Consumer Financial Stress - Financial Counselling Australia

Comparing Australian and International Systems to address

Consumer Financial Stress Charles Livingstone Emma Bruce Erica Kotnik Sharon King Department of Health Social Science School of Public Health and Preventative Medicine Faculty of Medicine Nursing and Health Sciences

In Memory of Jan Pentland

Jan Pentland was responsible for initiating this report and the project for which it presents findings and conclusions. She was an enthusiastic supporter of the project, providing expert advice, encouragement and guidance, and arranging access to key informants. Jan was, of course, a driving force behind the financial counselling movement in Australia and of extraordinary significance in the development and success of AFCCRA. Sadly, Jan died shortly after the report’s final draft was prepared. With the kind agreement of Jan’s family, we dedicate this report to her memory.

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Comparing Australian and International systems to address consumer financial stress

Acknowledgements

This paper was prepared by Charles Livingstone, Emma Bruce, Erica Kotnik and Sharon King. The funding for this project was provided by ANZ and the project was commissioned by the Australian Financial Counselling and Credit Reform Association (AFCCRA). We are grateful for much advice and assistance provided by Jan Pentland, Anna Mandoki, and Michelle Commandeur and to the key informants (professionals and consumers) who provided us with considerable assistance. However, responsibility for the contents of this report rests with the authors.

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Contents

In Memory of Jan Pentland

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Acknowledgements

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ES. Executive Summary

1

1.

6 6 6 7

Introduction and methodology 1.1. Context and background 1.2. Methodology 1.2.1. Identification of relevant literature 1.2.2. A key focus of the review: the distinction between ‘macro’ and ‘micro’ perspectives on financial counselling 1.2.3. Key informant interviews and group discussions

8 8

2.

Determinants and Conceptualisations of Financial Stress 10 2.1. Identifying risk and other factors for consumer financial stress 10 2.2. A ‘public health’ framework for assessment of Financial Counselling services and other interventions to address financial stress 16

3.

Aspects of Financial Counselling in Australia 3.1. Evolution and key characteristics of the Australian model 3.2. The example of Victoria: Financial Counselling and community development 3.3. Financial Counselling services for primary producers and rural populations 3.4. Fee paying models for addressing financial stress in Australia 3.5. Issues and limitations of the Australian model

23 23 24 26 27 28

4.

International models for Financial Counselling or like services 4.1. United Kingdom 4.1.1. Financial advice services in the UK – a snapshot 4.1.2. The UK Action Plan for over-indebtedness 4.1.3. British research and associated information regarding financial literacy, illegal and high cost lending and money advice 4.2. Credit and debt counselling arrangements in North America

30 30 30 32

Formal or ‘clinical’ models for Financial Counselling service provision 5.1. Role of formal or ‘clinical’ models of Financial Counselling practice in determination of best practice benchmarks 5.2. Summary of formal/clinical Financial Counselling models 5.3. Models for assessment or evaluation of Financial Counselling effectiveness

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5.

36 43

49 50 52

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6.

7.

Qualitative research with informants in Australia 6.1. Research with expert participants 6.1.1. Harms associated with Financial Stress 6.1.2. Drivers of financial stress 6.1.3. Effectiveness of financial counselling services 6.1.4. Funding base for Financial Counselling services 6.1.5. Training, qualifications and recruitment of financial counsellors 6.1.6. Reforms and enhancements required to address financial stress more adequately

55 55 55 55 56 57 58

Conclusions 7.1. Feasibility of determining best practice in financial counselling services 7.2. Best practice framework 7.3. Conclusions

61 61 62 62

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References

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Appendix 1: System level experts consulted

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Appendix 2: Interview guide for system level experts and financial counsellors

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Appendix 3: Interview guide for consumer group discussion

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Appendix 4: ABS Indicators of Financial Deprivation and Stress

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ES. Executive Summary

ES1.

Methodology ■■

The key research questions we were asked to address for this project were:

›› In what way is the model of financial counselling in Australia different to overseas models of financial counselling? ›› In what ways is it better or worse than overseas models of financial counselling? ■■

The project adopted a two part methodology involving:

›› a review of literature (including ‘grey’ literature), both Australian and overseas, followed by ›› a qualitative phase involving focus group and key informant discussions in Australia. ■■

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ES2.

We interpreted our focus as being to ascertain the extent to which financial counselling in Australia is thought to meet the needs of service users, and to identify any gaps in the services available to address financial stress. As we developed an understanding of relevant issues, it became clear that we needed to develop an appropriate conceptual framework. It also became clear that a system wide approach was a more appropriate way to explore the range of possible interventions which could assist in avoiding and/ or minimising the consequences of financial stress. We determined that a public health conceptual framework provided a good basis to identify and determine the full range of interventions (downstream, midstream and upstream, in the public health terminology) available to address financial stress. We adapted such a framework for the purpose of identifying an idealised system to address financial stress and applied this to the service systems we were able to identify via the research methods adopted for this project.

