Family and Friend Debt: What you should consider before you lend or borrow

Family and Friend Debt: What you should consider before you lend or borrow

The Bank of Mum and Dad on the Rise

An annual survey carried out by the Financial Conduct Authority, known as the Financial Lives Survey, has this year looked at the impact of the Coronavirus on consumer spending and borrowing, and has found that by October 2020, approximately 5.9 million people across the UK borrowed from family and friends.

Although borrowing from family and friends can be an easy way for many, especially the young, to make ends meet, it is also a practice that can be fraught with dangers.

The most obvious of these is if the money is not repaid, this often leads to broken relationships.

So, what is the Legal Position?

In Scotland the legal position is family and friend loans are legally recoverable, like any other loan. In fact, the law presumes when you give someone money, even an adult child, that money is a loan and not a gift. This is because under Scots Law there is a presumption against gift.

That means that in the absence of any evidence to the contrary, if you can prove you provided someone with money, then the assumption is it was a loan and not a gift.

It is, therefore, safer where someone is giving you money as a gift, that you ask they confirm that in writing.

Insincere Giver

The problem is not that someone who gives you money may be insincere and later request the money back, the problem is people may have a different understanding of the basis on which the money was being provided, so it is important to be clear at the outset.

Also, you need to also remember that it may not always be the “giver” of the money who later comes back looking for it to be repaid. Where the amount is significant, there are circumstances when someone else may treat the gift as a loan.

This may happen if the person who gave the money passes away. One of the roles of an Executor of a deceased person’s estate is to recover any debts owed to the deceased person. So, if they see a large sum of money being given to someone, unless there is proof that money was a gift, legally they may have to assume it was a loan and demand repayment. Likewise, this can also happen if the person that you loaned the money to is later made bankrupt, as their Trustee will have a similar role to an Executor in a deceased person’s estate and must recover all debts.

This can also happen where a parent may help a child by giving them a large sum as a deposit towards their first home. This may reduce any possible inheritance for other siblings, who when the parent passes away, may assume it was always to be repaid, or at least should be offset against any bequests left for the child that was given the money.

Friendship Destroyers

However, the other big problem with family and friend debts, is they are often loaned because someone is in financial distress. The borrower often will turn to family and friends specifically because they are experiencing financial difficulties and cannot borrow from elsewhere.

Unsurprisingly, therefore, it’s normal someone may struggle to repay the debt and because of this, the potential for close relationships to be damaged is created.

Also, the borrower may have other financial liabilities they have to pay, but the family or friend may expect their debt to be prioritised over other lenders.

What is Good Practice when Lending to Family and Friends?

When lending to family and friends, it is quite easy to feel put upon and placed in an impossible position.

The first thing you need to do is ask yourself can you afford to give the money in the first place?

There is a strong possibility that if someone is borrowing from you, it is because no-one else will lend to them, so there is a strong possibility you may not be repaid.

If this is the case, think how it may affect your relationship with this person.

It may be worthwhile, first, to offer the person advice, before you give them any money. Would they be better seeking advice from their local Advice Agency? Could they help them deal with their other debts? Could they see if they are entitled to other sources of funds, such as Community Care Grant or Crisis Grant from the Scottish Welfare Fund? These don’t need to be repaid.

Alternatively, the Local Authority may operate schemes that can help people get top ups on their electricity and gas or can make a referral to a local foodbank for them. They may also be able to identify other benefits they are entitled to.

Equally, has your family or friend considered borrowing from someone else, such as your local credit union? Possibly they could also help.

However, if these other sources of help are not available, and you do feel you can afford to give this person money, ask yourself, do you need it back? If this is a close friend or family member and you do want to help them, possibly the kindest thing to do is make it a gift. If you decide this is your intentions, make it clear to the person in writing the money is being given to them as a gift.

However, if you do decide you will need the money repaid, equally make it clear to the person, this is your intention, and the basis on which you want the money repaid. Tell them the amounts each week or month and of any interest you want to charge them (although be careful, as you could later be accused of being a loan shark or illegal money lender).

What to do if you are not Repaid?

Finally, what do you do if the person who borrowed from you starts missing payments, ignoring your calls, and generally trying to avoid you? Or what if they claim the money was always intended as a gift and accuse you of being an insincere giver?

Well, first there is the presumption against gift in Scots Law, so if they have not got something in writing to say the money was intended as a gift, then legally it will be considered a loan. However, you will also need evidence to prove you gave them the money and how much. So, again it is better you have something in writing or can evidence, possibly through a bank transfer, that you loaned them the money.

Second, you need to ask yourself why the person is not repaying you? There is a strong possibility the reason they borrowed from you was because they were having financial difficulties, so things may have got worse. Would it be more helpful for both you and them if you were to possibly help them to get debt advice? Or maybe you should just write the loan off and make it a gift and save your relationship?

But ultimately, if you find they won’t communicate with you, is there another family member or friend that could mediate between you and try get them to fulfil their obligations to you? You may have to be realistic, possibly the terms of the loan, how much they were to repay you, will have to be rescheduled and the payments made lower.

Ultimately, however, you may be able to take them to Court and enforce the debt that is owed, but again you must be realistic. Taking someone to Court can be complicated and stressful and will cost you more money to get the court order and recover the debt. If the person who owes you the money doesn’t have money to repay you, you may be throwing good money after bad. Again, you’re also going to have to be prepared to evidence the debt that is owed to you, so you will need to be able to show you loaned the person the money in the first place.

