Debt advice saves lenders money, so it make social and business sense for them to contribute to funding it, says Faisel Rahman
Personal debt in the UK now stands at �1.5tn. The latest figures show the number of unemployed people has reached 2.5 million. And the pressure on people is increasing. Recent research has indicated that over 2m households are already in arrears with bills and credit card payments and that an estimated 3.6m households may be in danger of falling into arrears. With many job cuts still to be announced, it is a problem that is set to grow. It was surprising, then, when it was announced that 500 publicly funded debt advisers from Citizens Advice bureaux and independent advice agencies were set to lose their jobs in April.
The good news is that the Department for Business, Innovation and Skills has now approved �27m from its contingency fund to support them for another year. But this is not a permanent commitment of support, only a reprieve.
In agreeing the money, the government has stated that it wants to put debt advice on a more sustainable footing. This, of course, is the big issue. The problem that advisers are dealing with is not going away in a hurry, as the figures above show.
The cost of providing quality face-to-face debt advice varies from �300-�500 per client. While telephone advice can be cheaper, people overwhelmingly prefer and value face-to-face support, which is fundamental in dealing with multiple debt and vulnerable clients.
The credit industry contributes about 3% to the estimated �150m annual cost of free debt advice nationally, but close to 70% comes from public funds and about 20% from charitable sources. The �27m of government money will help about 100,000 people over the course of the year, but this is a drop in the ocean considering the scale of the problem. Any long-term solution will need more money and to include the industry.
While there is plenty of research on the impact of debt advice on clients, there is little more than anecdotal evidence of the benefits to the credit industry. Yet debt advice services not only offer an invaluable lifeline but save banks and credit card providers lots of money.
According to a recent report by grantmaking charity the Friends Provident Foundation, debt advice means creditors benefit from reduced costs in chasing customers in arrears, reduction in time spent understanding the customer's financial position, and reduced costs in pursuing customers through the courts. In addition, creditors typically receive more money back if people see a debt adviser ? roughly �1,000 per client. Nationally, this equates to around �1bn more than if advice had not been given.
Clearly, there is a business imperative here for the industry to be involved. The British Bankers' Association rightly points out that the advice industry is fragmented, needs more standardisation, is affected by inefficiencies and has often been unable to directly evidence its impact ? which is mostly driven by short-term and incoherent policy. But even it has recognised that the industry needs to play a bigger role in supporting and ensuring quality advice is available for people who need it.
Last year, the Labour government established the Consumer Finance Education Body (CFEB), with a remit to help people understand financial services and better manage their money. It is funded by a levy on the finance industry and later this year will start providing a free national money guidance service to help people to choose and figure out financial products.
While civil servants and advice agencies hope that the CFEB will also take on the responsibility for debt advice funding and support, the body itself has been very quiet on this issue, leaving the future of co-ordinated debt advice in doubt. With the credit industry benefiting to the tune of �1bn a year and contributing so little, a levy to fund debt advice makes both business and social sense. Surely an alliance of the CFEB and the finance industry to support debt advice agencies would be the sustainable footing that the Treasury has been looking for and which the sector so desperately needs?
? Faisel Rahman is director of Fair Finance, a financial inclusion social enterprise.
Source: http://www.guardian.co.uk/society/2011/feb/22/finance-industry-levy-fund-debt-advice
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