Scottish Government

1 INTRODUCTION

Introduction

1.1 This review summarises and evaluates selected recent literature and research evidence on different money advice giving practices. It draws on evidence relating to the economic and policy environments within which debt occurs and is addressed, comments on the costs of debt and evaluates the relative benefits of different approaches to advising those with problem debt.

Aims, objectives and scope

1.2 Conducted for the Financial Inclusion Policy Team within the Social Inclusion Division, the review follows on from the Financial Inclusion Action Plan (Scottish Executive 2005) and Achieving our Potential: A framework to tackle poverty and income inequality in Scotland (Scottish Government 2008a). Achieving our Potential outlines the Government's commitment to increase 'the availability and usage of money advice services and ensur[e] they are appropriately targeted at and are accessible to people from minority ethnic and faith communities'.

1.3 The purpose of this review is to provide an overview of research on current money advice giving methods and to assess their relative costs and effectiveness for different client groups. By highlighting gaps in knowledge, it is intended the review will help to direct future research priorities.

1.4 The review's objectives were to:

1. Assess the effectiveness of different money advice giving methods

2. Capture the relative costs and benefits of different methods

3. Identify the types of clients who respond to/are reached by the different methods

4. Highlight any recommendations on how to improve practice and service delivery

5. Uncover inadequacies in either the quality, focus or scope of existing evidence and identify future research requirements

1.5 While the main objective was to review the effectiveness of different money advice giving approaches, the paucity of material dealing directly or systematically with this made it necessary to broaden the content of the work included in order to extract such insights where they were offered. Chapter two, therefore, also includes a section on issues about practice which contains some recommendations from the literature on how to improve practice in more general terms.

1.6 This review was conducted during the near collapse of the international financial markets and the subsequent credit crunch and global recession. There is a growing body of literature which attempts to acknowledge the ways in which these developments are affecting vulnerable groups and individuals experiencing debt. Although this review has been conducted prior to much of this work, it does recognise that the context within which debt occurs is changing dramatically and therefore that the nature, profile and experience of debt is evolving as a result.

1.7 In relation to government policy and actions, debt is frequently included under the umbrella of broader attempts to maximise incomes, combat financial exclusion or tackle poverty. It is also strongly associated with other advice giving services such as housing or legal support. Growing interest in and support for financial capability has also led to some blurring of the boundary between financial education as preventative or post hoc, and money advice as being offered to those already dealing with problem debt. This review has attempted to extract and put into context reference to money advice within this broader literature.

1.8 The review primarily focuses on literature and data from the last four years, although where it offers relevant insights or provides the only comment on a particular issue, older material has been included. The range of material covered includes academic, government, charitable, commercial and debt advice agency research as well as government policy and strategy documents.

Methodology

1.9 A desk based review of published literature on money advice giving methods was carried out. Literature was drawn from the range of sources detailed in Annex One in addition to material highlighted through online alert services and internet searches. Material was also identified through consultation with Scottish Government analysts and policy colleagues.

1.10 This study is not a systematic review of all available literature but is intended to provide an overview of evidence on the relative success of different money advice giving practices. However, the review does identify methodological problems with existing research, highlights limitations in scope and includes suggestions about possible future research priorities. Identified gaps in evidence are considered along side key findings and new insights emerging from recent changes to the context within which debt occurs.

1.11 The literature searches were conducted by the Scottish Government Information Management Unit (Library Services) and were completed by October 2008. Although more recent literature has been identified through online alert services and internet searches, some research published after this date may not have been included.

Context

It should be as easy to get help as it is to get the loans.
Female who sought advice (Turley and White 2007: 60)

1.12 Over the last decade the ratio of household indebtedness both secured on housing and unsecured ¹, relative to income, has increased by approximately 50% (Centre for Policy Evaluation 2008: 7). The global recession currently being experienced has been linked to reckless and unsustainable lending practices originating in the sub-prime real estate market in the United States. The emergence of sub-prime losses in 2007 and subsequent fall of Lehman Brothers in September 2008 resulted in panic on the inter-bank loan market, dramatic share and house price declines and huge losses and possible bankruptcy for a number of major international banks. After unprecedented growth in consumer credit, therefore, the past two years have witnessed a tightening of available credit and lending criteria, and sharp rises (and subsequent falls) in interest rates, inflation, fuel and the cost of living. ²

1.13 Scotland slipped into recession in the middle of 2008, with no easing in the rate of decline in GDP by the Q2 2009 which fell by 0.8% compared to the previous quarter. ³ The Scottish unemployment rate rose sharply from 4.7% to 7.1% over the year to the three-month period June-August 2009 (a rise of 67,000) (ibid). Furthermore, all age groups in Scotland have experienced a rise in unemployment, particularly with the 16-24 age group (ibid). The economic recession has exacerbated difficulties for those already experiencing debt and placed others in an increasingly vulnerable financial position. ⁴ Debt advice services in Scotland have to operate within and adapt to this challenging economic and public funding environment.

