisis, will not cope with future demand.

The tragedy of this is the modernisation and humanising of Scotland’s personal debt laws was one of the earliest and most notable achievements of the Scottish Parliament, from the abolition of poinding and warrant sales to the introduction of a new debt management scheme, known as the Debt Arrangement Scheme. Even Scotland’s bankruptcy laws were made more consumer friendly, making it easier for those with no other options to be permitted a fresh start, whilst free debt advice services were heavily invested in between 2003 and 2007.

By 2011, the progress that had been made meant it could reasonably have been stated Scotland had some of the most forward-thinking and progressive debt laws in Europe with well-funded advice agencies that could deal with the modern-day problems of over-indebtedness.

The benefits of this were all too evident in the aftermath of the credit crunch, when hundreds of thousands of Scots accessed both formal and informal debt solutions, and substantial levels of unmanageable consumer debt were addressed.

Then in 2012-13, the Scottish Accountancy in Bankruptcy (AIB), the agency which leads on debt policy for the Scottish Government, removed the wheels from these progressive policies that were driving such change. It concluded the law had become too debtor friendly and less than five years after the credit crunch, decided the law had to be re-tilted back in favour of banks and other financial institutions.

The effect was that within a year of the new rules being implemented in 2015, the numbers applying for bankruptcy fell by 44 per cent, whilst the numbers applying for the Debt Arrangement Scheme fell by 49 per cent.

It is now reasonable in my opinion to state the system is broken, incapacitated by funding cuts, but also by laws that have become the victim of “agency capture” by the AIB and are now developed to satisfy institutional needs of slotting everyone into formal solutions that can generate fees, rather than developing a system that benefits the whole of the community.

An example of this was evident last week, when the AIB declared the Debt Arrangement Scheme was a huge success, as it had recovered £200 million for creditors, whilst overlooking the fact more debt programmes had failed than had been successful.

Also, the Improvement Service produced another report that showed of the 49,000 people in 2016-17 who had sought advice from free, council-funded debt advice services, fewer than 21 per cent had their problems addressed through a formal solution, but more than 50 per cent had relied on their free sector advice agencies to negotiate solutions on their behalf.

It is now these free advice services that are facing cuts, with North Ayrshire Citizen Advice Service and Renfrewshire Law Centre only the latest to go in another round of cuts, closing their doors last week. More inevitably will follow.

Our debt laws may be world-recognised, but unless there are adequate resources and political will, they will not work.
The problem is they are no longer working and when Scotland faces another personal debt crisis, this will become all too obvious, but by then, it will be too late.

First published in The Herald, 4th April 2018

Money Advice Update – February 2018

Money Advice Update – February 2018

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.


The Wyman Report: A review of debt advice funding

The Wyman Report: A review of debt advice funding

Peter Wyman’s review into the funding of the debt Advice sector in England, Wales, Northern Ireland, and Scotland, is disappointing. It contains few observations of note, is uninspiring and was not insightful.

The one statement I found myself agreeing with was when he stated: “However, as all good authors say, the opinions, conclusions and recommendations in this report are mine and mine alone.”

Hear, hear. I agree.

Just because a report is commissioned, doesn’t mean it’s recommendations must be adopted. In this case, Peter Wyman’s report fails to rise to the challenge of the problem it purports to address, whilst its recommendations are underpinned by an ideology which is now reaching the end of its shelf life in the UK. I would suggest therefore, that is where his report should be left: on the shelf.

The report makes 20 recommendations, which when I read them, made me wish the author had stopped at 5. At least that way he would have embraced the ideological spirit of the austerity that he seems so keen to accept in his report.

The Cost of Free Advice Services in the UK

He estimates the cost of free debt advice services in the UK is £200 million. He then calls for this to be increased in 2018/19 across the UK, albeit only for a temporary period, by £10 million. This is a 5% increase, just under double the rate of inflation. However, coming after years of funding cuts and stagnation in the free sector, this would still be poor compensation and an inadequate response to a personal debt sector where the level of personal debt jumped by 10% last year and is expected to continue increasing in years to come.

In a country which has one of the largest financial sectors in the world and in which Peter Wyman acknowledges the demand for free sector money advice services is currently outstripping supply, it was disappointing to note that he finds the current costs unsustainable and makes recommendations to improve the efficiency of services by reducing duplication and encouraging, wherever possible, greater use of technology and the lowest cost delivery channels.

It must be asked what duplication is he referring to? Even in the areas where I work, there may be agencies doing the same thing, but no-one is idle. Demand outstrips supply. Where that demand is greatest is in relation to face to face services.

There also appears to be no shortage of supply in telephone and online services, and certainly some of the largest free sector providers of these services currently have the reserves to increase capacity if so required. Why, therefore, suggest other free services should further increase delivery using these channels, whilst cutting face to face delivery? This appears to an argument for further duplication, not the curtailment of it.

Banks may be abandoning their customers by closing branches, but this should not mean the advice sector must follow suit.

Missed Opportunities in the Wyman Report

Peter Wyman also argues for an extension of those who pay under the Fair Share Scheme, which is where creditors agree to revert a percentage of the sum paid to them through free sector debt management plans back to the provider. He, however, does not argue for an extension of the providers that can participate in the scheme. This would be a novel and innovative solution to the challenge that publicly funded services are facing, by moving more to a creditor funded model.

It would also arguably, allow increased capacity to be introduced into the free sector by the private sector, to meet unmet demand. He also makes no recommendation it could be put on a statutory footing with the introduction of a statutory breathing space scheme, in England, Wales and Northern Ireland. That would allow the free sector to cope with the increase demand that scheme will place on them. There is also no suggestion that possibly the limited availability to access the Fair Share Scheme is possibly an area worthy of investigation by the Competition and Marketing Authority.

Furthermore, his proposal to transfer 100% of the fee from a Debt Relief Order application back to the advice provider is barely worth mentioning. It is effectively arguing for the poorest debtors to pay for the services they are being provided. In Scotland the £90 application fee for a Minimum Asset Bankruptcy, barely covers the costs involved in administering the solution. Transferring 100% back to the advice provider would only increase the cost somewhere else for the public sector and inevitably result in a fee increase elsewhere.

His recommendations fall vastly short of the recommendations of the Money Advice Service in their Report on UK Debt Solutions, which proposes reintroducing fee remissions for Bankruptcy.

Over anticipated and under delivered is how I would summarise Peter Wyman’s report. It’s clear he has little understanding of the sector and delivers what is a relatively bland, unambitious, and unimaginative report, that contributes nothing to the debate other than to argue for a continuation of the culture of cuts and austerity.

Another alternative is possible, however

Taking Scotland as an example, the Improvement Service estimates that the cost of local authority, publicly funded money advice services to be approximately £11 million. Based on Mr Wyman’s estimate of £200 million across the UK, this would suggest another £9 million is being spent in Scotland by other providers and funders (based on approximately 10% of that £200 million being spent in Scotland). The Accountant in Bankruptcy service then costs £12 million approximately (but the costs of which are largely recouped through the ingathering of fees). There is then approximately £81 million distributed to creditors through statutory debt solutions, after private sector fees and outlays are recovered. This leaves plenty of scope for a fee increase to be used to protect existing face to face services and arguably increase provision of it to meet the current demand Mr Wyman identifies. This is easily achievable and sustainable.

What Peter Wyman should have addressed in his report was the fact that creditors are currently getting debt advices services too cheap. Instead, it appears, he argued for the profits to be privatised, but for the costs associated with dealing with consumers struggling with debts to continue to be socialised. In return he offered us a short-term increase to pay for the new headsets for our phones.

The report can be accessed here.