In the final, analysis, you may have to accept you will need to write the money off, and accept it is not recoverable. Whether that means you must write off the relationship, is for you to decide, but it may be that with the money you spent you have bought a life free of a person that was never your friend in the first place.

That may be a price worth paying.  

Scottish Government needs to act to Protect Homeowners

Scottish Government needs to act to Protect Homeowners

If the Scottish Government are considering extending the Protections that were introduced by the Coronavirus (Scotland) Act 2020 beyond the 30th of September 2021, they should do what they failed to do last time and increase protections for Scottish Homeowners.

Throughout the Coronavirus Crisis, the plight of tenants has attracted more attention than that of Homeowners, to the extent you would be forgiven for believing there is no risk to homeowners or a greater risk for tenants.

However, this is not the case, and arguably, the risk to homeowners is greater now than it is for tenants.

Homeowners lack a Safety Net

Like tenants, homeowners are at the same risk of experiencing income shocks and have been as likely to have been furloughed, or made unemployed.

Also contrary to popular perceptions, the vast majority have no more financial security or stability than many tenants do. In addition to that, the safety net that is the UK Welfare State, barely exists for them.

Homeowners, do not have the same level of protections as Tenants: they cannot claim Housing Benefit or their Housing Costs when they claim Universal Credit. Discretionary Housing Payments, a discretionary benefit paid by local authorities, to help with housing costs, is not available to them; and the Scottish Government’s Tenants Support Hardship Fund, is only, as the name suggests, for Tenants.

The only UK benefit that exists for them is the Support for Mortgage Interest Payments Scheme, which you would struggle to call a benefit anymore.

Support for Mortgage Interest (SMI)

Since the last crisis (the Credit Crunch) the benefits of SMI have now been eroded under 11 years of Conservative Government, with the waiting time before someone can claim now being 39, rather than 13, weeks; in addition to that, whereas the payments received were previously a benefit, they are now effectively a loan secured over your home.

In addition to that, SMI does not even pay all of someone’s mortgage, but only interest up to the first 2.09% on mortgages up to £200,000.

Now for those who are in a position to have been able to benefit from historically low interest rates, 2.09% may seem more than sufficient, but this fails to acknowledge that across the UK there are millions trapped in higher rate mortgages, where the finance company’s standard variable rate is sometimes as high as 4-5%.

For those with those higher-level mortgages, or higher interest rates, the Scheme will not even pay the interest on their loans.

Coronavirus (Scotland) Act 2020

Now during this Crisis, unlike the last one, homeowners do appear to have been overlooked.

Last time around, there were working groups set up, Pre-Action Requirements were introduced through the Homeowners and Debtor Protection (Scotland) Act 2010, the Scottish Government’s Homeowners Support Fund was refreshed, with a Shared Equity Scheme introduced to compliment the existing Mortgage to Rent Scheme.

However, this time around, homeowners, appear to have been overlooked by the Scottish Government when drafting the  emergency legislation that was laid before the Scottish Parliament. Like with tenants, no eviction or repossession ban was introduced until December 2020; but in April 2020, tenants got the additional protection of landlords (both social and private) being required to give them 6 months’ notice before they raised court action against them.

Homeowners got no such protection and still don’t have any similar protection, despite it being within the legislative authority of the Scottish Parliament to require Mortgage providers to serve a 6 months, rather than 2 months calling up notice on homeowners before raising legal action.

The piece of legislation that governs this area of law is the Conveyancing and Feudal Reform (Scotland) Act 1970 and it is wholly with the legislative powers of the Scottish Parliament to amend it.

We cannot just rely on Lender Forbearance.

The reasons why Homeowners were overlooked when this emergency legislation was introduced, is not exactly clear. Possibly the thought of Homeowners losing their home did not occur to the Scottish Government.

However, it is also true at the time when Lockdown began, the UK Financial Conduct Authority was quick to act and issued guidance to all UK banks that anyone affected by Covid 19 should be offered a 3-month payment break. Some were then offered additional payment breaks. 

However, as we now enter the 14 month of this crisis, lender’s forbearance is wearing thin and we must remember that although many  were offered payment breaks, lenders on the whole did not freeze interest and charges on their loans. Also when people do begin making payments again, many lenders want higher monthly payments to catch up on missed payments.

For those who are continuing to struggle and who may still be affected financially by Covid, the risks that a lender may issue a calling up notice and raise a repossession action within 2 months is now a real danger and will only grow.

This risk can only increase as we come out of this public health crisis and the support schemes that were put in place, such as the Furlough and Self-employed Income Support Schemes are withdrawn. We will not know what the medium to long term effects are of this until March 2023, at the earliest.

Unemployment may increase and people may be forced to accept reduced hours of work or lower rates of pay as businesses look to recover. Against that background those that are struggling to get by will have pretty much no benefit system available to support them with their housing costs. 

It, therefore, seems inevitable that the Scottish Government will have to consider extending many of the protections in the Coronavirus (Scotland) Act 2020 for tenants and consumers to the beginning of 2023 or even longer. If they do, then they need to also think about placing homeowners on an equal footing with tenants and requiring any calling up notice to give 6, rather than 2 months notice of any intended legal action. 