What creates financial stress, and how do we address it and its consequences? ■■

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Financial stress has its origins not only in a mismatch between income and expenditure, or as a result of personal misfortune or emergency such as illness or unemployment, but also in social, cultural and regulatory factors. Such factors appear to predispose some consumers to financial exploitation, and to create conditions in which exploitative products can be offered. This is compounded by a lack of confidence or expertise on the part of many consumers in negotiating what is frequently perceived to be a complex and daunting formal financial services system – making disadvantaged consumers more likely to pursue apparently more accessible, but often very high cost, alternatives. Financial stress appears to be often associated not just with socio-economic disadvantage, but

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also with what, in a public health context, might be termed co-morbidities – mental health issues, including anxiety and depression, and with broader issues of social exclusion. ■■

A comprehensive model to address financial stress would recognise the need to address both of

›› the catastrophic consequences resulting from this complex interplay of factors, (i.e., the immediate or looming financial catastrophes of presenting clients); as well as ›› the underlying ‘structural’ causes of such difficulty. These include the disabling effects of entrenched socio-economic disadvantage, the often complex legislative underpinnings of financial products, cultural and social barriers to comprehension of the implications of credit and indeed differing cultural perspectives to money and credit. ■■ ■■

Developing a model to comprehensively address these parameters is not likely to be a simple task. However, the broad ‘architecture’ of such a model is conceptually straightforward, requiring a series of downstream, midstream and upstream interventions, if it is expected to be fully effective (see Figure ES1).

Figure ES1: Basic public health model to address financial stress

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ES3.

Upstream (or Primary)

Midstream (or Secondary)

Downstream (or Tertiary)

Policy, actions or initiatives addressing the root causes of financial stress

Interventions or activities enforcing regulation, collecting data, evaluating interventions, providing information or education, early intervention and advocacy

Interventions to provide support to those in crisis or to assist in remediation of existing difficulties

Utilisation of fragments of such a model would be expected to reduce its overall effectiveness but nonetheless would be expected to alleviate at least some of the harms associated with financial stress.

Financial Counselling in Australia ■■

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The Financial Counselling (FC) model prevalent in Australia has evolved since the 1970s from an ‘emergency relief ’ model, where some form of short term material support was typically provided by a welfare agency to the consumer towards a contemporary model intended to address both short and longer term financial difficulties, derived from a community development approach. Although emergency relief continues to be necessary and to be provided, concepts of how best to address what might be regarded as the ‘structural’ factors inducing ‘chronic’ indebtedness have substantially altered, in the direction of a model derived from community development principles. Underpinning this community development model is a social justice philosophy incorporating ideas of empowerment, advocacy and the development and entrenchment of principles of consumer rights for low-income earners and other vulnerable consumers. A lack of enforcement for standardized accreditation of counsellors, and, up until very recently, no standardized education and training programs for counsellors across Australia have tended to undermine the development of an agreed model for Australian FC services. The Australian FC system almost certainly represents world’s best practice at present.

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ES4.

Current circumstances present a range of opportunities to consolidate the FC sector and develop a more comprehensive and effective approach to addressing financial stress.

Financial Counselling Internationally ■■

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ES5.

Recent funding increases and system improvements (including enhanced training opportunities and crisis-based funding increases) have bolstered the FC system’s visibility and capacity, but economic recovery may result in these improvements deteriorating.

The volume of literature emanating from the UK is, as far as we can determine, considerably greater than that available from either Australia or the United States. This demonstrates a greater official awareness of issues around financial exclusion and financial stress in the UK at present than is the case in either the US or Australia. There is considerable overlap between Australia and the UK in terms of the types of services provided and the manner of their provision, and much less overlap between both of these jurisdictions and services provided in the United States. In the UK the approach adopted to regulation of financial services has typically leaned towards a light regulatory touch (certainly until the global financial crisis provided some impetus towards a more heavy handed approach to regulation). As in Australia, industry is regarded as well able to regulate its own activities, with some oversight from government agencies. Financial services providers are either licensed by government, or regulated by a quasi-government authority (the Financial Services Authority), and are required to belong to an external dispute resolution scheme. However, there are distinctions, including the 100% industry funding of the UK Financial Services Authority, and the requirement (unlike Australia) that FC services be licensed. The UK approach to issues of financial stress is also supported by a high level commitment to principles of financial inclusion and support for the development by consumers of financial capability. The UK government has a high level commitment to the development of improved levels of financial capability and financial inclusion than its Australian counterpart. In the United States, credit counselling and debt restructuring are operated on what amount to a business basis, despite certain provisions of federal legislation which require financial counselling agencies to be not for profit organisations. There appears to be limited cohesion in the regulation of financial counselling or like services, and little current interest in development of a wholesale consumer education of harm prevention approach as regards the provision of credit and related financial stress, etc.

Conclusions and directions ■■

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Based on our review of the available literature from the three jurisdictions we have examined, and our research in Australia, it is clear that there are important differences in approach between the UK, Australia and the USA The contemporary Australian approach to FC services is founded on a social justice model which looks to maintain a distance from finance service providers, in order to guarantee as far as possible the avoidance of conflict of interest. We believe that the most appropriate comparison for assessing the overall effectiveness and quality of the Australian system of financial counselling is with the system operating in the UK.

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We conclude that the Australian system performs well in face to face counselling provision, has a strong and growing capacity for advocacy, is free from conflict of interest and provides a high quality and professional service. However, the Australian system has traditionally been chronically underfunded, lacks career pathways, has limited training opportunities, and is hampered by a relative lack of upstream and midstream activity, including a coherent whole of government approach to financial stress, lack of research and evaluation support, and incoherent data systems and collection. Recent funding improvements and expansion of training opportunities has addressed this to some degree but this could be reversed once present crises are resolved. The Australian system is not well advanced in multi-mode provision of services, although this is understood and likely to be addressed in the short to medium term. The UK has adopted a more considered and deliberate ‘whole of government’ approach to issues of financial stress, and has pursued a range of upstream and midstream interventions which are much less clearly conceptualised in Australia at present, although these themes are presently emerging. In particular, the UK has adopted a research agenda and instituted research infrastructure for this sector and has adopted a more consistent approach to data collection than appears to be the case in Australia. The UK face to face counselling sector has adopted a broader range of modes for service delivery (including person to person, telephone and web based systems), but is fragmented, has some potential for conflict of interest and lacks good training and service standards, and in some cases a professional staffing structure. Overall, the best fit with a ‘public health’ model for addressing financial stress would be a hybrid of the UK and Australian systems. Figure ES2 sets out the strengths, weaknesses, opportunities and threats of the Australian system as we assess them in the context of this project.