The housing market

1.14 As house prices have dropped, Standard Variable Rates have remained relatively high (despite a historically low Bank of England base rate of 0.5%) and many first time buyers and mortgage holders coming to the end of fixed rate deals have found themselves unable to meet more stringent borrowing conditions. Consequently, house repossessions have increased. Council of Mortgage Lenders data show that the total number of mortgages in arrears at the end of Q3 2009 is 29% higher than Q3 2008 (Scottish Government 2009a). Whilst there were 11,700 repossessions in the UK in 2008 (ibid), there is no accurate data on housing repossessions currently available in Scotland But there were 40,000 repossessions in the UK in 2008 and there are predictions that the number will be 75,000 in 2009 (Scottish Government 2009: 4). The number of people with mortgage arrears of more than three months has increased from 1.08% in 2007 to 1.88% in 2008. ⁵

1.15 The rental market has not escaped the trend and AXA research estimates that 13% of renters have gone into arrears in 2007-2008. ⁶ It is worth noting that, in contrast to other commentators, the Consumer Credit Counselling Service ( CCCS) suggest that adjustments to consumer behaviour occurred long before the American sub-prime crisis rippled across international financial markets, pointing out that there has been virtually no growth in unsecured credit since 2005 and that insolvencies slowed in the last quarter of 2007 ( CCCS 2008). ⁷

Consumer debt

1.16 There is no agreed definition of over-indebtedness, however, in a survey commissioned by the then Department of Trade and Industry, MORI Financial Services ( MORI 2004) suggested four 'objective' and one 'subjective' measures of over-indebtedness. These consisted of:

• Individuals spending more than 25% of their gross monthly income on unsecured repayments;
• Individuals spending more than 50% of their gross monthly income on total borrowing repayments (secured and unsecured);
• Individuals with 4 or more credit commitments;
• Those individuals in arrears on a credit commitment and/or domestic bill for more than 3 months; and
• (a subjective indicator) Those individuals declaring their household's borrowing repayments to be a 'heavy burden' ( MORI 2004: 3-4).

1.17 The above measures have become the benchmark for subsequent indicators and evaluations of 'over-indebtedness' in the UK, such as, the number and persistence of arrears, measures of household liquidity/illiquidity, and so on (Centre for Policy Evaluation 2008: 11).

1.18 According to the Bank of England "the proportion of households with some outstanding unsecured debt has increased and reached more than 50% in 2008" (Bank of England 2008 Q4). Relatedly, "after a number of years of rapid growth, the total amount of debt owed by UK households reached a little under £1.6 trillion by 2008 Q2, an average of around £60,000 per household" (ibid). The level of indebtedness has been growing steadily throughout 2008 with a pronounced increase during the second part of the year. Unsurprisingly, debt enquiries to the Citizens Advice Bureaux in England and Wales increased by 20% in the last year ( CAS 2009a). In 2008, Citizens Advice Scotland ( CAS) reported an increase of debt cases of up to 70% at individual bureaux (ibid).

1.19 The economic context within which debt occurs has undoubtedly altered dramatically. This in turn has affected the type of debt individuals incur and potentially the manner in which these problems can be solved. The steep increase in the cost of utilities has become a significant pressure on debt clients' income, whatever their earnings capacity ( CCCS 2008; Aznar, 2009). The difference between manageable and unmanageable debt may therefore be more dependent on the cost of gas and electricity than interest rates or credit card bills. Additionally, the demographic profile of those experiencing debt has altered, with those in difficulty getting older and poorer. The CCCS (2008: i) report that debt levels among the under 25s dropped a third from 2005, with more than half of clients aged over 40 ( CCCS 2008; CCCS 2009). In Scotland the majority of clients (57%) are over 40 ( CCCS Scotland 2008: 4). ⁸ Scottish Widows UK Pensions Report revealed that the debt burden for retirees is getting worse, with almost one in six (15%) retired people in the UK having an outstanding mortgage - with an average debt of £50,100 - an eight thousand pound increase from 2008 (Scottish Widows 2009). The average outstanding non mortgage debt amongst retired people with debt is £7,344, up from £5,930 in 2007 (ibid).Older people have more and higher debts than ever before.