 

Evictions beginning again across Scotland

Evictions beginning again across Scotland

As the majority of Scotland, from the 17th May, moves into Tier 2 under the Coronavirus Regulations, there is much to be rejoicing about. Being able to enjoy a pint in your local pub for one, without having to shield under the cover of a weather shredded canopy. Unfortunately, Scotland in May is not the best weather to be enjoying a pint in a garden. Nor is it the best time to be losing your home, if there ever is a best time. 

For some, however, that is what the ending of Lockdown will mean for them. Not the ending of worry and stress, but just the beginning of it.

We are not yet out this Coronavirus Crisis and although most of the emergency rules that were put in place to protect people and businesses will remain in force until the 30th September, the ones protecting tenants and homeowners from eviction and repossession are not amongst them.

Instead, from the 17th May, any area of Scotland that slips into Tier 2 will also see the ban on evictions also being withdrawn, including Glasgow, which is borderline Tier 3, but is still going into Tier 2, despite the First Minister saying she is concerned. [A last minute decision on Friday, 14th May now means Glasgow will remain in Tier 3 for the next week at least].

What Protections do Tenants have?

There will remain some protections for tenants, however. Landlords will still be required to serve 6-month Notices to Leave (private landlords) and Notice of Intentions to Raise Proceedings (Social Registered Landlords) before they begin any legal action. 

These must be served when your Landlord wants to evict you and take you to the First Tier Tribunal for Scotland (Housing and Property Chamber) (private landlords) or the Sheriff Court (social landlords). These protections will remain in place until the 30th September 2021. Previously landlords only had to give you 28 days’ notice, but these were temporarily extended due to Covid 19 (there are exceptions when your landlord wants to evict you for anti-social behaviour or if you have committed a criminal offence).

However, where your landlord has already served one of these notices on you and the six months has expired, if they now take you to the Tribunal or Court and obtain a Court Order, they will after the 17th May be able to begin eviction proceedings.

Where they have already obtained an Order allowing them to evict you, and your area moves into Tier 2 they may now be able to evict you.

What Protections do Homeowners have?

When a secured lender or mortgage provider wants to repossess your home, they must first serve on you a Calling Up Notice that gives you 2 months’ notice before they can take you to court and request the court provides them with an Order allowing them to repossess your home.

Once they take you to Court, however, and obtain an order, the procedure for removing you from your home is the same as it is for a Tenant.

What is the Procedure for Evicting you or Repossessing your Home?

If a Landlord or Mortgage provider wants to evict you, they must first serve on you a Charge for Removing, served by a Sheriff Officer, ordering you to leave the property. This must give you 14 days’ notice.

If you have still not left the property after those 14 days, the Landlord or Mortgage Provider must then arrange a Sheriff Officer to send to you a Notice of Removal, which must give you at least 48 hours’ notice of the day and time that the Sheriff Officer will attend your home and remove you.

What can you do to Prevent a Repossession or Eviction?

The most important thing you can do is seek advice as soon as you begin experiencing financial difficulties. However, even if you leave it to later, it is never too late to seek advice.

So that means even after a Notice from your Landlord indicating they want to take you to Court or a Notice from your Mortgage Provider telling you that they are calling up your Mortgage.

Ideally, you want advice and representation before your case is heard by the First Tier Tribunal or the Sheriff Court. It is in your best interest to be represented at that hearing. 

However, even if you have done nothing and a court order has been granted against you and a Charge for Removal, and even a Notice of Removal has been served, you may still be able to stop the eviction or repossession right up to the point before the Sheriff Officers remove you from your home.

Minute of Recall

Minutes of Recall are legal remedies that you can use up to the point before you are removed from your home. They can be granted if you were not represented at the Tribunal or Court Hearing, but can be complex, so you should seek advice from a solicitor or your local advice agency as soon as possible.

How Long do Court Order for Eviction and Repossessions Last?

When a Court or Tribunal grants an Order for your eviction or the repossession of your home, it normally has two parts. The first part allows the Landlord or Mortgage Provider to remove you; the other part is the part where they seek money, such as for rent arrears or your mortgage.

Normally, Landlords and Mortgage providers will seek to evict or repossess your home shortly after receiving the court order, using the above procedure.

However, in the case of Tenants, with Social Landlords, the Landlord, when the case involves rent arrears, must use the eviction part within 6 months of getting the Court Order (sometimes the Court can set a shorter period). However, under emergency Coronavirus Laws, they may get longer as the rules governing the eviction ban suspended the running of this 6-month period. This means where the Landlord got an eviction notice one month before the eviction ban, when it ends, he will still have another five months to use it, even though the eviction ban was first introduced in December 2020.

This means many Social Landlords in rent arrears cases, may be able to use Court Orders that, under normal conditions, would have been too old. 

 

Are Further changes Required for Minimum Asset Bankruptcies in Scotland?

Are Further changes Required for Minimum Asset Bankruptcies in Scotland?

The UK Government has announced several new changes that it intends to introduce for Debt Relief Orders (DROs), that apply only in England, Wales, and Northern Ireland.

These solutions are like Scotland’s Minimum Asset Bankruptcy Procedure (MAPs) and offer consumers with little income, and little to no assets, a solution for dealing with their debts and writing them off after a relatively short period of time. 

However, there are several key differences between the solutions and these differences will soon become more pronounced when changes proposed by the UK Government to Debt Relief Orders come into effect.