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Figure ES2: Strengths, weaknesses, opportunities and threats – Australian system for addressing financial stress Strengths

Weaknesses

■■ Face to face financial counselling is best practice

■■ Funding remains largely insecure and fragmented

■■ Increasing resource commitment from governments, especially in light of financial/economic conditions

■■ Training opportunities are variable

■■ Strong support from government and significant industry members, and the community sector ■■ Lack of conflict of interest ■■ Established networks and peak body ■■ Standardisation of credit regulation underway

■■ Service quality and standards require improvement ■■ Focused largely on downstream activities ■■ Lacks systematic evaluation and goals especially national goals ■■ Lacks research agenda and infrastructure ■■ Lacks whole of government commitment and strategy ■■ Regulation of some lenders needs work ■■ Financial counselling career structure not attractive ■■ Financial counselling services lack integration and are not seen as mainstream

Opportunities

Threats

■■ Recovery phase offers scope for regulatory reform

■■ Insecure funding may evaporate post recovery (especially in difficult fiscal environment)

■■ Strong interest in improving financial regulation and sustainability of consumer credit ■■ Technological innovation favours diversification of service modes ■■ Expansion of sector likely to improve visibility and public awareness, and training opportunities ■■ Improved funding may drive improved scale and efficiency ■■ Blue sky research opportunities

■■ New modes of delivery may bypass and eclipse face-to-face delivery on ‘efficiency’ grounds ■■ Education/financial literacy programs may supplant regulatory reform and direct financial counselling services ■■ Lack of research and evaluation is a critical problem ■■ Increase in ‘for-profit’ sector may increase financial stress ■■ High levels of consumer debt, inadequate income support and expensive housing loom as major problems

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1.

Introduction and methodology

1.1.

Context and background This paper sets out the results of a research project commissioned and funded by the Australian Financial Counselling and Credit Reform Association (AFCCRA) and ANZ Banking Group Ltd. The focus of the project was on the ways in which Financial Counselling may assist consumers to address financial stress and associated indebtedness and other problems. The specific purpose of the project was to explore the following key research questions: 1. In what way is the model of financial counselling in Australia different to overseas models of financial counselling? 2. In what ways is it better or worse than overseas models of financial counselling? The project’s scope was expanded during its course to include some consideration of appropriate models for conceptualising the range of services, interventions and other initiatives which may assist in relieving or avoiding financial stress (a term adopted in this report to refer to the circumstances which arise when a consumer is unable to meet financial obligations over a sustained period). This expansion of focus was necessitated by our consideration of the project’s purposes, which implicitly required that we adopt a framework capable of addressing the key research questions. Accordingly we adopted a ‘Public Health’ framework for comparative purposes, and have expanded this to address some issues around how Financial Counselling and related services and interventions might be optimised. This is discussed further below. Section 1 of this report sets out the methodology we adopted for the project. Sections 2 to 5 discuss themes identified from the review of literature, with section 2 incorporating a discussion of a ‘Public Health’ framework for Financial Counselling services and related interventions. Section 6 reports on the results of our research with key informants. Section 7 points to areas of potential improvement in the framework of services and interventions available in Australia, drawing together the project’s conclusions and suggestions for further research and considerations for refinement of a framework of initiatives to address financial stress and its consequences.

1.2.

Methodology The project adopted a straightforward methodology involving a review of literature (including ‘grey’ literature), followed by a qualitative phase involving focus group and key informant discussions to ascertain the extent to which Financial Counselling in Australia is thought to meet the needs of service users, and to identify any gaps in the services available to address financial stress. During the course of this project, Anna Mandoki of AFCCRA was able to secure funding from the AFCCRA Financial Counselling Foundation to visit the United Kingdom and undertake research consultations around the way financial counselling and like services are provided in that country, and the approach taken by the government of the UK in dealing with financial stress and related issues. Ms Mandoki prepared a report of this research (Mandoki 2009) and we have also drawn on this in the preparation of this report.

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However, Ms Mandoki’s report is a valuable and important document in its own right and we would urge all interested readers to draw on it for valuable insights and recommendations. During the course of this project we also came to the view that the project should be guided by development of an idealised conceptual framework for determination of the extent to which Financial Counselling and like services were able to fully address the needs of consumers. This gave rise to the development of what we have referred to as a ‘Public Health Model for Financial Counselling’. We discuss this concept in section 2.2 below, drawing on public health literature to do so, but adapting this to the causes and consequences of consumer financial stress. We have also utilised these data sources and the conceptual framework to identify some areas where we believe further research is warranted, and to suggest some further programmatic developments which we believe may offer more effective services and reduce the incidence and prevalence of consumer financial stress and its consequences in Australia.

1.2.1.

