The future of debt advice funding
The Money Advice Service (MAS) has invited Peter Wyman to carry out a review of debt advice funding.
MAS estimate £203m is spent annually on debt advice. Some £60m of this is provided by creditors through fair share contributions (FSC), paid in proportion to debt repayments following advice, while £48m comes from the financial services levy distributed by MAS. The remainder comprises £45m from local authorities; £15m in CSR donations and £35m paid to fee chargers by people in debt.
With consumer borrowing increasing by 10 percent annually and uncertain economic conditions ahead, the need for debt advice seems certain to grow. Wyman has been asked to take a view on how much debt advice will be needed, at what cost, how it should be funded, and by whom.
Answering the first question requires a working crystal ball, but we will probably have to rely on economists. Recommending who should put their hand in their pockets is contentious. Debt advice funding is discretionary for local authorities and there is no longer much room for such spending anywhere in government. People in debt should not have to pay for advice. Therefore the last agencies standing are creditors, paying either through the levy or voluntary donations, including FSC.
FSC is voluntary and most of it is received by three agencies, StepChange Debt Charity, PayPlan and Christians Against Poverty. FSC has the advantage of transparency: in 2016 for every £1 creditors donated to us, our clients’ debts were reduced by £10. Our clients reduced their debts by more than £500m, including more than £400m from debt management plans which are the basis for FSC. It provides funders with transparency about our efficiency and effectiveness. Its recurring predictability allows us to plan and scale up: our FSC income has grown by 22 percent in five years enabling us to respond to a 62 percent increase in the number of people seeking help over the same period.
FSC not only funds advice but also ongoing support, such as the annual reviews we carry out for our 200,000 plus clients. Because it is voluntary, not everyone pays, although last year we received nearly 90 percent of what we asked for. It does not work for all creditors, e.g. utility companies, but in many cases they make alternative donations. It is linked to debt repayment and we use the income to support a much larger number who cannot repay their debts – a cross subsidy which will be stretched if more people cannot repay their debts in the future.
The levy is a tax on some, but not all, beneficiaries of debt advice. It will not be easy to extend its scope. Public funding is by nature time limited whereas FSC is more secure, allowing for more rational planning and spending.
FSC is growing because it works. We need both FSC and the levy and both need to grow. The levy should play a bigger role in supporting those debt solutions which do not involve repayment, such as debt relief orders (DROs) which each cost us about £300 to set up. The client pays £90 to the Insolvency Service who pass just £10 to us. We fund DROs largely from FSC while others are fully levy funded and it would be more transparent if they were all funded from levy.
Wyman could legitimately argue that both the levy and FSC should evolve – to improve transparency and fairness, reward value and encourage the best client outcomes. He could also look to reward businesses that lend well and create less problem debt.
MAS’s move to a commissioning role should ensure funds are directed to the area of greatest need and used as efficiently as possible, creating a better debt advice market place.
The sector needs a diverse set of providers competing on client outcomes and efficiency, minimising gaps and duplication. We need to become more efficient – resources are scarce – and that is why StepChange is investing in a major business process transformation which will improve our efficiency and provide a better service to clients and creditors.