What are learning points?
Learning points share what people have learned from their experience in regeneration - from people working or talking together, or from research into issues and evaluation of what is happening. Learning points can help people and organisations to improve their practice through identifying what works and what doesn't. The views described in learning points do not mean that the Scottish Centre for Regeneration or the Scottish Government necessarily support them.
What is this learning point about?
This learning point is about debt and the provision of money advice in Scotland. It considers the impact of the recent economic downturn on the need for money advice and the approaches to delivery of this service.
It was written by Louise Dobbie and Morag Gillespie of the Scottish Poverty Information Unit (Glasgow Caledonian University) and develops from a review of the published literature. The paper aims to reflect on current policy and practice to propose ways in which services can develop in the future.
What are the main issues?
Demand for money advice has increased over recent years, and advice services are reporting that this demand has grown during the recession:
- How can we build client-centred money advice services that meet the needs of low-income groups?
- How do we ensure that people can access the right package of debt and financial inclusion support and at the time they need it?
- Debt is linked with poor mental health. It is a source of stress and anxiety that can compound the problems of poverty or a drop in income. How can we establish effective referral pathways to improve access to advice and support services?
- How can we secure sustainable funding for a sector that is facing increasing demand for services?
What do we know already?
Debt and the recession
In 2008 the UK entered recession against a backdrop of unprecedented levels of personal debt, including a rising level of mortgage arrears. This was the first time that the UK has entered recession with families from all income groups in considerable debt. Reliance on debt increased households' vulnerability to income shocks during the current recession. Too often the poorest people have been hit hardest as those on the tightest budgets find it the most difficult to cope with unexpected income shocks such as job loss. 1.
Over-indebtedness
The term over-indebtedness is used to describe debt which has become a major burden for the borrower. There is no generally accepted definition of over-indebtedness, but a range of factors are relevant, including both objective factors such as the ratio between debt and earnings and subjective factors, including an individual's own perception of their situation and of the pressures which this brings to bear 2.
Analysis of those at risk of over-indebtedness usually focuses on the ratio of debt to annual income and on the ratio of debt servicing payments to current income. In Britain over the last ten years, debt has increased at a faster rate than income. This has led to an increase in the aggregate debt-to-income ratio over recent years. The expansion of secured debt has driven this increase 3.
UK and Scotland
It is difficult to assess whether and to what extent the picture concerning debt is different in Scotland from the rest of the UK since little disaggregated information is available. However, a recent report looking at assets and wealth provides some information 4. The picture of Scotland from this survey (covering 2006-08) indicates that home ownership, wealth, borrowing and indebtedness are all lower than average, but not significantly so.
Other findings include:
- The proportion of households with non-mortgage borrowing commitments was lowest in Wales (41%) and Scotland (43%) compared with the GB average of 49%.
- Those who did owe money in this way owed relatively small amounts in Scotland - the mean average was £5,200 and a half owed less than £1,600.
- A smaller proportion of households in Scotland (8%) had fallen into arrears than the average of 10% across all households.
Home ownership
A key factor in the growth of borrowing has been the rise in home ownership. The policy of successive UK Governments has been to make it possible for more households to access home ownership. Mortgage borrowing is of concern because of the size of the debt and the possibility that families will lose their homes if they default. The groups who are at higher risk of repossession include those on the lower end of incomes at which home ownership becomes possible as well as those who have significant other debts. 5
Money advice
Money advice is a complex and growing part of advice work. For Citizens Advice Scotland (CAS) in 2008-09, debt continued to be the single biggest issue comprising 28% of all enquiries. In addition:
- the number of consumer debt issues rose by a substantial 13% in 12 months and;
- debt issues related to housing rose by 19% over 12 months. Specific issues include the difficulty of meeting mortgage and rent payments, and repossession.
There is evidence of growing pressure amongst services and unmet demand for advice. This comes not only from traditional client groups, including people on low incomes, but increasingly from groups less likely to use services in the past, including owner-occupiers 6.
Causes and consequences
Over-indebtedness can be caused by and contribute to poverty and social exclusion. Research has established that the key reasons for experiencing debt problems and arrears include financial shocks, persistent low income, poor money management, creditor behaviour and over-commitment. A sudden drop in income can be triggered by events such as job loss, the onset of ill-health or a relationship breakdown. 7.