Identification of relevant literature

We postulated that despite the existence of an academic literature around financial or credit counselling, much of the most relevant material available to address the project’s research questions would be ‘grey’, or informal literature, including discussion papers, reports for government, agency reports or policy statements, etc. It should also be noted that we were not able to undertake a systematic review because the available literature was not susceptible to grading for quality. Accordingly, we essentially undertook a thematic review. Accordingly, we utilised the ‘Google’ search engine with the search terms: financial management, poor financial behaviour change, financial counselling, financial support and advice, financial counselling services, consumer bankruptcy, financial problems, financial stress / crises / strain, debt counselling, consumer credit counselling, financial aid counselling, cash flow management, budget planning, financial savings, consumer education, financial knowledge, consumer credit counselling, financial distress management, debt management plan, financial decision making, money management, financial education, financial information / planning, personal financial management / planning, family / personal economic well-being management/ strategies, financial guidance, family / personal cash-flow budgeting, family financial counselling, financial help, personal financial risk tolerance assessment, borrower behaviour assessment, consumer protection, consumer law. This resulted in the identification of several thousand documents. We identified the most relevant of these on the basis of their apparent focus on the provision of financial counselling services (as these are understood in Australia) and the most closely proximate examples of similar services from overseas. We excluded any documents not in the English language, and for further simplicity in the comparative process concentrated on results from Australia, the United Kingdom and the United States of America. We also ‘snowballed’ from the original material identified as most relevant (a technique in which references or URL links identified in a document would be followed up if documents referred to were likely to be relevant and useful). From this activity we identified 98 documents, and we were able to obtain full text versions of 79 documents. We also undertook a review of formal literature using the databases available via the Monash University library, specifically CSI and ProQuest. We utilised the search terms referred to above for this search. As anticipated, much of the formal literature was not focussed on issues of interest to us in the context of this project, but we identified and obtained 17 articles which we believed to be relevant (at least in part) to our focus. We limited the search to articles in English, published after 1990, and referring to Australia, the United Kingdom and the United States.

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As noted above, we also drew on a report prepared by Anna Mandoki (Mandoki 2009) which was specifically focused on researching recent developments in the United Kingdom. We have dealt briefly with this report in a discrete section of the report but have integrated its findings and conclusions into the broader discussion of this report.

1.2.2.

A key focus of the review: the distinction between ‘macro’ and ‘micro’ perspectives on financial counselling

Early in the course of the review we discovered a division in the literature between ’casework’ (or ‘one to one’ service provision) perspectives on financial or credit counselling (the ‘micro’ perspective), and the broader issues of system structure, purpose and efficacy (the ‘macro’ perspective). We interpreted the project brief to be primarily focused on issues around the structure and purpose of financial counselling, etc, rather than on the relative effectiveness of specific styles, modes or types of intervention at the casework, or micro level. Although this is an important and critical area of interest in the field of financial counselling, it is not properly the focus of this project and accordingly although we have identified a number of formal clinical models for service provision these do not occupy a central position in this review. Rather, we focused on identifying and describing the broad structural and purposive (or intentional) characteristics of financial or credit counselling, and to develop a basis for comparison of distinct approaches to the provision of financial counselling or related services. In this review, we use the term ‘models’ in a broad sense to refer to these large scale structural and purposive characteristics, rather than to specific practice or theoretical models utilised to guide or direct intervention at the casework level.

1.2.3.

Key informant interviews and group discussions

We also undertook a series of discussions with expert informants via both individual interviews and group discussions. These expert informants were drawn from three groups – system level experts (that is, individuals with high level expertise and understanding of the financial services sector and/or services provided to consumers to address financial stress), consumers and financial counsellors. We also sought to undertake group discussions with Financial Counselling service managers but this process was forestalled by time constraints and we were unable to complete it. We sought to finalise this by email follow-up but this process was not successful. The purpose of these interviews and group discussion was to inform our understanding of the perceptions of various significant stakeholders in financial counselling service provision in Australia. We interviewed individuals as set out in Appendix 1 in all cases by individual interview. In one case, the interview was conducted by telephone. In all other cases, face to face interviews were conducted. The topics discussed in these interviews are set out in Appendix 2. Interviews were audio-recorded and interviewers took notes during the discussion. In most cases interviews were approximately one hour in duration. Interviewees were at liberty to raise any issues they wished, but interviewers sought to ensure that the areas identified in the list of themes were traversed. Interviewees were not provided with any incentive or remuneration for participation in these interviews. We also arranged a group interview session with 24 financial counsellors in Melbourne in February 2009. This session took place following a regular network meeting of Financial Counsellors and was arranged by a representative of the network. A private sector consultant undertaking a project for the Department of Justice (which provides funding to Financial Counselling services in Victoria) sought our agreement to attend this session and we did not have any objection to this. This consultant took no part in the process but was present throughout.

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The group discussion was guided by the interviewer in accordance with a thematic approach similar to that adopted for individual interviews. These themes are set out in Appendix 2. As with individual interviews, the discussion ranged relatively freely and was guided on to themes only where it appeared that discussions were not addressing specific themes. Participants were at liberty to address issues as they thought fit. Prior to commencing the discussion, a brief summary of the project to that point was presented using a ‘PowerPoint’™ display in order to acquaint participants with the project’s goals and process. This session was of approximately 2 hours duration. We also undertook a group discussion session with financial counselling service users, arranged by a financial counselling agency. We had intended to undertake two such sessions but this could not be arranged. Four consumers attended this session, which was guided by a schedule of themes as set out in Appendix 3.

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2.

Determinants and Conceptualisations of Financial Stress

2.1.