The Question is, then, is there more the Scottish Government should be doing to improve the Minimum Asset Procedure in Scotland?

Already, because of Covid 19, they have introduced emergency laws last year, that have now become permanent, and have improved the Scottish option in many areas, but still in one key respect, the level of income ignored, the Scottish solution still lags.

Maximum Debt LevelIncome IgnoredAsset LevelsCar ExemptionDuration Application Fee
MAP£25,000 (2)£0.00£2,000 (3)£3,0006 Months£50 (4)
DRO(1)£30,000£75£2,000£2,00012 Months£90

Notes

  1. Proposed changes
  2. In Scotland, Student Loans are ignored when calculating the maximum debt level
  3. No single asset can be worth more than £1,000
  4. Application fees are waived when someone is in receipt of a benefit. The vast majority of MAP applicants will pay no application fee in Scotland

Maximum Debt Levels

Both options are similar in the maximum level of debt you can introduce, however, the new proposed changes to DROs in the UK will mean up to £30,000 in debt can be included, whereas the maximum debt that can be included in Scotland is only £25,000.

However, in Scotland, where you have Student Loans, which liability for is not discharged in either solution, these are ignored when calculating the maximum debt levels. This for some will mean a MAP is a viable option in Scotland, when they have higher non-student loan debts, than it will in the rest of the UK, even when their non-student loan debts are lower.

However, this will not help those in Scotland without student loan debt, who may find if they lived in England could do a DRO, but in Scotland cannot. This, however, won’t prevent them using a Full Administration Bankruptcy in Scotland, which may only last12 months, like a DRO in the rest of the UK.

Income Ignored

This is one of the biggest differences between the two options, with DROs ignoring the first £75 of someone’s disposable income (what is left after their essential expenditure is taken off their income). In Scotland, no such provision is made, meaning if you have just £5 left each month from income that a contribution can be taken from, you cannot use the Minimum Asset Procedure.

It should be noted, however, that no contribution in either solution can be taken from benefits, so the only income that a contribution can be taken from is non-benefit income.

This undoubtedly is a shortcoming in the Scottish Solution, as what it means is in England, Wales, and Northern Ireland, where you have under £75 per month, you can keep it. In Scotland, not only can you not keep it, but you cannot use the Minimum Asset Procedure. You would then have to use the Full Administration Procedure (the equivalent to Bankruptcy in the rest of the UK) and unlike in England, Wales, and Northern Ireland, you would need to pay the money for four years and not just three.

Assets Levels

Although in relation to both solutions these look the same, with the maximum assets you can own being anything up to £2,000, in Scotland, there is one key difference in that no one asset can be worth more than £1,000.

However, in Scotland’s defence the extent of assets that are disregarded for the purpose of MAPs are more extensive (see here).

Car Exemptions

Scotland since 2010, has set the value of a car that is exempt for the purposes of a MAP and Bankruptcy at £3,000 (although it has not increased since then), whereas in the UK the value of car exempt for a DRO will only be set at £2,000.

The only other caveat in Scotland worthy of note, is the applicant must show they have a reasonable requirement for the car.

Duration

This is the other big difference between the solutions, in that in a MAP in Scotland, the solution only last 6 months, and after that the consumer becomes debt free. In the rest of the UK, the solution lasts 12 months.

Although it should be noted, in Scotland, even if you have £5 disposable income per month, you will not be able to use the Process and instead will have to use Full Administration Bankruptcy and pay for 4 years.

Fees

The other big difference now, since Covid 19 emergency legislation was introduced, is the amount it costs someone to apply for the procedure. In the rest of the UK, the fee is £90 (as it was for Minimum Asset Bankruptcy prior to Covid 19). In Scotland, however, that fee has now reduced to £50 and where the applicant is in receipt of several different benefits, the fee is waived. This means almost no-one in Scotland will pay an application fee, whereas in the rest of the UK, even after the new changes are introduced, the fee will remain £90.

Conclusion

There are several differences between both solutions, as can be seen, but on the face of it where the Scottish solution lags, when considered more widely, it is not as far behind Debt Relief Orders as it may appear. In actual fact, in many respects, MAPs appear superior.

However, it does appear the big difference in relation to both is the difference in how disposable income is treated, with many consumers having to use Full Administration Bankruptcy in Scotland for relatively small sums of disposable income.

Considering this may result in them having to pay for four years, this appears to be disproportionate; and from a policy perspective may be counterproductive. It may result in low-income households giving up relatively small additional sources of income, like part time jobs, just to avoid being excluded from the Minimum Asset Procedure.

The arguments in favour of Scotland, therefore using a similar approach to the rest of the UK and disregarding the first £75 of disposable income, appears overwhelming

The Money and Pension Service have questions to answer about Stepchange

The Money and Pension Service have questions to answer about Stepchange

Less than a year after the Money and Pension Service announced they were giving Stepchange, the Debt Advice Charity, a share of £7.5 million, to help increase their capacity to provide debt advice, they have announced they may slash up to 10% of their debt advisers across the UK, with demand for their services expected to rise. 

In June 2020, the Money and Pension Service (MAPS) split £7.5 million of funding between Christian Against Poverty, Stepchange and the private debt management Firm, PayPlan (which is a trading name for Totemic Ltd).

As explained in my previous blog (Stepchange Redundancies: Is it about Covid and a Flawed Funding Model?) Stepchange CEO, Phil Andrew, in a blog (Exceptional Times, Exceptional Measures, and the Future), explained the charity is consulting on redundancies.

