2022 – a very bad year for debt advice

This is my annual review, looking at the major events of 2022 for the debt advice sector and with some thoughts about 2023.

It concentrates on the bits I was most interested in. As it’s aimed at debt advisors and people interested in debt policy, I haven’t explained terms and acronyms they will all know.

A year of interlinked crises

Inflation

One of the first articles I wrote in 2022 year was Debt advice in an age of inflation. The December 2021 Bank of England Monetary Policy Committee report has said:

Bank staff expect inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022.

So at the start of the year advisers were already worried that benefits would only go up 3% in April 2022, less than inflation.

Then 2022 went much, much worse than the Bank’s prediction, with the Ukraine war and its impact on petrol and energy prices forcing inflation up to 9% in April and peaking (hopefully) at 11% in October.

The government brought in a range of help in the Spring, and more in the autumn. Most was aimed directly at people on means-tested benefits, but some was across the board, such as the £400 off electricity bills and the energy price cap brought in in the autumn.

This has proved far too little for many of the poorest. In The cost of living payments aren’t touching the sides of this crisis in September, Citizens Advice showed how calls to its Help through Hardship Helpline, run jointly with Trussel Trust, dropped off in July as the first cost of living payments were made, but then rose back up again in August.

It has also been not enough for much of middle England who are too well off to get means-tested benefits but who this year have been struggling to pay their bills and debts. Millions of households are behind on an essential bill.

Deficit budgets

A debt adviser commented on my article on inflation:

This will also mean a lot more clients presenting with deficit budgets, that are not resolvable even with truly heroic attempts unless the client gets PIP or LCWRA, which will take months. Until then debt advisors can only keep things ticking over. Maybe Breathing Space, maybe try a few hail marys like s13A, but it’s going to be grim for us. Worse for the clients.

That turned out to be prescient.

By the end of the year, Citizens Advice was reporting half of its debt clients had a deficit budget, up from 36% pre-pandemic. Other debt advice agencies were reporting similar trends, with Money Advice Trust saying that 45% of its clients had negative budgets, up from 37% in 2021.

Debt advisers have few tools to help resolve a deficit budget situation.

Insolvency is a significant help but even that is ruled out for many who have assets to protect or cannot afford the bankruptcy fee. How can you save up £680 fee when you do not have enough to live on if you make no payments to your debts? And when the underlying issue is too little income, even insolvency is not a cure as many clients will need ongoing help with grant and debt relief applications.

This is long-term, expensive casework which often needs to be local face-to-face advice, not phone or webchat. It doesn’t look cost-effective to bean counters but it is desperately needed.

MaPS consulted on the problem of deficit budgets this autumn. With no control over raising benefits or reforming insolvency, MaPS has one tool here that can help – providing additional money for debt advice. I don’t think anyone expects that will be the outcome of this consultation.

Energy bill crisis

At the bottom of every news article about energy bills, there is a quote from a government source listing the help they have given. But failing to address any of the specific issues in the article…

Citizens Advice said:

By the end of November, we’ve already seen more people unable to afford to top up their prepayment meter than for the entirety of the previous 6 years combined. 

These people are the canaries in the coal mine for this crisis. And some will die because of it. Historical “excess winter deaths” statistics show that in the 1950s-70s tens of thousands more people died in winter than more recently. The change from then has been central heating, but that is no use when it is switched off.

Ofgem’s advice when looking at Don’t Pay UK and the possibility of millions cancelling direct debits in October was almost totally useless – talk to your supplier (who will do what, cut your bills?), get a payment plan (that’s only for arrears), talk to a debt adviser (what are we supposed to do for clients facing impossible priority debts?) and apply for grants (a few will get lucky there. But not a million households.)

Depressingly, most communications from debt advice agencies went along with this as good advice… at a time when front-line advisers were getting increasingly desperate at the lack of tools to help clients with unaffordable energy bills. And increasingly worried about suppliers fitting pre-payment meters to many vulnerable people and remotely switching smart meters to work as prepayment meters. By the end of the year, these adviser concerns have proved accurate:

• Energy firms remotely swap homes to prepay meters
• Inside the courtroom where it takes minutes to force hundreds of people onto prepayment meters.

Loan sharks – how large a crisis?