Identifying risk and other factors for consumer financial stress Charles Dickens, no stranger to financial stress1, makes the point in David Copperfield that matching one’s expenditure to one’s income is the basis for happiness, as the inverse is the basis for misery. This logic was reflected in the way financial stress was dealt with in Australia until, beginning in the 1970s, the contemporary practice of Financial Counselling (FC) began to develop from its origins in the emergency relief model of providing material aid to people in need, often on the basis of their perceived ‘worthiness’ to receive such assistance. Although this approach persists in some circles, and there is, arguably, an underlying assumption that financial difficulties arise from the imprudent practices of individual consumers, there is an increasing awareness that financial stress has its origins in multiple causes, many if not most of which are beyond the immediate control of individuals, as Figure 2.1 charts. Figure 2.1: Interest rates and unemployment, Australia, 1979 - 2009 12.0

18.00

16.00 10.0

8.0

12.00 10.00

6.0 8.00 4.0

6.00 4.00

2.0 2.00 0.00

Ja n19 Ja 79 n19 Ja 80 n19 Ja 81 n19 Ja 82 n19 Ja 83 n19 Ja 84 n19 Ja 85 n19 Ja 86 n19 Ja 87 n19 Ja 88 n19 Ja 89 n19 Ja 90 n19 Ja 91 n19 Ja 92 n19 Ja 93 n19 Ja 94 n19 Ja 95 n19 Ja 96 n19 Ja 97 n19 Ja 98 n19 Ja 99 n20 Ja 00 n20 Ja 01 n20 Ja 02 n20 Ja 03 n20 Ja 04 n20 Ja 05 n20 Ja 06 n20 Ja 07 n20 Ja 08 n20 09

0.0

Month and Year Unemployment rate

(Average u/e rate)

Source: ABS 2009, RBA 2009

1 His father was imprisoned for debt when Dickens was a child.

Standard variable housing loan interest rate

(Average housing interest rate)

Interest rates

Unemployment rate % trend

14.00

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Increases in mortgage rates, for example, can substantially increase the proportion of households at risk of financial difficulty and until the recent onset of global financial turmoil it was reported anecdotally that more and more middle income households were experiencing financial stress as a consequence of this and other price increases, including fuel costs. From late 2008 until the time of writing, concern about rising unemployment has replaced increasing interest rates as the principal cause of financial stress in Australia, and around the world. Figure 2.1 sets out two key economic indicators to support the view that financial stress can be derived from quite extraneous sources, and may be difficult for individuals to foresee, particularly during periods of sustained economic growth when low unemployment and relatively low interest rates may induce high rates of borrowing. To many consumers, the events of late 2008 and early 2009 had not been experienced previously, and reports from some of those we interviewed during this project suggest that such unprecedented financial shocks have left many very vulnerable to financial stress. In any event, Singh& Shelly (2005) point out, for example, that ‘credit’ as such is not just an economic phenomenon but reflects social, cultural and psychological factors, and that in much of public discourse around issues of debt and financial responsibility, there is a lack of connection and integration of different perspectives (economic, social, cultural, and psychological). They suggest further that the non-economic literature has not to date sufficiently influenced consumer protection and consumer education practices, even though economic policy and western law are well understood within the tradition of classic sociological concepts of money and its cultural and social centrality. For many social groups, including people from culturally and linguistically diverse segments of the population, such concepts may well be more difficult to integrate into daily life, leading to low levels of perceived financial literacy. Further, legislation, and to a certain extent education programs around financial decision making assume that people understand information about financial products, and are able to make rational decisions on the basis of such information. Disclosure policies and credit codes rely on these same assumptions. It might well be argued that many current perspectives on (and approaches to) financial stress pathologise individuals rather than taking appropriate notice of the many factors which give rise to financial stress. In other words, those who experience financial stress are often held largely responsible for their own plight. This is not an unusual approach in contemporary society, although it is rarely helpful for either those in difficulty or those concerned with addressing such issues. It is clear from the available literature that the relationship between socio-cultural factors and perspectives and the likelihood of encountering financial difficulty is a complex one. It is further complicated by the plethora of complex financial products and arrangements which are available within contemporary western societies, and the complex legal and financial arrangements (including incentive payments) which provide for these products to be marketed to consumers via brokers and other agents. Indeed, although these arrangements in part appear to provide protection to consumers, in practice gaining access to such protection may rely on the goodwill and ethical conduct of financial service providers and on the capacity of specific consumers to not only understand but also enforce their rights (see, for example, ASIC 2005, ANZ 2005, CCLC 2003). A recent Victorian study (Schetzer 2007) highlights the circumstances of some people experiencing financial stress. Those who participated in the study, all of whom were clients of financial counselling services, had experienced debt related problems, including where magistrate court legal proceedings had been issued. The study participants were significantly disadvantaged, with low levels of income, and had relatively modest levels of debt. Most had education to year 12 high school level or less. More than half of the study group had sought assistance from a welfare organization, friend or other family member, and an overwhelming majority experienced difficulty in paying utility bills. Of the ninety participants in the study, 52 participants indicated that their difficulties were associated with other complex issues including mental illness, physical injury, disability, chronic illness, domestic violence or drug or gambling problems. Despite these complex issues, the majority of participants had financial