In his blog, Phil Andrew, justified the decision by claiming the Stepchange funding model (known as Fair Share) was flawed and as personal levels of debt and the amount people pay to it drops, the Charity’s income drops.

However, as I was able to show in my blog, Stepchange’s income has been increasing year on year for the last five year, and at the end of 2019, just before Covid began, the Charity had almost £21 million in general reserves. In fact, their Fair Share Funding has allowed them to grow into one of the UK’s more wealthiest debt charities, with income of over £54 million in 2019.

Is Fair Share Flawed?

And if additional proof of the sustainability of the Fair Share funding model is required, we only need to look at the other recipient of MAPS public funding, Payplan, who in their 2019 accounts, reported a profit of just over £2 million and held over £8 million in their private shareholder fund. 

Quite clearly the Fair Share Model of both Stepchange and Payplan has served both well.

Why the Money and Pension Service chose to approve public funding of a private debt management firm, with over £8 million in private shareholders fund, whilst public and third sector agencies had their funding cut, needs to be answered.

However, since that blog, Stepchange advisers have been contacting me to express their surprise that they may be about to lose their jobs, as the charity, only last year, went on a massive recruitment drive to cope with the anticipated rise in demand for their services. 

This recruitment drive, it appears, was largely funded by the additional £7.5 million of funding that was made available to Stepchange, Payplan and Christians Against Poverty last year (Additional £38 million for debt advice funding in England goes into action).

The purpose of this funding according to the Money and Pension Service was to recruit another 500 advisers across England, with CEO of the Money and Pension Service, Caroline Siarkiewicz stating only last August:

“In the wake of coronavirus, our first priority has been to maintain capacity in existing debt services and it’s great news we’ve been able to agree a funding package to support three major operators to maintain much of their pre-pandemic service levels. We know Fair Share is only one funding source and we stand ready to react to other challenges debt advice providers might face as a direct result of the pandemic. Over the coming months we will also be working to increase the availability of debt advice services by supporting the sector to train up hundreds more debt advisers”.

What about MAPS Statutory Duty?

However, less than 12 months after that huge recruitment drive it now appears Stepchange is slashing that capacity, which begs the question, what has happened to their share of the extra £7.5 million that they were provided with and what has the Money and Pension Service got to say about Phil Andrews announcement?

Under section 3 of the Financial Guidance and Claims Act 2018, the Money and Pension Service has a statutory duty to provide members of the public in England with free and impartial information and advice on debt. If less than a year after you provide significant levels funding to one of the UK’s leading debt charities, they announce they are slashing that  additional capacity, you have questions to answer.

Clearly the problem here is not Fair Share as a funding model, but the rapid increase in the number of staff recruited by Stepchange, with the added costs to their wage bill (which was £41 million in 2019). One would think that since MAPS last year expected demand for debt advice to increase 50% over three years, peaking in 18 months, why would your plans to increase capacity only be for 12 months? Surely the wheels should not be coming off the plan after only one year?

Of course, the timing of Stepchange’s announcement may be fortunate because we are approaching the 9th June, when last year Stepchange’s CEO, Phil Andrews, welcomed the announcement by MAPS of an additional £38 million for debt advice to help with Covid 19.

It may be that MAPS is about to make another big announcement and Stepchange may again be the fortunate recipient of additional funding. But if this is the case, do we need to go through the pantomime of putting hundreds of debt advisers through the fear of losing their jobs? Surely its not unreasonable to ask that when Stepchange and MAPS agree a strategy to massively increase capacity for debt advice, that they draw up plans that may span a period longer than 12 months?

And if demand has not peaked as quickly as anticipated, with the second, sort of unexpected lockdown, surely you would then just furlough as many staff as you can to preserve your fighting fund for later in the year, when demand is rising again? 

The Money and Pension Service need to step into the space that the Stepchange announcement has opened up. They need to explain what their strategy was, how much did Stepchange receive, how long was it for and how many additional advisers was it expected to employ.

They also need to explain the logic behind giving reserve rich, debt charities and private firms (who reported £2 million in profits in 2019) more money, whilst front line Citizen Advice Bureaux and Independent Advice agencies struggle to keep their doors open.

Stepchange Redundancies: Is it about Covid and a Flawed Funding Model?

Stepchange Redundancies: Is it about Covid and a Flawed Funding Model?

Stepchange, the UK’s leading Debt Advice Charity has announced, that like many organisations across the UK, when the current Covid crisis ends, and the Furlough Scheme draws to a close, some of their front line telephone staff may not have jobs to return to. 

This may have been predictable for many industries in the UK, particularly the hospitality, retail and tourism industries. However, the announcement by the CEO of Stepchange, that they are possibly going to lose 10% of their employees as the Covid debt crisis begins, will come as a surprise for many, not least Stepchange employees themselves.

What is the Stepchange Narrative

The reason’s why Stepchange is claiming these cuts will be necessary is because they have discovered, after nearly 28 years of operating, that their funding model is flawed.

This is the funding model, known as Fair Share, which has allowed them to grow into one of the UK’s wealthiest and largest debt advice charities. The way it operates is that for every £1 of debt their clients pays back to a bank, they receive a percentage in return (believed to be around 10%).