All income groups can experience an 'income shock', however those living in poverty or on persistent low incomes are most vulnerable. Creditor behaviour can exacerbate people's debt problems and add to their distress. A survey of CAS debt clients found that most people felt debt had a negative impact on their health, particularly their mental health. Interviewees attributed stress and depression to their financial situation, regardless of the reason for being in debt. Pressure from creditors contributed to the impact of debt 8.
The link between debt and affordable credit is that those who cannot access affordable credit are more likely to use high interest (legal) lenders such as doorstep lenders, payday loans. Where these options are not available, people can turn - as a last resort - to illegal lending. The high cost of most alternative credit increases debt problems. An investigation of the home credit industry found that APRs generally exceed 100 per cent, and for loans of around six months often exceeded 300 per cent. The total cost of credit can vary from around £30 per £100 borrowed for the shortest loans to over £100 per £100 borrowed for some of the longest 9.
The nature of over-indebtedness has changed, creating a need for new debt remedies. For example, some people with low incomes and unrepayable debts could not show they were insolvent or contribute to repayments, but continued to get interest and charges added to their debts, so they were caught in a debt trap.
Policy responses and proposals
The UK and Scottish governments have developed policy in response to growing concerns about over-indebtedness. Policy has aimed to both minimise the number of people experiencing problem debt and ensure that help is available for those who do become over-indebted 10. Consumer credit and the regulation of financial services remain reserved matters. Distinctive Scottish solutions have emerged in devolved areas such as legal debt remedies, including bankruptcy.
The UK Government's Financial Inclusion Action Plan: 2008-2011 announced a Financial Inclusion Fund (FIF) of £130 million and set out planned activity to address the priorities of improving access to banking, affordable credit and free face-to-face money advice. A summary of responses most relevant to over-indebtedness and money advice has included: 11
- free face-to-face money advice through continued support for BERR's money advice initiative with funding of £76 million - £74 million from the FIF and a further £2 million from BERR
- the DWP's Growth Fund initiative (£38 million) to increase the availability of affordable personal loans via third sector (not-for-profit) lenders such as credit unions and community development finance institutions
- a "Financial Inclusion Champions" initiative delivered by DWP which is now in operation and involves regional teams across the UK. This builds on the "Now Let's Talk Money" campaign to promote financial inclusion locally, including access to financial services and face to face debt advice 12
- UK-wide regional teams to target illegal money lenders and investigate offences of illegal money lending. To date, the Government has committed £16.5 million to fund this initiative 13
- continued work with the banks to ensure that principles of responsible lending and fair treatment for customers in financial difficulty are upheld and applied.
Improving access to advice for marginalised groups was an early priority in Scotland. A range of funding initiatives, from 2003, increased the resources available for money advice. For example in 2004-06 an extra £2 million was made available for 12 pilot projects which tested new approaches for groups including people with learning difficulties, those with mental health problems, people making the transition to work, lone parents, black and minority ethnic groups, young people and prisoners 14. Most funding for money advice has been included in the funding for local authorities as part of their overall budget settlement.
The Scottish Government continues to provide targeted strategic investment to develop alternative methods of delivery to face to face advice and support improvements in the quality of advice and the money advice infrastructure: This has involved:
- support for MATRICS (a training and second tier support service delivered by Money Advice Scotland and Citizens Advice Scotland)
- an accreditation system for the Debt Arrangement Scheme and the development of Scottish national standards for advice
- financial support for telephone based advice services including National Debtline (a money advice helpline) and Citizens Advice Direct (a telephone and email generic advice service that includes debt and money advice) 15
- until March 2008 the Scottish Government funded nine Credit Unions and a further six were funded by their local authority 16
Legislation on debt relief in Scotland has changed recently. Key changes include modification to the Debt Arrangement Scheme (DAS), a scheme designed to help individuals manage debts, and the introduction of a new route to bankruptcy for people with low income and low assets (LILA).
Over the first three quarters of 2009-10, LILA accounted for 6491 of 8370 bankruptcy awards on debtor applications 17. Research has identified that despite all the challenges that bankruptcy can bring, LILA is important because it offers low income groups the prospect of addressing the worry and stress of unresolvable indebtedness 18.