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matters resolved, including 46 people who negotiated arrangements. A number of participants resolved issues through bankruptcy. Participants were also positive regarding: i) their assistance in working out a solution to their debt problems; ii) being taken seriously by creditors; and iii) their capacity to alleviate stress and anxiety. More than half of participants needed additional legal services as well as FC services. Drawing on Pleasence, (2004) this report makes the clear point that ‘[e]ach time a person experiences a legal problem in relation to their debt related problems, their vulnerability to experience further problems increases’ (p107), and that credit provision and financial stress are strongly related (La Cava & Simon,2005). The study concluded that earlier contact with a FC service makes it much more likely that that person will be able to negotiate a satisfactory solution to their financial difficulties. The report concludes (amongst other things) that it would be useful and appropriate for creditors to provide information to debtors on how they might access FC services. However, FC services generally advise that they have traditionally been inadequately resourced to deal with any substantial increase in the number of clients presenting, and for this reason have not tended to advertise their services, given that referrals from community sector agencies or ‘word of mouth’ generates as much demand as most services have been able to meet. CAV (2006) reports that the Inspector General for Bankruptcy (2004) identified the principal causes of bankruptcy as unemployment, overuse of credit, domestic discord and ill health. Bankruptcy of course is far from the sole outcome of financial stress, and although the social gradient of financial stress (like relatively poor health status), is related to other indicators of disadvantage such as low income, illness, modest educational attainment and so on, it is also increasingly clear that the contemporary market in financial services plays a significant role in both entrenching relative disadvantage and inducing financial difficulties. For example, although households on lower incomes are more likely to suffer from financial stress than other households, such households are also more likely to pay higher costs to access credit. About a third of Australians do not own, and are not purchasing real-estate, and possess no significant assets to secure loans, nor to realise in emergencies. Banks generally do not offer personal loans for small amounts, preferring consumers to use credit card products usually characterized by very high interest rates (Griffith University & FCAQ 2005). At one end of the financial services spectrum, small loans from fringe lenders to the most socio-economically disadvantaged consumers may often attract the highest interest rates, and entrench both financial stress and relative socio-economic disadvantage. A random telephone survey conducted in NSW by Wesley City Mission (2006) indicated that a range of serious social problems arose from financial stress and anxiety, including relationship breakdowns, substance abuse, frequent gambling and violence. This study utilised an Australian Bureau of Statistics definition for financial stress (ABS 2002). The ABS indicators are set out in Appendix 4. The survey identified three factors commonly contributing to households experiencing financial stress and anxiety, i.e., i) exposure to limited credit options; ii) lack of financial literacy and ability to budget; and iii) a lack of knowledge about how to address financial stress before it escalates. Further, the study found that despite facing financial pressures, more than half of affected respondents did not seek advice, and of those who did, most sought advice from family members. Indeed, the study found that when faced with financial difficulties, the most common response was inaction. The study concluded that addressing financial stress requires a collaborative approach between community, government and corporations, particularly given that the issues associated with financial stress have multiple serious consequences for families and the broader community. It should be noted, however, that the ABS approach to assessment of financial stress is regarded as exploratory, given that there appears to be no established and consistent methodology for assessment of financial stress. Headey et al (2006) for example report that the HILDA (Household, Income and Labour Dynamics in Australia) survey uses the ABS criteria plus a question related to whether rent or mortgage payments had been made on time, and also that the Irish Government has adopted an approach

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which seeks to relate financial deprivation to measures of poverty. Financial stress, although a broadly useful concept, may therefore be seen to lack a high degree of specificity at present (Headey et al 2006). In a 2005 study, Good Shepherd & Brotherhood of St Laurence further accentuated the importance of providing low income earners with access to appropriate financial products. This study suggested that access to equitable financial products can assist in alleviating poverty, and that microfinance (i.e. small, relatively low interest loan products) can reduce people’s vulnerability to financial stress, reduce hardship and associated family stress, promote wealth creation and perhaps most significantly, create a solution to what appears to be burgeoning exploitation by fringe lenders (see also Foresters ANU 2007). Fringe lenders are not the sole contributors to financial stress amongst those on low incomes. Rich (2004) points out, for example, that dishonour fees charged by Australian banks are disproportionate to the actual costs associated with dishonouring payments and may be characterised as extravagant. Few consumers, and certainly not low income consumers, have access to practical options to negotiate or shop around for a better deal from banks, and penalty fees tend to be borne by those who can least afford to pay them. It is also commonly difficult for low income earners to avoid penalty fees, and these may often contribute to preventing low income earners from escaping their state of financial hardship. Cultural and psychological barriers are also thought to operate to exclude some low income consumers from seeking access to some financial services provided by banks or other established and well regulated institutions. Kempson (2006) argues that people from low income backgrounds find banks and formal financial institutions intimidating and assume they are likely to be uninterested in dealing with them, a form of self exclusion which is based on a low self-assessment of social worth. Other people from culturally diverse backgrounds, where banking is not accessible to most ordinary people, are also reportedly intimidated by the prospect of engaging with the formal financial services sector, and accordingly are also likely to self-exclude. Kempson cites examples of this latter phenomenon including indigenous people in Australia and Canada, and also notes that “Pakistani and Bangladeshi communities face religious barriers to banking, because transaction accounts that can be overdrawn (even if inadvertently) are haram (forbidden) under Islamic law” (Kempson 2006, 8). Low cost, low fee bank accounts could be of assistance to low income earners, as could micro-financing schemes. Regardless of these possibilities, in reality the financial pressures already experienced by those on low incomes are often exacerbated by the utilisation of relatively high cost financial products which are for many low income earners the only credit option available, whether provided by banks (in the form of credit cards) or by fringe providers (in the form of payday lending or pawnshop loans). Wilson (2002) found that although payday lenders, for example, vary considerably in the lending criteria they utilise, interest rates charged are consistently high. In 2008, the maximum allowable interest rate in Victoria was 48%. However, Wilson (2002) found that once fees and charges were taken into account, some payday lenders charge effective interest rates much higher than this. In addition, the 48% ceiling on interest rates did not apply uniformly across all states. As a result of these two factors, effective interest rates in some states were sometimes several hundred percent per annum. Further, and unsurprisingly, Wilson (2002) concluded that payday lenders were predominantly located in areas of socio-economic disadvantage, and their advertising was targeted at low income consumers already under financial stress. Loans were typically advanced to pay bills or to cover day to day living expenses. Wilson also suggested that banks should develop more socially appropriate financial products for low income earners, in conjunction with the community sector. A small scale study by Singh & Shelly (2005) identified a number of important characteristics associated with the way people deal (or, in many cases, fail to deal) with debt issues, and identified some likely avenues to address these issues. Four broad patterns to respond to issues of debt were identified, being: i) avoidance; ii) management; iii) ‘floundering in debt’; and iv) moving between these categories. Singh & Shelly concluded that education around financial management needs to go beyond assistance