Stepchange’s CEO Phil Andrew explained why this model is flawed in a recent blog published by the Charity. He pointed out that as debt levels for their client’s drop and the amount people are paying to their debts falls, the level of fees the Charity received also reduces.

He also pointed out that not every creditor contributes to the Fair Share Scheme and this is true for Local Authorities and Utility Providers.

However, across the UK and certainly in Scotland, Local Authorities are some of the largest funders of local advice agencies, such as Citizen Advice Bureaux, who do not benefit from the Fair Share Scheme. It cannot, therefore, be said they do not contribute to the cost of providing debt advice and many of these charities provide face to face services for clients that Stepchange don’t.  Also none of these advice agencies have been able to benefit like Stepchange has from the Fair Share Scheme, as Banks only allowed Stepchange and another firm, known as Payplan, to participate in it. 

Also in the Charity’s accounts for 2019, although utility providers don’t participate in the Fair Share Scheme, they did contribute £596k to Stepchange through donations.

In actual fact the 2019 Accounts show that Stepchange customers paid almost £436 million through Debt Management Plans to their Creditors and the Charity received over £48 million from their Charitable activities (largely Fair Share). They also earned another £5 million from other trading activities and received another £403k in commissions from insolvency practitioners and mortgage advisers for referring clients onto them.

It is also appears as part of their charitable activity income, Stepchange received £3.7 million from the Money and Pension Service and UK Home Nation Governments, with nearly £1 million (27%) of that coming from the Scottish Government, despite Scotland only having approximately 10% of the UK population.

Overall, in 2019 Stepchange did experience a small overspend, and their wage bill did add up to over £41 million (72% of their total expenditure; or 75% of their total income). However, by the end of 2019 they still had almost £21 million in general reserves, so the overspend was easily absorbed by the charity.

In actual fact, when you look at the historic accounts of the Charity it is hard to see where the flaw is in their current funding model, with their income increasing year on year for the last five years (between 2015 and 2019 income increased by 18%).

So Why Doesn’t this Crisis add up?

The most obvious reason this crisis doesn’t add up, is because it is hard to see that Stepchange is in a Crisis or that the 10% of cuts to staff are even necessary, as claimed by the CEO Phil Andrews.

It is certainly true that like many debt charities and private debt advice firms Stepchange will have seen a reduction in demand during the Covid Crisis due to the extra forbearance that has been shown by the banks and the UK Furlough Scheme. These measures will to a large extent have been protecting people from the effects of problem debts. Some clients in existing Debt Management Products will also have missed payments to the charity, and if the creditors don’t get paid, nor does the charity.

To what extent this has occurred is not clear, but statistics released by the Scottish Government in relation to their Debt Arrangement Scheme shows that although missed payments increased, from a monthly average of 6% during 2020, they peaked at 15% only in December (when a seasonal increase in missed payments would be expected) and for most of the year never rose higher than 12% (approximately double normal missed payment rates). 

However, none of this suggests a catastrophe and there is no reason to believe Stepchange’s missed payment rates during 2020 would have been much different. Stepchange may have lost some fees, but they also, as their CEO has stated used the Furlough Scheme during 2020, so have been receiving additional support from the UK Government.

They also continued to operate and took on new cases, albeit at lower rate than they expected. They do, however, have a huge pre-existing Debt Management Book that will still have been operating during 2020 and generating fees for them (albeit with increased missed payments). It is also believed they will have been the beneficiaries of the decision by the Financial Conduct Authority to increase the Debt Advice Levy on Banks at the beginning of the Crisis and more than likely will have received additional funding from the Money and Pension Service and the UK Home Nation Governments.

In fact, it wouldn’t be unreasonable to think that 2020 may well have been quite a comfortable year financially for Stepchange. Certainly, there were opportunities to subsidise their operating costs, attract additional grant funding and still benefit from their existing work in progress.

Also when the Furlough Scheme and other income schemes are brought to an end, as expected later this year, and banks roll back  the forbearance  they have been offering their customers, demand is likely to increase and it has been forecast this will continue significantly so for the next 2-3 years.

This, then begs the question, why do Stepchange need to cut their staff by 10%? Especially, as that will only reduce their capacity at a time when demand will be on the rise. It makes no strategic sense and Stepchange, as we have seen, are large and wealthy enough to weather out the type of storm we saw in 2020.

What is the Pulse?

It may well be the answer is in the Pulse, a new Debt Advice Platform that Stepchange have been developing and in their 2019 Annual Report described as a debt advice platform and customer relationship management system, that will increase their capacity. Arguably, it may also reduce their need for front line telephone advisers.

It certainly was not an inexpensive investment for the charity. Remember the overspend the Charity had in 2019? Well, it appears the development of Pulse may have contributed to that overspend, being reported in 2019 as costing almost £2 million in Transformational costs.

This begs the question whether the proposed 10% cut in Stepchange staffing numbers is really the result of a flaw in Stepchange’s funding model and the Covid 19 Crisis; or is this just a case of Covid 19 being used to make cuts in staffing numbers that were always planned with the rolling out of Pulse?

There certainly does not appear to be an obvious flaw in the Stepchange funding model. They are definitely in a position most debt charities would envy.

So where is the Crisis? What Crisis?

So, is there a Crisis in debt advice funding in the UK and a lack of capacity? Yes, there is, but it is not one that Stepchange has been struggling with, unlike local Citizen Advice Bureaux and local authority funded services.