Reponses to recession and credit crunch
After a long period of economic growth, the UK went into recession in 2008. Problems with the repayment of sub-prime mortgages in the US triggered a global wave of concern about lending around the world in August 2007 resulting in a "credit crunch". Falling house prices reduced consumer confidence and consumer spending, while record debt levels and rising living costs, particularly for fuel, put pressure on household budgets.
Support for homeowners emerged as a key concern for UK and Scottish governments in response to recession. The UK Government has worked closely with lenders to encourage early identification of mortgage difficulties and delay repossession action 19.
The Mortgage Help Campaign was launched to publicise the support available for homeowners facing difficulties. Measures to assist struggling homeowners have had a clear focus on prevention alongside advice and support at each stage for anyone facing repossession 20.
In Scotland the Home Owner and Debtor Protection (Scotland) Act received Royal Assent on 18 March 2010. It has established measures to protect people struggling to deal with debt by increasing protection against possession of their homes or bankruptcy. In addition, the Scottish Government now operates a revised Mortgage to Rent scheme and a Mortgage to Shared Equity scheme which can help owners experiencing difficulty in paying any loans that are secured against their property. These are funded from the Home Owners' Support Fund which was recently increased to £35 million 21.
To support Registered Social Landlords (RSLs) undertake projects in their local communities - beyond their principal role Scottish Ministers allocated £36 million for a Wider Role Fund available for the three financial years from 2008-11. Work could involve provision of advice and access to income maximisation support. 22
Since the UK Government established the Tackling Over-indebtedness Task Force in 2003, the Credit Industry and the Credit Reference Agencies have been under increasing pressure to improve the way the granting of consumer credit is controlled. In response to the economic downturn:
- the UK Government's Consumer White Paper set out a strategy for future regulation of credit markets including a review of the credit and store card market which has now been completed 23
- further reforms to UK consumer credit rules are also being introduced through the implementation of a European Directive on consumer credit
- the Office of Fair Trading has conducted a range of work to tackle irresponsible lending. A publication of irresponsible lending guidance is forthcoming 24
What have we learned?
Client-centred service provision
Services need to be delivered in ways that are appropriate for individuals to achieve access to services and gain advice that enables them to make fully informed decisions. A 'one size fits all' approach to advice including advice for low income and disadvantaged groups is not effective.People may have trusted sources of support other than advice services, so services need to work across traditional boundaries to reach excluded groups more effectively.
People may have problems, in addition to debt, with which they need help, so approaches to advice and support that put the client at the centre are important and reinforce the need for partnership approaches in this field. Approaches that can be effective here include support services providing a bridge to money advice that is tailored towards the needs of service users. For example, a project run by the Glasgow Association for Mental Health developed a system of supported referral in collaboration with financial inclusion advisers and advice services. This involved mental health support staff accompanying people through the advice process for as long as required 25.
Building on the evidence from previous research, guidance is being developed in a range of areas to help. For example:
- There is a standard form and guidance for providing evidence on debt and mental health for creditors and advisers produced by the Royal College of Psychiatrists 26.
- A new publication gives advice on how creditors can take steps to improve their methods of debt collection and help people deal with their debts in a way that suits their circumstances 27.
Awareness and publicity
The issue of low awareness of available services is long-standing and continues. Recent research with private tenants by Shelter, found one in five respondents felt they would not know where to go for advice if they needed it in the future 28.
Participants had a wide range of ideas about how to improve advice services and access to advice. Better targeted marketing such as television slots were suggested. Other work emphasises the importance of local level publicity including local free publications, leaflet-drops and posters in public service offices.
New delivery channels
Policy is focused on early intervention and ensuring that an appropriate range of services and delivery channels are available to meet different needs. For example, while some people need face to face advice, other people may prefer to use telephone or internet based services.
Investment in services including National Debtline and Citizens Advice Direct contribute to this change of direction and there are new initiatives that will help to provide a broader range of options. These should help to reduce the pressure on face-to-face provision that can be targeted towards those who need it. Recent initiatives include:
- Scotcash which is a Glasgow based Community Development Finance Institution (CDFI) that combines providing access to affordable lending, banking and advice. It targets low-income groups and offers a range of services and products including affordable loans, saving accounts, white goods packages, basic bank accounts and money advice 29.
- National debt advice charity the Money Advice Trust is working in partnership with lenders, the debt collection industry and the advice sector to develop a streamlined, self-help debt advice service to increase the availability of debt advice.
