Energy Debt & Debt Advice Funding
Francis McGee: Throughout 2024, I worked on a project with Clear Consultancy Services, funded by Impact on Urban Health, looking at the experiences of people struggling with energy debts. The work found that people who owed their energy supplier money received markedly different service – usually worse –than other customers. We also found inconsistency and complexity in the support offerings of different suppliers.
These findings reinforced evidence that Ofgem was accumulating and helped make the case for tougher regulation to improve standards.
But our project also took us into a different line of inquiry, about how the energy sector helps to fund the provision of free debt advice across Great Britain. This article is about that area of the work, and will cover:
1. why a project on energy debt also looked at funding of debt advice
2. what we did and what we found
3. our recommendations
Why a project on energy debt also looked at funding of debt advice
Our evidence highlighted three components of support for people in difficulty with energy bills:
1. keeping bills down,
2. assistance for people struggling to pay; and
3. access to free debt advice.
Debt advice is a crucial safety net when people fall through the first two layers of support, and where energy issues are part of a more complicated overall picture, as they usually are. That’s why our work came to think about the availability of debt advice alongside other support. If it’s about availability, it’s about funding. And the availability picture isn’t pretty: overall levels of debt advice funding only support a minority of those who need advice to access it, about 2m people out of 8m in need.
We also found that energy is the fastest growing type of debt presenting at debt advice services in Great Britain both by volume and by value. The number of energy debts advised on by the biggest advice agencies rose by 5.2% between 2022-23 and 2023-24, and the value of energy debts rose by 33%. This means there’s a link between energy debt and the workload of debt advisers. If it’s about workload, it’s about funding. And the workload picture’s not pretty either.
We repeatedly heard from debt advisers that advice is becoming harder to deliver. The number of client debts is rising, especially priority debts, driving up the number of creditors advisers have to deal with. The size of priority debts is rising, which drives negative budgets and the likelihood of having to resolve emergencies like court action or disconnection threats. So if you’re a priority creditor, like an energy company, offering support that advisers and their clients find complex, you’re helping make debt advice harder and more expensive.
We also heard from the experts we interviewed that energy will continue to be a major cause of problem debt in future years, even though prices are more stable. Ofgem’s “debt reset” ideas will obviously help, but they’ll tackle only a quarter to a third of the total accumulated debt and could increase the workload for advisers, who often access debt relief mechanisms on behalf of clients and have to re-advise people when their debt levels change.
For all these reasons, it was appropriate to look at whether energy sector is contributing sufficiently to the availability of free debt advice, through the funding it provides.
What we did and what we found
If you want to find out whether one sector is funding debt advice in a fair and proportionate way, you can’t look at that sector in isolation. You need to look at funding in the round and see how much comes from where.
We went to six of the largest debt advice agencies in Great Britain and asked them for
· the number of debts they advised on in each of last few years
· the types of debts advised on (a split by creditor sector)
· the sources of their funding (split by the same creditor sectors)
Why these data? Our assessment was that debt type, number and value are reasonable proxies for the work required to advise a client. This view was supported by our interviews with the debt advice sector.
The resulting dataset gave us a consistent and reasonably comprehensive picture for 2022-23 and 2023-24. Below is the 2023-24 data. It includes 2.75 million individual debts presented to advisers in that year, with a total value of £5.8 billion.
It includes £161 million of funding supporting debt advice. Around £8 million of this is specifically linked to delivering statutory debt solutions, leaving around £152 million for advice giving.
This data is not completely comprehensive. The best estimate we can make of the total annual income of the free-to-client debt advice sector is somewhere around the £200-220 million mark. We know we’ve excluded local authority in-house provision, local authority funding of external advice services and funding received by local community advice services from sources other than MaPS. But this picture covers around three quarters of total identifiable funding, with a slight bias towards FS creditors and away from Local Authorities because of the characteristics of the agencies whose data we used.
A first key finding is that household bill debts account for between 35% and 58% of the debts presenting at debt advice by number and between 25% - 38% of debts by value (the ranges arise depending on whether Buy Now Pay Later is included in financial services or in retail and depending on the composition of debts allocated to debt purchasers and debt collection agencies).
This is a transformation in the debt landscape since 2011, when research was done to design the current funding framework. The transformation is not sudden or temporary, and it’s not specific to energy. The increasing proportion of ‘household’ debts, such as energy, water and Council Tax is now a long-term trend.
The 2011 assessment dismissed the idea of including household debts in the debt advice funding model because such debts were seen as too small to be worth measuring. So only the FS sector was compelled to provide funding.
Our second finding is that there’s no good correlation between measures of a client’s debt burden, which drives an adviser’s work burden, and funding for that adviser’s work. The mis-match is widespread and varied between sectors.
The third finding is that the energy sector is contributing more funding to free debt advice than many stakeholders thought. However, much of this is recent, piecemeal and there was a real concern it would turn out to be short-term. Most of it is targeted from a few generous energy companies into strategic partnerships with a small number of advice agencies. At the time of the study, energy definitely didn’t have the biggest mismatch between funding and debts, and it certainly won’t now the new energy-funded service Energy Debt Advice Service operated by Citizens Advice, StepChange and MAT is up and running.
But overall, we found a funding model that is out of date, out of line with today’s debts, too discretionary and with risks of short termism and incoherence.
A better model would spread the compulsory funding of debt advice to all major creditor sectors, including energy and also central and local government, water and so on. This broader base would make funding more resilient, more predictable and more scalable, enabling the debt advice sector to meet more of the need.
A better model would better align funding with factors that drive adviser work, and adjust the share of funding with the rise and fall of different debt types over time.
What we recommended
We recommended legislation for that kind of model. It could be launched all in one go via a Debt Advice Funding Bill, or one area at a time as legislators have the bonnet up on different sectors.
To power our recommended model, we borrowed the mechanism behind the existing FS levy:
1. HMT would set the funding requirement on advice from MaPS and stakeholders.
2. It would allocate the funding requirement to different sectors according to the number of debts.
3. Sector regulators would allocate the funding requirement between firms, as FCA does now for financial services.
4. Regulators would collect the money using a new purpose-built levy or by modifying an existing one.
5. The money would be shared three ways: MaPS would get some, as now. Devolved Governments would get some, as now. And regulators could retain some, or allow firms to retain some, for their own allocation to debt advice. This way, nothing in our model would jeopardise successful bilateral partnerships
A couple of ancillary recommendations support this central one.
First, while there’s no case to target energy sector in isolation for more money, there is a case to prioritise energy in the build of a new model. This goes back to energy being the fastest growing debt category and to the specific conduct issues we found.
Second, the model needs to be powered by good data, and getting our dataset together was just too damned hard. It’s gappy and inconsistent, and creditor and debt agency accounts are needlessly opaque. And yet most if not all the information that’s needed is probably already being collected by FCA, MaPS and devolved governments between them. These need to get their heads together and create a debt advice data strategy, that makes more use of what they collect already, fills in gaps and could under-pin a better model.
So that’s the story of how an investigation into the plight of people in energy debt, and the difficulties faced by debt advisers trying to help them, led to a proposal to overhaul how debt advice is funded in Great Britain. We’d love to know what you think of it.