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to develop budgeting skills, including encouraging people to discuss financial issues with their family, and the enhancement of life skills to support articulation of priorities and the overt recognition of the family and personal costs of over-commitment. Singh also suggests that community organisations need to develop a capacity to provide interest free loans in certain circumstances and that credit providers need to assess consumers’ actual and genuine ability to repay the debt, rather than minimal monthly repayments. Singh also identified the ‘poverty trap’ inherent in the high effective marginal tax rates applying to families in receipt of transfer payments, where increased income derived from increased formal labour market participation may be taxed at so high an effective marginal rate (taking into account reductions in transfer payments), as to dissuade pursuit of increased labour market income. Some banks and financial institutions have acknowledged the role of modestly priced financial services in addressing these issues. For example, ANZ (2005) in a submission to Consumer Affairs Victoria (CAV), argued that the consumer credit market is changing in Australia, particularly in relation to the form, use and availability of credit. The submission contended that there is growing demand for nontraditional lending products, and that the uniform consumer credit code (UCCC) imposes sanctions against credit lenders who willingly lend to those who cannot conform to repayment provisions without suffering hardship. The ANZ’s first financial literacy survey identified specific risk factors for low levels of financial literacy. These risk factors were low income and low savings, low educational attainment, being relatively young and being aged 70 years or more. The bank submitted that it is currently deploying micro finance, financial literacy and other initiatives including services known as SaverPlus, MoneyMinded and Kickstart; and operates a small loans program, as well as training a ‘hardship’ team in ANZ’s call centre to refer customers to financial counsellors2 . The NAB also supports small, no interest and low interest loan programs (NILS and StepUp), as well as a micro enterprise loans program, in conjunction with the community sector3 . ANZ and NAB are large Australian banks, two of the ‘big four’ who constitute the ‘four pillars’ of the Australian banking system. Unfortunately, as laudable as such initiatives may be, there is ample evidence of continuing irresponsible provision of credit to consumers, including credit products provided by large and very reputable banks (see ABC 2008). Amidst increasingly uncertain economic conditions, such practices might easily lead to serious financial stress for many consumers. Improving the financial literacy of consumers via programs such as the ‘understanding money’ website provided by the Australian government4 or the ‘FIDO’ ‘managing your money’ page of the Australian Securities and Investments Commission 5 may be helpful for some consumers. School based programs (which we are advised are currently being implemented in a number of Australian states) may prepare people for negotiation of financial issues later in life. However, those groups most at risk of financial stress are in all probability those least likely to be aware of such programs, or to engage with them. Feeny (2005) reports on the relative success of the ANZ program (‘Money Minded’) provided to those in financial stress. However, Feeny (2005) also highlights the severe embarrassment experienced by those in such a position, and their associated reluctance to seek help in resolving financial issues. Financial matters and in particular financial stress appear to be very difficult subjects for many people to acknowledge or discuss, and this is a significant barrier to the effectiveness of financial literacy or education programs. It does appear from the available evidence that for many people acknowledgement that their financial knowledge or their capacity to manage money may be inadequate is more embarrassing to admit to than many other shortcomings. Yet few people have been well educated in financial matters, and for many their knowledge of such matters is derived from information obtained from financial service providers.

2 3 4 5

http://www.anz.com/aus/aboutanz/Community/default.asp http://www.nab.com.au/About_Us/0,,81306,00.html#3 www.understandingmoney.gov.au http://www.fido.gov.au/fido/fido.nsf/byHeadline/Money%20management

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The concept of ‘financial exclusion’ has recently emerged in the United Kingdom to account for some of the circumstances which entrench poverty and relative socio-economic disadvantage more generally. According to Howell & Wilson (2005), the original UK derived definition of financial exclusion is thought to be less applicable for Australia, where there appears to be a lower level of disengagement from the financial systems than is the case in the UK. Howell & Wilson (2005) also report that data from 2003 suggest that only 0.8% of the Australian adult population utilised no financial products and another 6% utilised only a transaction product. Nonetheless, this discussion is very useful because it highlights the role that the regulatory system can play in creating or perpetuating financial exclusion, and reinforcing existing socio-economic disadvantage. Howell & Wilson argue that the regulatory framework relies heavily on competition and disclosure to protect consumers, but the absence of any obligation to supply specific products means there is no incentive for mainstream suppliers to provide services to financially excluded consumers. Further, Howell & Wilson argue that the requirements of the UCCC do not ensure that fringe lenders are obliged to provide fair, safe and affordable loans to financially excluded consumers. The regulatory framework is also thought to place significant barriers in front of industry or community organizations that seek to develop effective ways of meeting the needs of financially excluded consumers. The treatment of all financial services providers as the same, does not allow credit unions to develop a different, more reflective approach. And there are also risks for community organizations seeking to meet client needs, if, for example, their products amount to deposit-taking products and require regulation. In terms of mainstream providers, obligations to shareholders imposed through the Corporations Act severely limit the extent to which micro-finance products can be offered if they are not profitable in isolation. Although the regulatory framework is not the only mechanism for addressing financial exclusion in Australia, it can play a vital role in improving access to affordable financial products and reducing financial exclusion and financial stress. Howell & Wilson argue that reform to corporate, financial services and consumer credit regulation is needed to: create space for the development of voluntary initiatives by both community and for-profit organisations without the fear of inappropriate regulation; explore ways in which corporate social responsibility can be better accommodated within existing corporate structures; impose obligations on mainstream providers to meet the finance needs of financially excluded consumers; and ensure that exploitative products are simply not available in the marketplace. It appears relatively clear, therefore, that financial stress has its origins not only in a mismatch between income and expenditure, or as a result of personal misfortune or emergency such as illness or unemployment, but also in social, cultural and indeed regulatory factors which appear both to predispose some consumers to financial exploitation and create conditions in which exploitative products can be offered. This is compounded by a lack of confidence or expertise in negotiating what is frequently perceived to be a complex and daunting formal financial services system – making disadvantaged consumers more likely to pursue apparently more accessible, but often very high cost, alternatives. Financial stress appears to be often associated not just with socio-economic disadvantage, but also with what, in a public health context, might be termed co-morbidities – mental health issues, including anxiety and depression, and issues of social exclusion. For these reasons, and also because of the applicability of the public health approach to a range of social issues, we decided to explore the possibility of utilising a public health framework to discuss and assess the provision of services intended to address financial stress. This is discussed in section 2.2.

