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.