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Where Has The Scottish Debt Advice Levy Gone?

Where Has The Scottish Debt Advice Levy Gone?

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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

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.

 

 

Learning to Breathe: The English Way

Learning to Breathe: The English Way

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Scottish money advice services should pay particular attention to the plans of the UK Treasury for statutory debt management and breathing space schemes for England, Wales, and Northern Ireland.

The schemes, which will not be extended to Scotland, as they fall within areas devolved to the Scottish Parliament, are already provided for by the Debt Arrangement Scheme (DAS) and the Statutory Moratorium process contained within the Bankruptcy (Scotland) Act 2016.

However, early Indications are, that the UK schemes are promising to surpass Scotland’s 14-year-old DAS Scheme in their forward thinking and their protection for financially distressed consumers and may provide a roadmap for improving the Scottish scheme, which in recent years has been struggling to remain relevant.

Length of Breathing Space and Freezing of Interest

The first proposal for the UK scheme, which is worth mentioning, has been called for by Stepchange, and is for the 6-week protection period, that currently applies to Scottish Moratoriums, to be extended to 52 weeks for UK debtors.

Also during that period, UK consumer champion, Martin Lewis, has called for consumers to be protected not just from enforcement action, but also from interest, fees, and charges being applied to their debts (MSE Call on Government to Give People in Debt Real Breathing Space).

If implemented, this would be an improvement on the current position in Scottish moratoriums, which do not freeze the interest and charges on debts (I argued for such a proposal in 2013, in response to the rise in payday lending, but the Scottish Government rejected it at the time, arguing the balance in favour of debtors had gone too far – see Civic Scotland Owes Scotland).

Recognising Debtor Repayments

Another area relates to a recommendation of the Money Advice Service in their recent report: UK Debt Solutions – recommendations for change, which has called for further exploration of debt ‘rehabilitation’, including better recognition of debt repayment.

It is a simple fact in Scotland, regardless of how much the Scottish Government promotes the Debt Arrangement Scheme over other solutions, bankruptcy can have a less damaging effect on someone’s credit rating than repaying their debts can. In bankruptcy, the debtor’s liability for their debts are ended when the debtor receives their discharge, normally after one year; whereas the person who takes ten years to repay their debts, must accept their accounts will show as being in arrears for that length of time (and their account payment history may appear for another six years after that).

Lack of Capacity

Finally, however, it may be that Scotland still has something to teach in relation to statutory debt repayment schemes, other than the mistakes we made.

It is quite clear that the UK will face the same problems that Scotland has, in that supply for free services is being outstripped by demand and the creation of a statutory scheme is likely to add to that demand.

In Scotland, it was not until after 2011 that the Debt Arrangement Scheme took off, when rules allowed greater opportunity for the private sector to participate. However, the practices of some parts of the private sector, particularly in relation to fees, are as much a cause for concern as they are elsewhere in the UK in relation to debt management plans.

It is partly for this reason, the Scottish Government have indicated they will consult on the introduction of a form of the Fair Share Scheme which is operated voluntarily by the UK clearing banks with organisations like Stepchange and Payplan.

The simple truth is, that although organisations like the Money Advice Trust appear to want to restrict provision of the service in the UK to free providers (Making the Treasury’s breathing space scheme as effective as possible), the capacity of the private sector will be required, although this does not mean services cannot still be provided on a free to consumer basis.

In conclusion

Scotland may have led the way in the UK with statutory debt repayment schemes and breathing space processes; however, that doesn’t mean we have a monopoly on knowledge. There are still things we can learn, as it is certainly true the Scottish schemes are not meeting expectations.

Stepchange call for Reform of Debt Arrangement Scheme

Stepchange call for Reform of Debt Arrangement Scheme

UK debt charity Stepchange has called for the Scottish Government to reform and extend the Debt Arrangement Scheme to make it more available to hard pressed Scottish families.

Following on from my report into the Debt Arrangement Scheme last week, a Stepchange spokesperson speaking in The Herald said:

 “Expanding the DAS would give people time to get back on their feet without the worry of their debts spiralling out of control. By extending DAS, the Scottish Government would give people the best chance of getting themselves back into a position where they can start making payments on their debts.”

However, as I showed in my report, last year Stepchange only set up 424 debt payment programmes under the Debt Arrangement Scheme in 2015/16, down from the 632 they set up in 2014/15.

The Debt Arrangement Scheme has seen a substantial reduction in the number of cases proposed and approved since April 2015 after the Scottish Government introduced new rules that calculated how much people had to pay towards their debts in the Scheme.

In the first year after the rules were introduced, 2015/16, the number of cases reduced by 51%, and only increased in 2016/17 by 9%, meaning the numbers are still down by 46% from the 2014/15 figures.

In my report I called for the Scheme to be extended and reformed by:

  • reforming how the Common Financial Tool is applied to debtors entering into a Debt Payment Programme;
  • removing the requirement all debts had to be included, to allow priority debts like mortgage and rent arrears to be dealt with differently; and
  • by allowing more firms to become payment distributors as part of the Scheme