*First published in the Herald under the title Free debt advice must be properly funded.
The announcement that the debt charity, Christians Against Poverty (CAP), are now unable to take on new clients until after the new year is a body blow for the free debt advice sector in Scotland.
Although CAP have not attributed a lack of funding as their problem, the reality is many of the advice agencies left to serve the clients CAP would have saw, are facing themselves an existential threat from a lack of funding.
The largest funders of free debt advice in Scotland has always been local authorities, but facing their own challenges, they cut their funding for free debt advice by 45% between 2014 – 2017(Improvement Service).
With both consumer and council tax debts now on the rise, the need for the Scottish Government to form a comprehensive strategy for funding free debt advice is greater than ever.
Some steps have been taken by laying new Regulations in front of the Scottish Parliament. These propose increasing the amount creditors pay from 10% to 22% when someone enters into the Debt Arrangement Scheme (DAS), Scotland’s formal debt repayment plan. The hope is some of these funds will be returned to free advice agencies.
However, the proposals are inadequate as they will only apply to new cases, and don’t address the issue of how 7,000 existing cases, being operated by Citizen Advice Bureaus and Local Authorities, will be paid for.
These cases return £15-20 million each year to banks, credit card companies, local authorities and HMRC, but are dependent on advice agencies being adequately funded.
If the Scottish Government, however, were to amend these regulations, so the new fee structure could be applied to existing cases, an extra £2-3 million could be raised immediately for free debt advice in Scotland.
However, it is not enough for the Scottish Government to look at just raising funds from one solution, as that creates the risk that solution may be mis-sold by unscrupulous firms and services in order to generate fees. They must ensure advice agencies are properly funded regardless of the solutions the client uses; or indeed doesn’t use.
The emphasis must be on ensuring consumers receive best advice.
Another funding model I have proposed is to create a Scottish Debt Advice Levy that can be applied to all formal debt solutions.
A recent Working Group established by the Scottish Government considered this proposal and recommended the Scottish Government should consider it.
The idea is the Levy would aim to recover some of the costs of free debt advice from those who benefit from it, namely the creditors. In a sense applying a polluter’s pay or fair share model.
With £74 million being paid last year to lenders via formal debt solutions, even after private insolvency firms and the Accountant in Bankruptcy took tens of millions in fees, the levy would aim to recover some of the costs of the free sector, as presently they receive nothing.
Such a model would also benefit creditors, as evidence shows when free debt advice is under capacity, for every £1 invested, between £4 and £9 is returned to creditors.
Even a 5% Levy, therefore, would not only help fund free debt advice in Scotland, but help return tens of millions to creditors each year.
The truth is there is no commercial reason for not funding free debt advice properly; and significant political reasons why the public purse should not bear a disproportionate burden in relation to the cost.