Many of these agencies have seen real cuts amounting to up to 50% over the last ten years, with many of those cuts being accelerated over the last five years, whilst Stepchange seen their income increase.

It is my suspicion that Stepchange are doing what many businesses are doing: using Covid 19 as an opportunity to re-organise and transform themselves in a way that will leave tens if not hundreds of thousands unemployed and struggling to pay debts and bills.

I also suspect Stepchange, however, is facing a real crisis and it is not with the Fair Share Scheme, which has rewarded them so well to date.

The real crisis Stepchange face is when the UK Government launch their own Statutory Debt Repayment Plan, like the Scottish Government’s Debt Arrangement Scheme. For the first time many organizations will be able to participate in that Scheme and compete with Stepchange on an even playing field, in a way that was never possible under the Fair Share Scheme (which only Stepchange and PayPlan were able to access).

This will mean they will face competition from other charities and private debt management firms like they have never before.

If any evidence of this is required, we only need to look at the Scottish Debt Arrangement Scheme, which in 2019 introduced a statutory form of the Fair Share Scheme and returns 20% of everything paid by clients to providers like Stepchange (almost double the traditional Fair Share Scheme). Re-launched in November 2019, recent Debt Arrangement Scheme statistics produced by the Scottish Government show that private sector provider Carrington Dean, in 2020, despite the lockdown and also having furloughed some of their own staff, delivered three times the amount of Debt Payment Programmes that Stepchange did, and that was without Money and Pension Service or Scottish Government funding.

So if they can make the service profitable, how can Stepchange not?

If this is now replicated across the UK, with the UK Scheme, Stepchange may face their biggest crisis yet in the form of competition like they never have had.

The worry is this will create a real funding crisis for them and they will be forced to return to the Money and Pension Service and the UK Home Nation Governments, looking for increased funding that will leave less for those front line agencies that have been in crisis for the last ten years.

Debt Advice Guide

Debt Advice Guide

Please download my free electronic Guide for Scots Struggling with Problem Debts. 

It contains links to online tools, videos and information on how to deal with problem debts.

In the Guide you will find information on 

  • How to Maximise Income.
  • Draft a Budget.
  • Different Debt Repayment Strategies.
  • Debt Enforcement Procedures; and
  • Formal Debt Solutions

Please wait while flipbook is loading. For more related info, FAQs and issues please refer to DearFlip WordPress Flipbook Plugin Help documentation.

Are Klarna and other BNPL Lenders the New Wonga?

Are Klarna and other BNPL Lenders the New Wonga?

Stella Creasy, the Labour MP who became a champion of the campaign against Payday Lenders, has now compared “Buy Now, Pay Later” (BNPL) credit providers with the high-cost lenders that exploded across the UK after the last financial crisis.

Klarna, Clearpay, Laybuy and Paypal she suggested could become the new Wonga’s of this crisis.

And alongside another 70 MPs, she has now tabled an amendment to the Financial Services Bill, that is passing through the UK Parliament, calling for them to be better regulated within three months of the Bill becoming law.

This would force the UK’s Financial Regulator, the Financial Conduct Authority (FCA) to accelerate its current plans to regulate this new market, which otherwise could take 18 months.

Any new regulations will be vital if UK Consumers are to be protected from what is currently a poorly regulated financial market and should take the form of limiting the number of agreements that are exempt under the Consumer Credit Act 1974.

Are there Similarities between Payday and Buy Now Pay Later Lenders?

Stella Creasy is correct there are similarities between Payday Lenders and Buy Now Pay Later firms, and many debt advisers have been warning if we don’t learn from the past, many UK Consumers will indeed have to pay later.

The first similarity is for many BNPL firms, the pandemic has been what the Credit Crunch was for the Payday Lending industry: an opportunity.

In the aftermath of the Credit Crunch, many traditional sources of lending were heavily restricted for consumers.  Many found banks were reluctant to lend and were reducing their overdrafts, whilst many credit card firms reduced the credit limits and even cancelled the cards of customers who had never missed a payment. Some creditors, on the other hand, just did not know who they had been lending to and what risks they had exposed themselves to. The Bank of England, also had most of them on a choker leash, having bailed them out at the expense of the UK public.

Similarly, even before this pandemic began many lenders had already began restricting access to their credit facilities, wary of an increasingly interventionist Regulator, the Financial Conduct Authority. They were warned about irresponsible lending, not carrying out proper creditworthiness checks and effectively farming many of their customers in persistent overdraft and credit card debt.

Many of their Payday lending competitors, have also now left the consumer credit market, many through liquidation, after collapsing under the weight of mis-selling claims and tougher regulation.

Other firms, like Amigo are currently praying for the FCA to give them a last-minute reprieve.

In addition to that, consumer credit borrowing from many traditional sources were already maxed out and coming to an end for many consumers as we came to an end of this consumer credit cycle which began in 2014/15. As with the last financial Crisis, they were weekly reports in the run up to this pandemic by the UK’s banks and financial regulator saying they were not concerned with levels of indebtedness. It was all very manageable.

Since then and the beginning of the pandemic, many lenders have now had to offer their customers payment breaks, because they cannot afford to make monthly payments.

Against such a backdrop, the lightly, to non-regulated, Buy Now Pay Later firms have arrived with their fun, lifestyle marketing campaigns, and easy to access credit facilities. It does not matter if you have a poor credit score, nor does it matter if you are already over committed, with light touch affordability checks and non-regulated agreements, you can buy now and pay later.

