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Debt advice, priceless
Local Government Chronicle – 6 November 2008

As the economic downturn continues, indebted residents plagued by financial crises are relying on their council for help. Mark Smulian reports

Councils that succumbed to the lures of Icelandic banks may be well placed to sympathise with residents who have come unstuck after being similarly seduced by easy loans, mortgages and endless offers of credit cards.

The economic downturn has increased the numbers who beat a path to councils' debt advice services, or to the voluntary bodies that act on their behalf.

Rent, council tax, mortgages, credit cards and bank loans are all sources of trouble. Some luckless folk may even need the services of the local authority loan shark teams, which hunt down those who seek to profit from other people's debt troubles backed up by threats of blackmail, assault or worse.

Figures from the Money Advice Trust - the main telephone helpline service - indicate the scale of the problem. It had 20,889 calls in August, against 15,450 in August 2007, and this year the call volume did not, as normal, level off after the post-Christmas season.

Cumbria CC is well prepared for an upsurge in inquiries from indebted households, having this year conducted a scrutiny review of debt services. This concluded financial inclusion should be a priority in all its strategic partnership policies.

Many parts of Cumbria suffer a 'high house prices, low wages' trap, which the review found was a root cause of indebtedness. Cumbria put its debt advice work out to tender, which the council has a 316,000 contract with Cumbria's Citizens Advice Bureau (CAB) to deliver.

Cumbria's head of communities Stuart Pate explains that council officers in adult and children's care services and trading standards previously provided debt advice incidentally to their main jobs.

"Tendering it to the third sector means we are able to see what we are getting for what we spend," he says. "We are clear about outputs, which we were not before, and we have greater capacity."

No staff transferred to the CAB, since they were all fully engaged on other work. Mr Pate identifies the main groups that sought help in Cumbria this year. They are the elderly and school leavers not in education, employment or training.

Another group likely to seek assistance are young people who have taken out fixed short-term mortgages that are ending and having difficulty getting another. Rural communities, he adds, are "feeling the pinch because of fuel costs".

Birmingham City Council provides its debt advice service in-house, which Jacqui Kennedy, director of regulatory services, says suits its complex needs better than the voluntary sector. "The service is based at neighbourhood offices so it can give debt advice to people who call in on other matters, such as housing benefit," she says.

"We also provide training on debt to advisers in other fields who have contact with the public."

Birmingham has an income maximization team, which tries to ensure that claimants receive the benefits to which they are entitled, and a financial literacy team, which works through credit unions to open school banks that encourage pupils to become "financially aware before they get into problems", she says.

If this work is the friendly face of tackling debt, Birmingham has a different one for the loan sharks, who are defined as those who lend money without the required authorization from the Office of Fair Trading.

Birmingham's 32-strong team covers all of England except London, the north-east and south-west under a government-backed programme that began in 2004.

At that time there was little action against loan sharks unless they blackmailed, threatened or assaulted someone, in which cases the police would deal with that offence but not the lending itself, which remained a civil matter.

"The link with criminality was lost then," Ms Kennedy says. "Now, we have police embedded in our trading standards teams and deal with all the offences connected with loan sharking, we do the surveillance and charge people and have secured prison sentences totalling 39 years."

Birmingham sends financial inclusion specialists into areas where loan sharks have been cleared out, who advise on alternative and legitimate forms of borrowing.

On the south coast, Rother DC outwardly comprises a series of genteel resorts and villages. But this masks a high level of social need, particularly among elderly people, now being worsened by debt, says head of policy Brenda Mason.

The East Sussex district has negotiated a service level agreement with the CAB, which it has also helped to move into a community building with other voluntary bodies. The agreement specifies what the CAB must do for the council's 75,000 grant, including office opening hours, outreach services, collaboration with council benefit staff and relief of 750,000 of indebtedness each year.

As Ms Mason points out, it is an agreement tailored for a wholly demand-led service. "We are very flexible on the targets," she says. "There are no financial penalties attached, but the agreement is helpful in giving councillors confidence in the service the council gets. It allows us to see what is happening and if the CAB is in difficulties on any targets they will come and talk to us."

The money spent on debt advice is a sound investment, according to a Rother cabinet report. This said: "Potentially 6.50 of debt is relieved for every 1 spent by the council on this service. "The indirect economic consequences of this debt relief are very substantial, often preventing job loss, homelessness and other severe consequences that accompany unmanaged debt."

Poverty may be concealed in Rother, but it is clearly visible in North Ayrshire Council's area, where David Hornell, manager of its Money Matters service, says both traditional heavy industries and some of their new technology replacements have been lost.

"We are an unemployment black spot, and I've noticed a large increase in enquiries recently. For example, there were recently six about mortgages in one afternoon, we never used to get that," he says.

North Ayrshire is even now still collecting some poll tax debts and Mr Hornell often has to deal with council tax arrears, or rent arrears cases referred by housing colleagues.

He fears the effects of the government's reduction from 12 months to three in the period for which housing benefit claims can be backdated. "I think it will be quite significant, people just have to find the money to pay the rent and if you are on a low income how do you do that?" he says.

Some will turn to Scotland's new system of self-declared bankruptcy for those with low incomes and assets, on which the council's service advises. "They make a fresh start when the bankruptcy is discharged after a year," says Mr Hornell.

As recession gathers, so does anti-debt activity. The Department for Work & Pensions has launched a financial inclusion 'champions' programme and the energy regulator Ofgem has launched a service with the CAB to advise on fuel poverty.

Nicky Rose, who leads on banking and finance for the Trading Standards Institute, sums up the need for advice services, but also why they may miss those most in need unless their existence and powers are made clear by councils.

"What appears to be the easy thing to do if a default notice or demand comes is to ignore it and hope it goes away," she says. "The effective thing to do is to get advice."

Credit unions

Credit unions are little like the original building societies, which lent only to members based on the assets they had collectively contributed.

Their's is a world without derivatives or dodgy banks. Unions are owned by their members who elect volunteers to their boards. They are legally limited to charging a 2%-a-month interest rate and any surpluses are reinvested or distributed as dividends.

Many unions have dropped the requirement that members can borrow only a fixed multiple of their personal investment, and instead assess ability to repay.

The big difference with banks is that a credit union "will lend a few hundred pounds if that is what someone needs, and there is no arrangement fee," says Abbie Shelton, policy officer of the Association of British Credit Unions.

All credit unions must have a 'common bond' between members, typically an area or workplace; many unions were set up originally by councils for their staff.

In the past decade these bonds have become larger and unions may now cover an entire city or London borough. Some councils now use unions to help combat social exclusion and employ staff on their behalf or provide them with money or premises.

The Local Government Association says the downturn has seen councils set up new credit unions to help people whose borrowing applications may be rejected by banks.

From October 2009, unions will be allowed to pay interest on deposits, which should make them more attractive to savers. LGA chair Margaret Eaton (Con) called on the government to implement this change earlier to encourage the unions' growth.

Examples of partnership working include Newham LBC and Leeds City Council, in both of which credit unions provide accounts for looked-after children so they have money available once they leave care.