On 22 April 2021, StepChange introduced that it was once proposing to chop its personnel by way of 10%. It has began the procedure of consultations about 140-17o redundancies.
To many of us this may sound abnormal.
In October 2020, the Financial Conduct Authority (FCA) found that 20 million folks have noticed their monetary state of affairs aggravate as a result of of Covid-19 and seven.7million folks noticed it aggravate so much. The FCA estimates 8.5million individuals are “over-indebted” and so may doubtlessly have the benefit of debt advice.
So with extra monetary issues than ever, why is one of the biggest debt advice businesses making cuts? Especially as £38million in additional funding was once made to be had for debt advice in 2020 by way of the Money and Pensions Service (MAPS)?
Phil Andrews, the StepChange CEO, has defined why StepChange has had to try this in Exceptional times, exceptional measures, and the future.
But I believe this disaster for StepChange is in fact a broader disaster for the complete debt advice sector, with the method debt advice is funded proving now not appropriate in the present debt surroundings.
Fewer folks took debt advice in 2020
StepChange was once contacted by way of 500,000 folks in 2020. But it gave complete debt advice to just 200,000, a 3rd down on the 300,000 folks it recommended in 2019.
Covid-19 emergency measures akin to furlough, cost breaks and transient advantages will increase enabled many of us to get thru 2020 with out debt advice. In many circumstances this was once simply suspending the debt downside, with pastime nonetheless being added. This “kicking the can down the road” is smart whilst you don’t know what your source of revenue can be like in six months time.
Everyone – govt, MAPS, debt advice businesses – is anticipating call for for debt advice to extend in the future in 2021. StepChange were making plans on the foundation of 400,000 wanting debt advice from it this 12 months. But the emergency measures have long gone on for much longer than anticipated and the build up in call for for debt advice hasn’t but began.
This has badly hit StepChange’s source of revenue.
80% of StepChange’s income in 2019 got here from “Fair Share” contributions. These contributions are made by way of some collectors getting per thirty days bills from the Debt Management Plans that StepChange is easiest recognized for.
The pandemic has reduce Fair Share source of revenue in two techniques:
- fewer new purchasers have began DMPs;
- many consumers already on DMPs have needed to scale back or droop their bills if their source of revenue has fallen.
As Andrews says, the pandemic has laid naked the flaws in the Fair Share method of funding debt advice:
The proven fact that we predict call for to extend in the long run doesn’t exchange this present truth.
Fair Share isn’t simply fallacious – it’s damaged
Andrews emphasises issues coming up from the pandemic and the sudden prolong in the build up of folks wanting debt advice. Both very reasonable issues.
But that implies that debt advice funding is dealing with a brief downside – the proposed redundancies and extra emphasis on potency and issues will give a boost to. That doesn’t glance proper to me.
There are 3 primary issues of Fair Share.
1) Fair Share contributions are not obligatory
Paying a Fair Share contribution is not obligatory for collectors. Every business outsider thinks that is abnormal, however at first it labored somewhat smartly, with maximum collectors opting for to pay Fair Share.
Peter Wyman, in his January 2018 Independent Review of the Funding of Debt Advice identified that:
[in] fresh instances the makeup of debt has modified markedly, with a a lot better share now made up of money owed to collectors who don’t generally give a contribution to Fair Share.
The share of person money owed akin to loans and bank cards has fallen. Benefits overpayments and arrears on council tax and different family expenses have greater yearly.
Many of those are precedence money owed and now not incorporated in DMPs – however they scale back the quantity to be had for DMPs. The non-priority expenses are incorporated, however their collectors don’t most often pay Fair Share contributions.
Wyman’s suggestions to get extra folks to give a contribution to Fair Share on a voluntary foundation have failed and the development against extra non person money owed has persisted.
2) Disposable earning are falling
Wyman additionally known the 2nd factor:
Disposable earning have additionally tended to cut back, which additionally reduces the quantity of debt repaid thru a Debt Management Plan and due to this fact Fair Share contributions.
For the debt advice sector that is extra intractable than the factor of not obligatory contributions. It is out of the keep watch over of MAPS, debt advice businesses and collectors, because of the financial system and govt coverage, with actual wages and advantages now not conserving tempo with inflation.
Well-designed debt advice funding could be counter-cyclical, offering additional assets when call for spikes in a recession. Instead, source of revenue from Fair Share drops as disposable earning fall. Wyman had no proposals to take on this basic downside with Fair Share.
Disposable earning persisted to fall after the Wyman assessment in 2018-19. And in 2020 the pandemic supposed many StepChange purchasers in DMPs had to scale back or take a smash from their DMP bills, all impacting on StepChange’s Fair Share source of revenue.
This isn’t a brief downside that may right kind itself over the subsequent 12 months. And if the £20 per week uplift to Universal Credit is got rid of in the Autumn, it’ll get so much worse, with a 3rd of StepChanges purchasers being badly affected.
3) DMPs are changing into much less necessary
The 3rd downside is that debt advice is changing into extra complicated.
The adjustments in the types of money owed purchasers have and decrease disposable earning make DMPs much less appropriate for lots of. A funding style the place 80% of source of revenue for a debt advice company comes from one debt resolution turns out beside the point if that resolution gained’t paintings for the majority of new purchasers – if now not 80% no less than 50%.
The Insolvency Service has began the procedure of overhauling insolvency choices with the DRO session it began in January. Long-overdue, it must lend a hand many consumers.
But for StepChange, the greater numbers who can be eligible for DROs promise a double monetary whammy – further DROs that it isn’t funded adequately for and a discount in the quantity of purchasers on low per thirty days bills DMPs, who must be transferred to the extra suitable DROs.
Efficiency? Unlikely to be the resolution
This Covid-related shift in our running panorama additionally occurs to coincide with primary operational exchange, which was once already beneath method earlier than the pandemic, to make our techniques of running considerably extra versatile and scalable to prevailing marketplace stipulations.
Which is on message with Wyman’s emphasis on selling extra potency. But how reasonable is that this when debt advice itself is changing into extra complicated?
Fintech advances akin to Open Banking and Machine Learning that Wyman was once captivated with may facilitate say DMP annual opinions. It isn’t transparent they’re of a lot use with a shopper who wishes to use for a Discretionary Housing Payment or whose psychological well being issues imply they want sensible lend a hand coping with collectors and bailiffs. Or for purchasers with unfavourable disposable source of revenue.
If StepChange sidesteps this kind of debt advice, it doesn’t exchange the downside for the debt advice sector – it simply pushes the extra difficult circumstances to the similarly badly funded face-to-face products and services.
Time for a reconsider of debt advice funding
The Terms of Reference for the Wyman assessment have been to imagine how a lot debt advice can be wanted, how a lot it’ll price and the way it’ll be funded over a 5 12 months duration.
Just over 3 years later, the record seems to be in large part beside the point. All the debt advice traits have been running towards the Fair Share debt funding style earlier than Covid-19 – extra non-consumer money owed, decrease disposable earning, extra complicated debt circumstances.
Now the pandemic has demonstrated how a debt funding style according to the quantity folks in debt can pay off is at all times going to fail badly in recessions, when it’s maximum wanted.
And the information of the StepChange redundancies way a reconsider is urgently wanted. No-one thinks the call for for debt advice goes to stick low over the subsequent two years.