This is a classic case of financial markets moving faster than regulators and like with Payday Lenders, if we don’t act quickly, the damage will already be done to the finances of millions by the time we do.

The Rise of Buy Now Pay Later Lending

This is not scaremongering, as just over Christmas, UK consumers spent £2.3 billion using Buy Now Pay Later (BNPL) facilities, whilst since the pandemic, it is believed that consumer spending, using BNPL, increased by 35%.

The fact is the unregulated products that many of these firms are offering present a risk to consumers, even if the Lenders claim they don’t. Deals such as pay within 30 days or pay over 3 months are still debts if they cannot be paid: the fact they don’t charge interest and fees doesn’t remove the risk. The simple fact is for these products, the business model is to encourage people to buy (and, therefore borrow) more, so the BNPL Firms can charge the retailers a fee. The dangers of people becoming over indebted is, therefore, real.

Such deals are possible because they take advantage of UK Consumer Credit Law that exempt fixed sum loans from regulation providing payments are paid within 12 months and no interest or significant charges are applied to the debts.

Similar exemptions also apply for running credit agreements, which allow consumers to spend within certain credit limits, providing interest and charges are not applied, and the number of monthly payments are less than three.

However, contrary to popular belief not all credit agreements being offered by Buy Now Pay Later lenders, like Klarna, are unregulated. Some, where they do not meet the criteria for exemption, are governed by the Consumer Credit Act 1974, which means proper affordability checks should be carried out, and if they are not, those lenders could face the same mis-selling claims that pay day lenders did.  Another possible similarity in future?

FCA Must Regulate and not in 18 Months

The reality is it is now time for the Financial Conduct Authority to act and they should do so to reduce the number of agreements that are exempt under the Consumer Credit Act.

The number of agreements that qualify as exempt was expanded in 2015, to reduce the number of products the FCA had to regulate. This was understandable at the time, as they were taking over the regulation of 50,000 consumer credit firms.

However, that time has now passed, and as we have seen and will see, opportunistic, new consumer finance firms will always find new and innovative ways to get ahead of the Regulators.

They may claim they want regulation, but that is usually only if it is on their terms. However, if this financial crisis and the last one has taught us anything, it is like Coronavirus, if we are still talking about it, it’s probably already overdue.

Five Ways to Pay off your Debts

Five Ways to Pay off your Debts

As we begin a new year, and set new resolutions for the year, many will make their target for 2021 to pay down their debts.
We, therefore, look at five ways that you can pay down your debt.

The Snow Ball Approach

The Snowball approach is a simple one. It involves you paying down the debts that you are paying most for, first. The idea is to reduce how much your debts are costing you each month.


Normally, this will mean paying off the ones with the highest rates of interest first, but not always.

Sometimes, even debts with lower levels of interest can cost you more each month, if the balance is higher.


You still must pay all your ongoing liabilities as normal, such as your gas, electricity, council tax, rent, or mortgage.


You must also make sure you pay the minimum amounts towards your other debts each month, before you pay everything else to your most expensive debt.


As you pay off each debt, you move onto the next one, until you have none left.

The Money and Balance Transfer Approach

The Money and Balance Transfer Approach is a form of refinancing and involves using credit cards, so is only likely to be possible if your credit rating is good enough to successfully apply for a credit card. Alternatively, you may have one that you have not used.

A Balance Transfer is when you transfer one credit card balance over to another credit card, to take advantage of an interest free period.

A Money Transfer is similar but involves transferring cash from a Credit Card over to another account, such as an overdraft and using that to pay off the balance on the other account.

Again this is with a view to taking advantage of an interest free period.

The two things you must watch for is there will normally be a transfer fee, that will be a percentage of the money you borrow. You just need to make sure that will not be more than you will pay in interest if you do not transfer the money or balance. You also must make sure you use the interest free period to reduce your debt and stop using credit.

The Consolidation Approach

The next approach is a common one, and that is to consolidate your debts, so you make only one payment each month.


This involves taking out a loan to repay all your other debts. You then just have one debt to pay each month.


The problem with this approach is you can end up owing more, even if you do not borrow any more than you owe. The problem is you will have to pay the interest on the loan, which means you will likely have to repay more than you originally borrowed.


Also, the danger is if you keep borrowing from other sources of credit, such as credit cards and overdrafts, your debts can quickly become a problem again.

The consolidation Loan approach can help you deal with your debts, but it is also the one that is most likely to fail if you do not address the underlying reasons why you were using credit in the first place.

The Incremental Approach

The Incremental Approach is like the Snowball Approach, but in reverse. The idea is also to achieve the same outcome as the Consolidation Approach, only having one debt to pay, then none.

The way the Incremental Approach works is you pay off your smallest debts first, then when that is paid off, move onto the next one. This may be more costly than the Snowball Approach, but you will reduce the number of debts you have sooner, which can sometimes make it easier for people to manage their monthly payments.

You still must pay all your ongoing liabilities and maintain minimum payments to all your other debts.

The Formal Debt Solution Approach

The Final option is to seek advice from an advice agency and use a formal debt solution.

This can mean the Debt Arrangement Scheme, a Protected Trust Deed, or a Sequestration, which is the name for Bankruptcy in Scotland.