- CASHflow is an assisted self-help debt advice resource that has been piloted and is now being rolled out nationally. Debt clients set up an agreed financial statement online with assistance from licensed advice providers. They can use the statement to make repayment offers directly to their creditors, with assistance from a licensed advice agency, often without the need for the advice agency to act directly on their behalf. 30
Money advice and wider inequalities
People living with long term ill-health or disability are more likely to be living in poverty. The health service has an important role to play and this sector is now developing activity to maximise income for different patient groups as an approach to help address low income and poverty and contributing to reducing health inequalities. 31 For example:
- NHS Greater Glasgow and Clyde have developed a service to meet the money advice needs of people affected by stroke (patients, carers and family). This service offers general advice over the telephone, as well as hospital and home visits. It is based on patient needs, relies on proactive support by NHS staff, simple referral routes and holistic support covering all aspects of money advice.
- Macmillan Cancer Support has established partnerships with local money advice services in parts of the UK including some areas in Scotland, to improve access to specialist advice and address the stress and anxiety associated with money worries which often arise following diagnosis for example, due to a drop in income or increased costs associated with managing their cancer. The service is delivered in places that are convenient to the clients and their families including in their own home, in hospitals and other health settings.
What next?
The UK economy is beginning to show signs of recovery. However, the debt 'hangover' from the growth of credit and home ownership will remain with us for some time and demand for advice is unlikely to fall quickly. Low income groups, including low paid workers, are likely to remain particularly vulnerable to falling into arrears with payment commitments.
The traditional model of money advice will continue to face pressure for change because of tighter public sector funding, technological developments and different levels of need for support, including approaches that enable people to keep more control of their own situation.
Developments identified in the delivery of advice reflect the fact that services should address a continuum of needs from money guidance through to intensive face-to-face support. The trick for the future will be in achieving the right balance to ensure that the most excluded or marginalised groups do not lose out because of more intensive support needs and the costs that they can incur. This balance of provision will not happen by chance, not least because of the number of agencies involved and the different layers of government that have a role to play.
Further information
Footnotes
1. Ben-Galim D and Lanning T (2010) Strength Against Shocks: Low-income families and debt, IPPR.
2. BERR (2007) Tackling Over-indebtedness Annual Report. Available at: http://www.bis.gov.uk/files/file42700.pdf
3. BIS (2010) Over-indebtedness in Britain: Second follow-up report. Available at: http://www.bis.gov.uk/assets/biscore/consumer-issues/docs/10-830-over-indebtedness-second-report.pdf
4. Daffin C (ed) (2009) Wealth in Great Britain: Main Results from the Wealth and Assets Survey 2006/08, ONS. Available at: http://www.statistics.gov.uk/downloads/theme_economy/wealth-assets-2006-2008/Wealth_in_GB_2006_2008.pdf
5. Ben-Galim D and Lanning T (2010) Strength against shocks: Low-income families and debt, IPPR
6. Gillespie M and Dobbie L (2009) Funding Money Advice Services: Exploring sustainable models for the UK. Dorking: Friends Provident Foundation
7. Gillespie M, McKendrick J, McHardy F and Dobbie L (2009) Drowning in Debt: Scottish CAB clients and debt. Edinburgh: Citizens Advice Scotland.
8. Gillespie M, McKendrick J, McHardy F and Dobbie L (2009) Drowning in Debt: Scottish CAB clients and debt. Edinburgh: Citizens Advice Scotland. Available at: http://www.cas.org.uk/drowningindebt.aspx
9. Competition Commission (2006) Home Credit Market Investigation: http://www.competition-commission.org.uk/rep_pub/reports/2006/fulltext/517.pdf
10. BERR (2007) Tackling Over-indebtedness Annual Report. Available at: http://www.bis.gov.uk/files/file42700.pdf
11. HM Treasury (2007) Financial Inclusion Action Plan: 2008-2011
12. Department for Work and Pensions (March 2010) About Financial Inclusion (webpage): http://www.nowletstalkmoney.com/gb/en/about-us.html
13. BIS (March 2010) BIS web page: http://www.bis.gov.uk/policies/consumer-issues/consumer-credit-and-debt/real-help-now-for-those-in-difficulty/illegal-money-lending-and-loan-sharks/illegal-money-lending-project
14. Gillespie M, Dobbie L, Mulvey G with Gallacher Y and Campbell J (2007) Money Advice for Vulnerable Groups: Final Evaluation Report. Scottish Executive (Web only publication) available at: http://www.scotland.gov.uk/Publications/2007/03/22115958/0;
15. Scottish Government (March 2010) Money advice (web page): http://www.scotland.gov.uk/Topics/People/Social-Inclusion/17413/22379
16. Scottish Government (March 2010) Scottish Government support for credit union (webpage): http://www.scotland.gov.uk/Topics/People/Social-Inclusion/17413/Supporting-Credit-Unions
17. Accountant in Bankruptcy (2010) Quarter 3 Insolvency Statistics 2009-10 Available at: http://www.aib.gov.uk/About/annualtargets/quarterlyreports/Q3insolvencystatistics
18. Gillespie M, McKendrick J, McHardy F and Dobbie L (2009) Drowning Debt: Scottish CAB clients and debt. Edinburgh: Citizens Advice Scotland.