The CSJ Swimming with sharks report highlighted this issue. There are no good statistics – the FCA needs to look at collecting better data routinely and permanently, which was the first of the CSJ’s recommendations.  If the government wants to tackle the menace of loan sharks they need to adequately resource the Stop Loans Sharks team – that was the second of the CSJ’s recommendations.

However loan sharks are a symptom of a financial crisis not a cause. No authorised lender should lend to people with a deficit budget and priority debts. As the FCA said in March:

We see no case for lowering [affordability] standards – we won’t help consumers one bit by making it easier for firms to lend them money that they can’t pay back.

To reduce the need for loan sharks, effective government action is needed to stop deductions from benefits and restore the benefit safety net – which the CSJ report chose to turn a blind eye to, instead listing largely or wholly irrelevant measures such as:

HM Treasury should promote the uptake of Help to Save.

IVAs in chaos?

In the summer the Insolvency Service issued Guidance to IVA firms about supporting people with cost of living problems. I covered this here: Help with IVAs if you can’t pay because of the cost of living.

But firms did not have to tell clients clearly what help was available. And many people, desperate to end their IVA, were horrified at the idea of an extension for another year. Only StepChange is taking the sensible step of seeking a mass variation.

Two top-10 IVA firms have gone into administration this year. And there are rumours about other firms pulling out of doing new business. How much of this is to do with the increasing administration costs of IVAs where the clients may be in difficulty, and how much is caused by the escalating costs of lead generator fees and investors wanting to make a profit is unclear.

The growing debt advice crisis

In a year where there was a chorus of advice to people with cost of living problems that they should talk to a debt adviser, you would expect that extra resources would have been urgently found for debt advice, especially face-to-face services that help most with priority debt problems.

But no extra money has been provided by MaPS, not even to keep pace with inflation, let alone expand services. See this MaPS FOI response – MaPS funding for regional debt services has been reduced from £34m in both 2020 and 2021 to a budgeted amount of 33m this year and 30m next year. As We are debt advisers points out, this is a 21% cut in real terms.

Debt advisers are leaving the profession every week. Some left as their contracts were not renewed with advice agencies have no security of funding for future years. But many also because they cannot afford to live on their wages or because of the strain of working under a MaPS contract. Advice agencies are finding MaPS funded posts hard to fill.

The looming mortgage crisis

Mortgage rates were already heading up over the summer as base rates went higher. Then came the September-October Truss-madness. The FT said this week that:

the cost of the average two-year fixed rate mortgage deal rose from 4.74 per cent at the time of the “mini” Budget to 5.8 per cent just before Christmas. Rates on five-year fixed-rate deals rose from 4.75 per cent to 5.61 per cent.

This crisis has only just started.

How the regulators and quasi-regulators responded

This adds up to a year that has been worse for many people than 2020 was.

2020 saw immediate action by the FCA to allow payment holidays, by the DWP to halt sanctions, by MaPS to support debt advice agencies, etc. Did we get a similar response in 2022? Did we hell. Apart from help from the governement, almost nothing has been done.

FCA

Here is the FCA’s own summary of the highlights of its year. Pre-occupied with its new consumer duty, the FCA has done almost nothing to help consumers facing a cost of living crisis.

So it reminded lenders they are supposed to be sympathetic. Wow.

And in December it issued a short notice consultation on Guidance for mortgage lenders to support borrowers with cost of living problems. But that basically set out what options are already there.

Last year, the FCA’s 2021 highlights press release mentioned the proposal to ban the referral fees debt packagers can receive for IVAs. That was a great idea that would have helped clean up the part of the IVA cesspit that the FCA is responsible for. But in 2022 nothing has happened and thousands more people have been sold unsuitable IVAs as a result of this failure. In November the FCA said another consultation would happen in 2023.

Ofgem & BEIS

At the centre of the cost of living crisis, Ofgem and BEIS should have been looking for ways to protect customers:

• why does the UK have the most expensive domestic energy prices in Europe?
• why does the spot price of gas set the price for renewable electricity generation?
• why should customers have to foot the bill for Ofgem’s previous failure to regulate suppliers properly?
• where were the proposals for a social tariff that could have helped protect the people most in need?
• the new Warm Home Discount scheme looks, as debt advisers predicted, to be turning out to be a lottery as to who gets help.