Not only are 'pre-retirees' in significantly more debt than other age groups but it also takes them longer to pay back this debt, with an average payment plan of 11 as opposed to 9 years … Such high levels of 'pre-retirement' debt are hugely concerning. ⁹

Background - money advice policy and funding

Delivering money advice

1.20 Having considered changes to the context within which debt occurs and subsequently how the nature of debt itself has altered, the following section looks at the Scottish and UK government approach to supporting money advice services.

1.21 Money, or 'debt' advice, has operated as a distinct discipline for about 25 years (Fearnley 2008: 14). The provision of money advice has become a significant element within the UK and Scottish Government's approach to promoting financial inclusion. Advice is delivered through a wide range of organisations (see Annex Two) and channels. According to HM Treasury research ( IFF Research Ltd 2007: 5), Citizens Advice Bureau ( CAB) account for approximately two-fifths of all providers of free debt advice in England and Wales. A further quarter of providers are independent advice agencies, the majority of which belong to the Advice UK network. Charities are the next most common provider of advice, accounting for 15% of providers (ibid).

1.22 Debt advice is primarily delivered via the following means:

• telephone advice - provided by National Debtline or the Consumer Credit Counselling Service, for example
• face-to-face advice - delivered by Citizens Advice Bureaux, local authorities and other independent community advice groups
• 'self-help' methods - such as the generic money advice materials provided by advice agencies
• fee-charging debt management companies (insolvency practitioners)
• other financial professionals - such as bank managers or independent financial advisers.

Scottish Government Policy and Actions

1.23 The Scottish Government has one overarching purpose, 'to focus Government and public services on creating a more successful country, with opportunities for all of Scotland to flourish, through increasing sustainable economic growth'. This central purpose is underpinned by a number of high level targets concerned with economic and population growth, productivity, solidarity, cohesion, participation and sustainability. The most relevant of these in relation to financial inclusion and debt is the solidarity target which aims 'to increase overall income and the proportion of income earned by the three lowest income deciles as a group by 2017'. These targets are in turn supported by five strategic objectives to become a wealthier and fairer, smarter, healthier, safer and stronger, and greener country. A number of national outcomes and indicators add detail and measurable goals to the National Performance Framework. National six in particular which suggests that 'we have tackled the significant inequalities in Scottish society' is a key driver for addressing financial inequity in Scotland.

1.24 The Scottish Government defines financial inclusion as individuals having access to appropriate financial products and services, including having the skills, knowledge and understanding to use them. In Scotland, the Government has generally considered financial inclusion in the context of social policy and social justice/social inclusion. Financial exclusion can be both a symptom of poverty and a cause of poverty. People on low incomes may have difficulty opening bank accounts, getting low cost loans or building up savings. Those who do not have bank accounts cannot use cheaper payment options, such as direct debit, and have to use more expensive forms of credit, such as doorstep lenders. This increases their risk of falling into debt and poverty.

1.25 Published in May 2003, A Partnership for a Better Scotland: Partnership Agreement (Scottish Executive 2003),set out the (then) Scottish Executive's commitments for the next four years, these included specific financial inclusion deliverables, amongst them:

We will support an extension of the money advice service, building on the work of local authorities, the Citizens Advice Bureaux network and other voluntary sector bodies, to help those burdened by multiple debts. ¹⁰

1.26 Tackling financial inclusion was one of the six objectives in Closing the Opportunity Gap (Scottish Executive 2004), the Executive's strategy for tackling poverty, published in July 2004. The Executive pledged to:

To reduce the vulnerability of low income families to financial exclusion and multiple debts - in order to prevent them becoming over-indebted and/or to lift them out of poverty.

1.27 This had the associated target to:

By 2008 increase the availability of appropriate financial services and money advice to disadvantaged communities to reduce their vulnerability to financial exclusion and multiple debts.

1.28 The Financial Inclusion Action Plan (Scottish Executive 2005), described what the Scottish Executive and its partners could do to increase financial inclusion. ¹¹ It was built around three strands of activity, money advice, financial capability (skills, knowledge and understanding) and access to financial products and services, in particular affordable credit. From 2006/07 to 2007/08, delivery of the Financial Inclusion Action Plan was supported by £10.6 million of funding, the Financial Inclusion Fund, allocated to the 11 local authority areas with the greatest problems of financial exclusion. The allocations were based on levels of income deprivation and the proportion of households without bank account or savings.

