Long-term quality over short-term quantity
12 August 2019
Henry Aitchison, Head of Policy at CSA, talks debt advice funding and CSA Member contributions.
There is supposed to be a curse: may you live in interesting times. Well, ignoring the wider political landscape - if that’s remotely possible - it’s been an ‘interesting’ few months.
The government has been driving relentlessly forward on its Breathing Space and Statutory Debt Repayment Plans both of which will be effectively underwritten by firms that are owed money (and the debt is unlikely to be ‘repaid’ though it would be settled). The latest batch of regulatory and related fees have been unveiled by the FCA and, in the words of Yazz, ‘the only way is up’. Creditor letters regarding defaults have been described as ‘thuggish’ despite creditors, and those acting on their behalf, having absolutely no choice as to the content and having complained robustly about that fact because of the effect on consumers for many years). And to cap all that, Sir Hector Sants is reportedly minded to demand a further £100 million from industry for debt advice1.
The Credit Services Association’s (CSA) chief executive, Peter Wallwork, recently expressed our dismay at Sir Hector’s reported comments. The key objection was that there was ‘little or no transparency on how effectively current funding is spent, who actually pays or understanding of why other sectors which contribute to the household debt position are not also paying.’
We’ll gloss over the fact that back in March, despairing of getting any clarity from other sources, we published our own rough estimate of contributions to the free-to-client debt advice sector from all sources. This was the result of poring over reports, claims and company records. Imagine our surprise when the official figures appeared shortly afterward which seemed to broadly align with ours. Estimates will vary slightly, but it seems that financial services are contributing about £120 million out of about £180 million, one way or another.
Where things start to go sour, hence our continuing dismay, is that there are still a lot of unanswered questions about how that money is being spent and what value is being achieved. We’ve been calling for that for some time, both from the organisations funded and from the Money and Pensions Service (MaPS). And yet, to misquote the character Captain Marko Ramius in The Hunt for Red October, we have been deafened by the sound of their silence.
Industry getting hit with demands for more money is nothing new. But another £100 million without showing why would be a little startling. Added to year on year increases in regulatory and other costs and the potential effect of the Government’s Breathing Space and Statutory Debt Repayment Plan (industry will pay for the debt relief, the contract value reduction and the cost of administration!), it begins to look a little unreasonable and slightly irrational.
But perhaps the Government attitude or indifference should not be a complete surprise. Different parts of the picture are ‘overseen’ by different departments so are not joined up. There are some alluring myths doing the rounds that officialdom should really have put to bed. It isn’t unreasonable to expect all parts of Government to be accountable and responsible to the big picture not simply their own part of it.
Last year, debt purchasers were ‘outed’ in the press for not contributing to or supporting debt advice enough through the voluntary FairShare system. There were just two, slightly embarrassing, problems for those doing the ‘out-ing’. The firms being criticised were actually paying more than £25 million – almost half - in addition to the hefty compulsory debt advice levy contribution they also made. And, of course, those doing the out-ing seem a little confused about the meaning of ‘voluntary’ (an act done of one’s own free will – ie not in response to a demand, requirement or coercion).
It doesn’t end there. There is a current vogue for claiming that financial services firms ‘benefit’ from debt advice. This is undoubtedly true - so far as it goes. A better-informed customer will be able to more effectively evaluate options and advice can result in more sustainable repayment plans. Firms will therefore get back a little more of what they are owed and, more valuable, have customers experiencing a positive journey.
Whether that ‘benefit’ is even close to what has been claimed is a different matter. And, of course, the focus is somewhat obsessively on financial services, rather than considering benefit more generally.
The CSA has challenged some of the more persistent myths, and will continue to do so. But it is also resolutely supportive of high quality, free-to-client debt advice, as are its members. But the conversation needs to come back to the facts, not the hyperbole or the emotive. Fairness is a concept that must be considered in the round. Demands for funding cannot continue to fall on the same comparatively small cross section of ‘creditors’ and evidencing quality and consistency of advice is not a suggestion.
And this is part of the problem. The debate has become a somewhat Medieval exercise in clerical tithes – pay or we’ll denounce you as a witch. It needs to come back to a basic, factual, footing. Is the existing funding being well spent? If you don’t know the value that is currently being obtained, how do you know what more might actually be needed?