Instead Ofgem appears to have been mainly on the side of the suppliers – in the summer one of its directors even resigned.  In recent months it has issued some fines and warning letters, but there is no sign yet that these are making suppliers change their practices and provide adequate support to their vulnerable customers. Installation of prepayment meters is effectively disconnecting many customers who cannot afford to pay.

Presumably Ofgem knew that more suppliers would go under if people stop paying… see this blog by Cornwall Insight which looks at the current rocky finances of many suppliers: Bad debt and energy suppliers: A systemic risk. So there were no easy choices, but Ofgem and BEIS have failed consumers badly.

DWP

The Work and Pensions Committee recommended the DWP pause deductions from benefits to give extra breathing space to struggling families struggling because of the cost of living. Nothing happened.

The number of UC sanctions is soaring, despite little evidence that they are effective in increasing the hours claimants work. Indeed the DWP seems keen to suppress as much evidence as possible in a variety of areas.

The low-key campaign to get more pensioners to apply for Pension Credit has resulted in very prolonged delays in processing applications.

Insolvency Service

When the Insolvency Service consulted on changing DRO limits in 2021, most of the responses from debt advisers listed all the problems with DROs that were not limit-related. The IS chose to only bring in easy limit changes and kicked everything else down the road to the long-proposed review of personal insolvency.

Well we had the consultation for the review of personal insolvency this year – here is my response. When will there be any action on this?  Who knows…

The whole personal insolvency framework does need changing, with at present some people being excluded from any form of insolvency. But rapid action is needed to tackle some of the worst bits as soon as possible – allowing omitted debts to be added into DROs, removing the 1 every 6 year rule, dramatically reducing or means-testing the bankruptcy fee, increasing the value of cars allowed in bankruptcy and DROs.

We can’t wait years more for these changes that have been needed for a long while and have become even more urgent in 2022.

Nothing practical has been done in 2022 to prevent the scandal of widespread IVA mis-selling. What happened to the Sip 3.1 consultation that the IS held in 2021? It seems to have disappeared without trace. Why can’t the IS follow the FCA’s proposed route and ban the payment of IVA referral fees?

It is hard to avoid the suspicion that the Insolvency Service is mainly concerned with its own interests and those of Insolvency Practitioners, not the customers.

MaPS

MaPS had initiated a debt advice recommissioning plan in mid 2021, without any industry consultation. This involved advice agencies bidding for commercial contracts. By the end of 2021 it had been forced to withdraw the “regional contracts” covering face to-face advice from its proposals.

The terms of these contracts involved the agencies estimating what the demand for debt advice would be. And how much their costs would increase over the years of the contracts. Both looked like pretty silly ideas in 2021 and have become ever more ludicrous in 2022.

I don’t know if MaPS ever considered abandoning the whole idea in 2022 in favour of actually helping the debt advice sector through a very difficult time. It should have done.

But MaPS has persevered with this recommissioning and is still planning a real cut to face to face services. It announced the new contacts in November that start in February. These include the new DRO hubs, which are a not great solution to the wrong problem. The issues that debt advisers have with DROs have not been resolved by these hubs. The Insolvency Service needs to reform the DRO rules, at which point the new hubs will become pointless.

We will be able to see in 2023 if the new contracts have any redeeming features or whether they have been an act of vandalism on a sector in need of help.

And next year…

What’s coming up in 2023?

Energy bill problems are set to get worse in 2023. Average energy bills are expected to rise by c £500 in April and the universal £400 help with electric bills is being withdrawn.

The £900 help for people on means-tested benefits next year sounds more generous than the £650 in 2022, but set against the price increases and the loss of the £400, people getting this help will still be worse off.

The Bank of England said in December that payments on 4 million owner-occupied mortgages will rise in 2023. It won’t just affect people with mortgages, many renters may be affected if their landlord’s mortgage goes up. And with LHA rates frozen in the mini-budget this year, that is going to be a disaster for many.

2023 is going to be a difficult year for many people in work. If the recession results in many job losses, things could get very bad.

We need to manage better than in 2022

By “we” I mean everyone, from front-line debt advisers to the most distant of regulators and government bodies such as the DWP.

Learning from experience would of course be easier if things stayed much the same for a few years. But those are not the times that we live in.

I suggest that regulators:

• need to be more nimble, reacting faster to emerging problems;
• work together more, as many issues cross regulatory boundaries and progress is too often seen as someone else’s job;
• must stop obsessing about competition and start putting the interest of customers first.