1.29 From November 2008, financial inclusion was embedded in Achieving our Potential: A framework to tackle poverty and income inequality in Scotland (Scottish Government 2008a) . This includes the commitment to 'increasing the availability and usage of money advice services and ensuring they are appropriately targeted at and are accessible to people from minority ethnic and faith communities'. Achieving our Potential is one of three complementary Government strategies which form a coherent approach to addressing disadvantage in Scotland. The Early Years Framework (Scottish Government 2009c) acknowledges the importance of ensuring children have the best start in life and a good education, and Equally Well: The report of the Ministerial Taskforce on Health Inequality (Scottish Government 2008a), suggests that health inequalities are bad for the country as well as being a matter of social justice.

1.30 The national government policies outlined above have been accompanied by a new concordat between the Scottish Government and the Council for Scottish Local Authorities ( COSLA). The "concordat sets out the terms of a new relationship between Scottish Government and local government based on mutual respect and partnership" (Scottish Government and COSLA 2007: 1). The document signals a move towards greater autonomy for local government and a simplified funding and reporting structure through the development of Single Outcome Agreements. Support for money advice services is structured by this new, evolving relationship between national and local government in Scotland.

Funding money advice in Scotland

1.31 Local government is the main funder of face to face advice in Scotland. The Scottish Government provided £3m from 2002 onwards and an additional £2m from 2004 through the local government settlement to support its commitments on increasing the supply of money advice. The second tranche included funding for the introduction of the Debt Arrangement Scheme ( DAS), which can be accessed only through approved money advisors.

1.32 The Scottish Government funds training for the money advice sector through Money Advice Training, Information and Consultancy Services ( MATRICS), a collaboration between Money Advice Scotland and CAS. MATRICS also provides second tier support, specialist advisors to help advisors with particularly complex cases, and operates the approval process for DAS. The Government also part funds National Debtline and supports the Scottish National Standards for Information and Advice Providers, which cover money advice (and housing and welfare rights advice).

UK Government policy and funding

1.33 The UK Government's ( HM Treasury 2004) first financial inclusion strategy, Promoting financial inclusion, was published in December 2004. ¹² It:

• announced the creation of a dedicated Financial Inclusion Fund of £120 million for the 2005-08 spending period;
• announced a goal, shared between Government and the banks, to halve the number of adults living in households without access to a bank account, and to make significant progress within two years - recently announced that 60 per cent of the progress required to achieve the shared goal had been made; and
• established an independent Financial Inclusion Taskforce to advise the Government and monitor progress.

1.34 The UK Government viewed financial exclusion as resulting from a market failure in the financial services industry, and increasing access to banking and affordable credit were important aspects of the strategy. However, building financial capability and providing access to money advice were also seen as of key importance in promoting financial inclusion.

1.35 The UK Government committed £47.5m to recruit and train new money advisers in England and Wales between 2005 and 2008. In 2008-11 the UK Government committed £85m to maintaining this new capacity. It also provides around a third of the funding for National Debtline.

1.36 Published in March 2007, Financial inclusion - the way forward ( HM Treasury 2007a), set out the UK Government's policy framework for financial inclusion in 2008-11. ¹³ This included:

• a new Financial Inclusion Fund for 2008-11
• an extension to the Financial Inclusion Taskforce until March 2011, so that it can continue to monitor and evaluate progress and advise the Government on financial inclusion developments
• a ministerial working group chaired by the Economic Secretary to the Treasury, with members from the Department for Work and Pensions, the Department for Business, Enterprise and Regulatory Reform, the Department for Communities and Local Government, the Cabinet Office and the Ministry of Justice to develop an action plan for financial inclusion in 2008-11.

1.37 This was followed, in December 2007 by Financial inclusion: an action plan for 2008-11 ( HM Treasury 2007b). ¹⁴ The action plan set out how the Government intended to use the £130 million Financial Inclusion Fund to achieve its financial inclusion objectives in the three-year spending period from April 2008 to March 2011.

Responding to the economic recession

1.38 The economic recession has significantly increased demands on advice services, particularly in the areas of debt, housing and employment advice. In its 2008 Pre-Budget Report the UK Governments responded by announcing: ¹⁵

• an additional £5.85 million in funding between November 2008 and March 2011 to increase the provision of free telephone debt advice which could assist 70,000 people each year with their debt problems ;
• a further £10 million in funding between November 2008 and March 2010 for Citizens Advice Bureaux to expand local face-to-face advice capacity which could assist a further 335,000 people each year.

1.39 The first part of this funding was allocated to the UK-wide National Debtline service. The Scottish Government received a Barnett consequential for the second part of the funding, which it also directed to increasing the supply of advice through Citizens Advice Bureaux.