19. Communities and Local Government (2009) Preventing repossessions fact Sheet. Available at: http://www.communities.gov.uk/documents/housing/pdf/1380862.pdf
20. Communities and Local Government (2009) Preventing repossessions fact Sheet. Available at: http://www.communities.gov.uk/documents/housing/pdf/1380862.pdf
21. Scottish Government (2009) Law change to help families, press release 17/06/09. Available at:http://www.scotland.gov.uk/News/Releases/2009/06/17172506
22. http://www.scotland.gov.uk/Topics/Built-Environment/regeneration/widerrole
23. BIS (2010) A Better Deal for Consumers - Review of the Regulation of Credit and Store Cards: Government Response to Consultation. Available at: http://www.bis.gov.uk/assets/biscore/corporate/docs/c/10-768-consumer-credit-card-consultation-response.pdf
24. OFT (2010) Office of Fair Trading web page: http://www.oft.gov.uk/advice_and_resources/resource_base/legal/cca/irresponsible
25. Dobbie L and Gillespie M (2009) GAMH Financial Inclusion Development Project Evaluation Report for Glasgow City Council. Glasgow: Scottish Poverty Information Unit. Available at: http://www.povertyinformation.org/fileuploads/gamh-evaluation-report-final-8832.pdf
26. MALG (2009) Guidance for money advisers and creditors to support the use of the MALG debt & mental health evidence form (DMHEF), available at:
http://www.rcpsych.ac.uk/pdf/DMHEF%20GUIDERCPsych%20webApr%2009.pdf%20(2).pdf
27. McDermott A (2010) Do the Right Thing: Advisers and creditors experiences of best practice in debt collection. London: Citizens Advice and others. Available from: http://www.citizensadvice.org.uk/index/campaigns/policy_campaign_publications/evidence_reports/er_consumerandebt/do_the_right_thing.htm
28. Reynolds L and Smith J (2009) Taking the Strain: The private rented sector in the recession. Shelter and The Money Advice Trust
29. http://www.scotcash.net/
30. Money Advice Trust (2010) Assisted self help scheme 'Cashflow' rolls out nationwide Press Release 25 March 2010. Available at: http://www.moneyadvicetrust.org/content.asp?ssid=76
31. Scottish Government (2008) Equally Well: Report of the Ministerial Taskforce on Health Inequalities, Edinburgh: Scottish Government
Scottish Centre for Regeneration
This document is published by the Scottish Centre for Regeneration, which is part of the Scottish Government. We support our public, private and voluntary sector delivery partners to become more effective at:
- regenerating communities and tackling poverty
- developing more successful town centres and local high streets
- creating and managing mixed and sustainable communities
- making housing more energy efficient
- managing housing more efficiently and effectively
We do this through:
- coordinating learning networks which bring people together to identify the challenges they face and to support them to tackle these through events, networking and capacity building programmes
- identifying and sharing innovation and practice through publishing documents detailing examples of projects and programmes and highlighting lessons learned
- developing partnerships with key players in the housing and regeneration sector to ensure that our activities meet their needs and support their work
Scottish Centre for Regeneration
Scottish Government
Highlander House
58 Waterloo Street
Glasgow
G2 7DA
Tel: 0141 271 3736
Email: contactscr@scotland.gsi.gov.uk
Website: www.partnersinregeneration.com
May 2010