Invest in prevention rather than cure
We know that the ‘silver bullet’ is prevention not cure. But that will require changing future attitudes to financial products and personal responsibility. It will not be a quick fix but, as social policy, the work of years for Government.
People need to understand that it’s not a disaster if you can’t make a payment; it’s a disaster if you ignore the problem for one to three years before seeking help. The overwhelming majority of us carry some form of debt. There is no shame in that. Things do sometimes go wrong however well prepared a person is. There’s no shame in that either. Getting help or at least discussing the problem with your creditors (financial or otherwise) at an early stage is the smart way forward.
Industry knows this which is why it has invested considerable time and effort in trying to improve engagement rates and early detection – over many years. Complaints will always happen, but it is relatively easy to find examples of consumers expressing pleasant surprise at the positive experience when they did finally engage. But the challenge is getting them to engage early enough, and one not helped by scattergun claims of inappropriate harm or poor conduct which influences consumer attitudes until they learn otherwise.
Quality over quantity
The start point needs to be an honest debate, on the facts and not the surveys, about what the problems are and what actually needs to be done. Just saying ‘we need to up the number of advice sessions’ doesn’t fly any more than endless demands for more money. We need to focus on what advice, to what standard, to whom and where will it have the greatest return.
The variables do not end there. The FCA has ploughed considerable effort into satisfying itself that the fee-charging debt management sector is meeting the requisite standard. That presents an interesting dichotomy. If the issue for firms is in ensuring high quality advice that is free at the point of delivery to consumers, does elective funding have to go to the ‘free’ sector if it is more difficult to evaluate quality and consistency?
It isn’t strange to question whether existing contributions are spent well and achieving value for money. Nor is it unreasonable to expect those receiving funds, whether by levy or elective contribution or both, to be able to evidence that value. The FCA expects regulated firms to understand their own business. MaPS is supposed to ensure value from the funds it is entrusted with. So why is providing adequate evidence seemingly so hard?
Poor advice results in a poor outcome for customers. Unnecessarily costly advice simply means that fewer consumers are able to benefit per pound spent. Demanding more without being willing, or perhaps able, to reliably show that value for money is being achieved is unacceptable and unworkable. For all the reports, models and surveys, the claims are impressive but actual evidence remains elusive.
If this process is improved, debt advice can be more streamlined, and cost savings and efficiencies can be gained for the benefit of all, particularly the customer.
Who foots the bill?
At last we come to the most vexed question – who needs to pay?
Actually, the question itself is remarkably easy to answer. The idea that the cost should be borne solely or predominantly by the financial services sector alone is plainly ridiculous. Every creditor whether a lender, telecoms or utility provider, or central and local government ‘benefits’ from debt advice to a degree so it is reasonable to expect that all should contribute in some way. Since financial services are usually at the back of the queue for being paid it is difficult not to laugh in the face of suggestions that they should pay the most, even though they already do.
The CSA has argued for some time that there should be common principles across all creditor types for the pursuit of debts. Critically, that doesn’t mean there should be the same approach in every case as the dynamics of different businesses and different debts means that there must be some nuancing and not a ‘one size fits all’ approach. But there are overarching points that can apply generally. You would expect every creditor to want, and need, to understand a customer’s financial position to a degree but that won’t mean an I & E statement in every situation.
And let us not forget, direct financial contributions are not the only, or necessarily the best, way to support and improve free-to-client debt advice. There are firms that would happily contribute technical advice and expertise to help improve systems and processes, for example. After all, firms have considerably more experience of the rigours of close regulation.
But the rider is still attached - firms have every right to ensure that they are getting both quality and value for their customers from that funding. Every other business needs to be able to show both for the markets they compete in so continued silence on that score simply is not an option.
Changing the conversation
Tracy MacDermott, then acting CEO of the FCA, once touched on the dangers of regulation failing to find balance between consumer and business. That the further the pendulum swung to one side, the further it would swing back to the other eventually. She was surely right in that and the same is true of funding.
The nature of the discussion needs to change as do the attitudes. Sweeping generalisations and oversimplifications based on small, questionable surveys and theoretic assumption driven models (and how are those funded by the way?!) need to be replaced by rational, evidence-led discussions: what is being achieved and to what standard, what else is needed now, can we predict the future problems and anticipate need and solutions? If we do that, rather than the finger pointing, then we actually have a chance of helping more of those in financial difficulty.
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