On the 10th of October, DG JUST held the Debt Advice Stakeholder Forum, bringing together key stakeholders in the area of debt advice and household over-indebtedness, aiming to gather expertise to inform the Commission about further actions to address the complex topic of household over-indebtedness. In her opening speech, Tiina Astola, DG JUST Director General, underlined the impact of over-indebtedness on the family and children, identifying debt advice as one way which helps prevent over-indebtedness.
COFACE-Families Europe spoke during the workshop dedicated to funding debt advice and focused on the French “Points Conseil Budget” good practice. UNAF (Union Nationale des Associations Familiales), COFACE-Families Europe’s French member, hosts several such debt advice services and has drawn key lessons from their practice.
When it comes to funding debt advice, it will invariably be funded by two main means: either by citizens via taxation, or by consumers via increased pricing of financial services (even in the case of a levy on the financial services industry, the cost will be passed on to consumers).
Debt advice has several benefits for lenders, namely cost savings (no need to pay expensive debt collection companies or private/professional, sometimes inhouse, debt mediation services), and bringing structure to a chaotic situation (multiple lenders trying to collect their debt at the same time). Borrowers can also benefit from debt advice but only if certain conditions are met, such as the independence of debt advice services, and especially, if the country has workable personal insolvency laws in place. Indeed, failure to have personal insolvency laws, lenders often have no incentive to engage in a debt mediation procedure (since there is no “threat” of settling the matter in court with the risk of having all or part of the debts cancelled). In Belgium, one very interesting method used to fund debt advice also provides benefits for borrowers: financial service providers pay a levy depending on the number of defaults within their portfolio. This creates an incentive for financial service providers to minimize the number of defaults of their clients and promotes responsible lending. This is made possible thanks to the public credit register, which has a clear mandate in preventing over-indebtedness and is one of the only ones of it’s kind in Europe.
The main lessons learned from the French “Points Conseils Budget” are the following:
- Public funding is essential in order to ensure that the services are functional. Failure to provide enough funding creates quality issues, and a disincentive to communicate and promote the service for fear of being over-run.
- One of the best funding mechanisms is via a levy on the financial services industry by the government, which is then redistributed to relevant debt advice services. This ensures a “neutralization” of the funding and avoids any conflict of interest (some of the problems that debt advice services funded by the industry can face are offering debt restructuring solutions when other better solutions would be available, or setting a higher priority for loan arrears then for other arrears such as rent).
- Quality control is important to ensure that the debt advice services, benefiting from public funding, are acting in the best interest of the over-indebted consumers/families. However, a balance between funding debt advice and funding quality control has to be found, since sometimes, especially when quality control is outsourced to external contractors, there is an incentive to maximize the budget allocated to quality control, which diminishes the resources available for debt advice, defeating the purposes of the financing!
- Funding should also take into consideration the public image and perception that various debt advice service providers have. Sometimes, when such debt advice providers are too intimately linked with social services, over-indebted consumers hesitate to seek help due to the stigma and shame that comes with reaching out to such organisations. This is one of the advantages of the UDAF (local branches of UNAF), which are seen as more “neutral” since they deal with many other issues besides over-indebtedness.
- The diversification of funding is not necessarily easy for debt advice services, especially if they have a special status such as being a recognized consumer association, or having the power to manage the personal property of individuals under trusteeship. Reaching out for private funding can thus directly generate conflict of interest or being incompatible with the independence that comes with the extended powers some of these services have.
For more information, please visit the official website of the event here: https://ec.europa.eu/info/files/debt-advice-stakeholders-forum-10-october-2018-agenda_en
Or contact Martin Schmalzried: firstname.lastname@example.org