Coalition law leaves 50,000 without debt advice
Ministers are refusing to use cash from payday lender fines to fund charities offering debt advice. Don't they realise this looks bad?
We're only talking about £3 million here. Barely £2.8 million, actually, which is the total of two fines coughed up by payday lenders in 2014.
Most of it – some £2.6 million – came from Wonga for sending bogus letters to borrowers. The rest came from a fine against First Financial, which had sent out millions of unlawful text messages.
These were companies breaking the rules to encourage vulnerable people to increase their debt. And yet the cash directly resulting from their rule-breaking isn't going to the most obvious place.
Instead, thanks to a tweak of the law back in 2012, the Treasury ensured all fine income above enforcement costs are now fast-tracked into its current account at the Bank of England. Legislating to ensure this has given ministers carte blanche to shrug their shoulders and say 'it's the law' – when it's this government that passed the law.
This is how it come to pass that money which the think-tank New Philanthropy Capital estimates could fund 50,000 hours of potential face-to-face debt advice is instead going towards the exchequer's vast coffers.
"Regulators are quite right to fine payday lenders when they break the rules, but we just don't want to see the fines just ending up in the Treasury coffers," says NPC chief executive Dan Corry.
"Much better would be to target the money so that it helps the people most damaged by the behaviour of loan sharks and high-interest lenders."
Thanks in large part to the campaigning of Labour MP Stella Creasy, this is not the first time the government has been feeling the heat over payday lenders.
So, for the first time this year, it is making payday lenders contribute towards the levy that funds the money advice service. This is a government-overseen body tasked with coordinating the provision of debt advice. Its budget, which is based on need, is £38 million in the current financial year.
"The government is committed to ensuring that customers have access to free and independent debt advice, and that the financial services industry pays their fair share to provide this advice," a Treasury spokesperson says.
But the NPC claims telephone-based advice only helps fix short-term problems. Face-to-face meetings are much more likely to help struggling people in the long run, its research has found.
Those turning to the government service for help will only receive this if they ask – and there are fears payday lenders may escape having to fund it in the future altogether.
The £38 million figure looks, on the face of it, like it makes the question of an extra £3 million or so seem irrelevant. NPC believes it could make a big difference to charities struggling to cope under the coalition's austerity drive, though.
"There simply isn't enough free face-to-face debt advice to meet demand," says David Hawkes, national money advice coordinator at AdviceUK, Britain's largest network of independent advice centres. He says charities need all the cash they can get because so many more people are struggling with debt. The squeeze on household incomes and the coalition's welfare reforms are to blame for that. Any rise in interest rates won't help, either. "More funding is needed, especially following the virtual demise of legal aid and what is likely to be another round of harsh local authority cuts in the coming year," Hawkes warns.
Personal debt is on the rise. The number of individual voluntary arrangements – in which people agree to make regular payments to creditors – is now at its highest level since 2005. And, as Labour MP Paul Blomfield says, almost three million people are dealing with problem debt – many because of what he calls the "unscrupulous practices" of payday lenders.
Blomfield, who acts as secretary of the all-party parliamentary group on debt and personal finance, is all too aware of the growing demand for free and independent debt advice. "We've made real progress in regulating payday lenders but many of these big companies are continuing to break the rules," he says. "It's right that the fines imposed on them should go towards helping the people they rip off and hard-pressed local advice services."
It may be right, but – under the Treasury's current rules – it's not going to happen. Charities will have to make do – and 50,000 people who could have benefited from some useful face-to-face advice will have to go without.
