Debt Management

DM 16A

Supplementary written evidence submitted by Consumer Credit Counselling Service

CCCS and ‘Fair Share’ Funding – a note

I would like to thank the committee, through you, for giving me the opportunity to provide evidence in person to its inquiry into debt management.

The session on Tuesday covered a range of issues but did not have time to discuss the CCCS fair share contribution (FSC) funding model. This note, therefore, sets out how the arrangement works and how it helps to ensure – through voluntary arrangements with the creditor community – we are able to provide free, impartial and high quality debt advice to people as they need.

CCCS helped over 400,000 people deal with their personal debt problems last year. Since its founding in 1993, a key principle of CCCS is that private monies from the financial services industry should fund the charity to help and support the over-indebted. During the CCCS’s formative years, much time and effort was spent by the chairman and trustees in achieving the support of lenders. Subsequently a sustainable revenue stream in the form of a FSC from their collections and recoveries functions was agreed.

Today, virtually all the major banks, credit card companies and other lenders agree to pay FSCs in recognition of the unique service CCCS provides to the financially vulnerable. The payment is based on creditors returning a percentage of the monies repaid to them through Debt Management Plans (DMPs). For clients, every penny paid goes to pay off their debts, while lenders donate separately to CCCS. This enables CCCS to operate a free and impartial service that provides help and support for all.

It is important to appreciate that lender support for CCCS is based on voluntary donations that nonetheless provide us with a sustainable revenue stream. Market research shows that borrowers in heavier debt are more reluctant to speak to their creditors and do not want to pay for help. Creditors appreciate that the independent, high quality and holistic service CCCS provides means clients are better placed to repay their debts over time (through DMPs). To this end, CCCS disbursed £289 million of client monies to creditors in 2010, while the charity’s income from FSCs was £28.6 million (90 percent of operating income).

Technological developments in the form of our unique online debt counselling service, Debt Remedy, and the application of its rules-based approach to our telephone helplines meant that as the recession hit, CCCS was able to rapidly step up its operation to meet a 35 percent increase in demand for its services, doing more for less. While only one in ten of the services we provide are eligible for Fair Share, this is enough to ensure CCCS can provide impartial support to the nine in ten people who contact us who do not end up on a repayment plan.

However, the success of the charity’s ‘fair share’ arrangement has prompted some in the commercial sector to look to at how they can improve their funding models.

One for-profit debt management firm, Payplan, is funded by similar – but contractual – agreements with creditors, enabling it to offer free-to-client DMPs. However, Payplan is a company and therefore has to look after its bottom line when deciding who it provides services to. To support its model, Payplan, like the other for-profits, engages in selective behaviour – the company only provides a service to debtors who can find at least £50 disposable income in their monthly budgets – other people struggling with unmanageable debt will need to look elsewhere for help. By contrast, CCCS has a token payments scheme that we will be rolling out in full in 2012 to give debtors experiencing a temporary income shock an extra breathing space (9.1-9.2).

The further expansion of this type of funding arrangement therefore presents a serious threat to the very benefit that ‘fair share’ provides to the UK's wider debt advice needs. Although it might seem superficially attractive to extend fair share funding to the fee chargers, the danger is it puts at risk the full range of debt solutions that clients need .

The main risk is that f or- profit companies would continue to target advice at the debt solutions that are most profitable to them (see points 7.1 and 7.2 of our submission) – while charities like CCCS who serve all debtors would be put in jeopardy (7.6).

In our submission to the inquiry, we showed there is strong evidence that for-profit debt management firms cherry-pick who to help, based on whether or not clients provide them with a revenue stream ( 7.3-7.4). That firms offer profit-seeking, rather than the most appropriate advice, is a key finding of a recent review of the sector by the Office of Fair Trading (7.1). The refore, the danger of opening up fair share to commercial firms is that it would incentivise this behaviour on an industrial scale, becoming all the more necessary for revenues and absolutely vital for market position. Instead of building on what works, expanding fair share to the for- profits would reduce the solutions available to clients and detract from the holistic service that those of us in the charitable sector are trying to provide.

In contrast, the CCCS approach is to develop a strategy for ‘fair share’ that increases capacity in the free sector and ensures key charitable partners have access to sustainable private sector funding. Our longstanding partnership with the Money Advice Trust (National Debtline) is one example, yielding £815,000 in 2010 for the Trust’s impartial free-to-client advice service.

Meanwhile, our new strategic partnership with Citizens Advice means that local bureaux get a share of the monies CCCS receives from lenders when they refer clients to CCCS-administered DMPs (3.6-3.7).

Innovative arrangements like these are essential to help struggling borrowers sort themselves out. The scale of personal debt and its impact on people’s lives demands a strategic response and the free sector remains the best place to go for financial recovery, hence CCCS continues to be the largest and most respected provider. The free sector needs to be protected and promoted as such, with partnerships and a more efficient mix of delivery channels ensuring people get the independent, impartial debt help that they need.

25 November 2011