On 22 April 2021, StepChange announced that it was proposing to cut its staff by 10%. It has started the process of consultations about 140-17o redundancies.
To many people this will sound bizarre.
In October 2020, the Financial Conduct Authority (FCA) found that 20 million people have seen their financial situation worsen because of Covid-19 and 7.7million people saw it worsen a lot. The FCA estimates 8.5million people are “over-indebted” and so could potentially benefit from debt advice.
So with more financial problems than ever, why is one of the largest debt advice agencies making cuts? Especially as £38million in extra funding was made available for debt advice in 2020 by the Money and Pensions Service (MAPS)?
Phil Andrews, the StepChange CEO, has explained why StepChange has had to do this in Exceptional times, exceptional measures, and the future.
But I think this crisis for StepChange is actually a broader crisis for the whole debt advice sector, with the way debt advice is funded proving not suitable in the current debt environment.
Fewer people took debt advice in 2020
StepChange was contacted by 500,000 people in 2020. But it gave full debt advice to only 200,000, a third down on the 300,000 people it advised in 2019.
Covid-19 emergency measures such as furlough, payment breaks and temporary benefits increases enabled many people to get through 2020 without debt advice. In many cases this was just postponing the debt problem, with interest still being added. This “kicking the can down the road” is sensible when you don’t know what your income will be like in six months time.
Everyone – government, MAPS, debt advice agencies – is expecting demand for debt advice to increase at some point in 2021. StepChange had been planning on the basis of 400,000 needing debt advice from it this year. But the emergency measures have gone on much longer than expected and the increase in demand for debt advice hasn’t yet started.
This has badly hit StepChange’s income.
80% of StepChange’s income in 2019 came from “Fair Share” contributions. These contributions are made by some creditors getting monthly payments from the Debt Management Plans that StepChange is best known for.
The pandemic has cut Fair Share income in two ways:
- fewer new clients have started DMPs;
- many clients already on DMPs have had to reduce or suspend their payments if their income has fallen.
As Andrews says, the pandemic has laid bare the flaws in the Fair Share approach of funding debt advice:
The fact that we expect demand to increase in the future doesn’t change this current reality.
Fair Share isn’t just flawed – it’s broken
Andrews emphasises problems arising from the pandemic and the unexpected delay in the increase of people needing debt advice. Both very fair points.
But that suggests that debt advice funding is facing a temporary problem – the proposed redundancies and more emphasis on efficiency and things will improve. That doesn’t look right to me.
There are three major problems with Fair Share.
1) Fair Share contributions are optional
Paying a Fair Share contribution is optional for creditors. Every industry outsider thinks this is bizarre, but originally it worked reasonably well, with most creditors choosing to pay Fair Share.
Peter Wyman, in his January 2018 Independent Review of the Funding of Debt Advice pointed out that:
[in] recent times the make-up of debt has changed markedly, with a much greater proportion now made up of debts to creditors who do not typically contribute to Fair Share.
The proportion of consumer debts such as loans and credit cards has fallen. Benefits overpayments and arrears on council tax and other household bills have increased every year.
Many of these are priority debts and not included in DMPs – but they reduce the amount available for DMPs. The non-priority bills are included, but their creditors don’t normally pay Fair Share contributions.
Wyman’s recommendations to get more people to contribute to Fair Share on a voluntary basis have failed and the trend towards more non consumer debts has continued.
2) Disposable incomes are falling
Wyman also identified the second issue:
Disposable incomes have also tended to reduce, which also reduces the amount of debt repaid through a Debt Management Plan and therefore Fair Share contributions.
For the debt advice sector this is more intractable than the issue of optional contributions. It is out of the control of MAPS, debt advice agencies and creditors, resulting from the economy and government policy, with real wages and benefits not keeping pace with inflation.
Well-designed debt advice funding would be counter-cyclical, providing extra resources when demand spikes in a recession. Instead, income from Fair Share drops as disposable incomes fall. Wyman had no proposals to tackle this fundamental problem with Fair Share.
Disposable incomes continued to fall after the Wyman review in 2018-19. And in 2020 the pandemic meant many StepChange clients in DMPs needed to reduce or take a break from their DMP payments, all impacting on StepChange’s Fair Share income.
This is not a temporary problem that will correct itself over the next year. And if the £20 a week uplift to Universal Credit is removed in the Autumn, it will get a lot worse, with a third of StepChanges clients being badly affected.
3) DMPs are becoming less important
The third problem is that debt advice is becoming more complex.
The changes in the sorts of debts clients have and lower disposable incomes make DMPs less suitable for many. A funding model where 80% of income for a debt advice agency comes from one debt solution seems inappropriate if that solution won’t work for the majority of new clients – if not 80% at least 50%.
The Insolvency Service has started the process of overhauling insolvency options with the DRO consultation it started in January. Long-overdue, it should help many clients.
But for StepChange, the increased numbers who will be eligible for DROs promise a double financial whammy – additional DROs that it is not funded adequately for and a reduction in the number of clients on low monthly payments DMPs, who should be transferred to the more appropriate DROs.
Efficiency? Unlikely to be the answer
This Covid-related shift in our operating landscape also happens to coincide with major operational change, which was already under way before the pandemic, to make our ways of working significantly more flexible and scalable to prevailing market conditions.
Which is on message with Wyman’s emphasis on promoting more efficiency. But how realistic is this when debt advice itself is becoming more complex?
Fintech advances such as Open Banking and Machine Learning that Wyman was enthusiastic about could facilitate say DMP annual reviews. It is not clear they are of much use with a client who needs to apply for a Discretionary Housing Payment or whose mental health problems mean they need practical help dealing with creditors and bailiffs. Or for clients with negative disposable income.
If StepChange sidesteps this sort of debt advice, it doesn’t change the problem for the debt advice sector – it just pushes the more complicated cases to the equally badly funded face-to-face services.
Time for a rethink of debt advice funding
The Terms of Reference for the Wyman review were to consider how much debt advice will be needed, how much it will cost and how it will be funded over a five year period.
Just over three years later, the report looks largely irrelevant. All the debt advice trends were working against the Fair Share debt funding model before Covid-19 – more non-consumer debts, lower disposable incomes, more complex debt cases.
Now the pandemic has demonstrated how a debt funding model based on the amount people in debt can repay is always going to fail badly in recessions, when it is most needed.
And the news of the StepChange redundancies means a rethink is urgently needed. No-one thinks the demand for debt advice is going to stay low over the next two years.