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2.2.

A ‘public health’ framework for assessment of Financial Counselling services and other interventions to address financial stress Although financial stress and its correlates present within a complex environment, particularly in the context of providing effective counselling services, it is certainly not without parallels in other areas of intervention for purposes of improving the wellbeing and welfare of the community. The arena of public health, for example, provides a model for considering the range and type of interventions required if one’s goal is not only to provide support and assistance to individuals in immediate difficulty, but to reduce the likelihood that others will experience such difficulty, or to provide mechanisms to address it at the earliest possible stage. The contemporary public health approach is to ensure that practices undertaken to improve health and wellbeing are equitable and promote social inclusion and integration, and that all activities and pursuits that have the capacity to impinge on health and wellbeing are undertaken so as, at the least, not to prove harmful to health and well being but as far as possible actively promote good health (Baum 2005). Public health in its contemporary form has an underlying social justice agenda – it promotes equality of access to services and interventions as a means of effectively improving the overall health of populations, on the basis that more equal societies experience better overall outcomes in terms of health and wellbeing than do societies where inequality is more entrenched. There are pragmatic reasons for this. A healthy society has more productive capacity, imposes fewer burdens on scarce health care resources, and reduces the likelihood of the poor becoming a reservoir of disease with which to infect the better off. But there is also strong evidence of the benefits to society overall of improving the lot of the most disadvantaged (see Wilkinson and Pickett 2009), since inequality is a ‘socially corrosive’ force (Wilkinson and Pickett 2006). An important element of the public health approach is the concept of health promotion, defined in the World Health Organisation’s Ottawa Charter as: the process of enabling people to increase control over, and to improve, their health. To reach a state of complete physical, mental and social well-being, an individual or group must be able to identify and to realize aspirations, to satisfy needs, and to change or cope with the environment. Health is, therefore, seen as a resource for everyday life, not the objective of living. Health is a positive concept emphasizing social and personal resources, as well as physical capacities. Therefore, health promotion is not just the responsibility of the health sector, but goes beyond healthy life-styles to well-being (WHO 1986).

Further, health promotion, as Nutbeam describes it … represents a comprehensive social and political process, it not only embraces actions directed at strengthening the skills and capabilities of individuals, but also action directed towards changing social, environmental and economic conditions so as to alleviate their impact on public and individual health. Health promotion is the process of enabling people to take control over the determinants of their health and thereby improve their health (Nutbeam 1998, 1-2).

In the public health context, socio-economic and cultural factors predispose individuals to health risk through their interaction with socio-biological factors such as lifestyle and diet, or relative risk of exposure to carcinogens, pathogens, or toxic substances and more strictly biological factors such as genetics and the effects on the body, or its systems, of pathogens and carcinogens, for example. It has been well established that socio-economic disadvantage is itself a risk factor for disease, disability and premature mortality through the interaction of such status with other risk factors described above.

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In a similar way, the likelihood of experiencing financial stress appears to arise from a concatenation of socio-economic and cultural factors, exacerbated by risks such as unemployment, single parenthood, female gender, educational disadvantage and so on (Breunig & Cobb-Clark 2004; Marks 2007). It may well be that absolute socio-economic disadvantage is itself an obvious and major risk factor for financial stress, but this factor is accentuated by other socio-cultural factors including educational disadvantage and limited access to relatively ‘safe’ financial products, and that accordingly the already high risk position of the socially disadvantaged is much more likely to give rise to financial stress when exposed to the shock of, for example, a sudden unforseen expense, unemployment, or prolonged illness. To extend the public health analogy into the realm of appropriate responses, the best way to address such an interacting socio-economically and socio-biologically complex causal system requires what are referred to in contemporary public health literature as ‘upstream’, ‘midstream’ and downstream’ interventions (Baum 2005). In a public health context, upstream interventions are those which utilise legislative powers or other resources to minimise exposure to risk, for example via prohibiting the consumption of tobacco products in workplaces, restaurants and other public places, or via the imposition of workplace safety standards, to use two examples. Midstream interventions are those designed to ensure that individuals or groups within the population are provided with information and are able to access preventative educational or other interventions – for example, vaccination, screening, or safe sex programs – which are likely to reduce exposure to risk, or to minimise the consequences of exposure. Downstream interventions are those which address the consequences of exposure – that is, treatment, rehabilitation and so on. In the context of this project, upstream (or primary) interventions would be those which attempt to address root causes of financial stress. This involves, amongst other things, legislative and regulatory protection to encourage the healthiest and safest possible environment for consumers. The regulatory regime governing non-banking financial service providers may allow some providers to lawfully engage in exploitative or unfair practices. Indeed, it is arguable on the basis of the discussion above that even large and highly reputable banks may charge excessive fees and fail to offer appropriate financial products to some consumers. To a considerable extent, legislation and regulation could address these issues. Socio-economic disadvantage is clearly a key contributor to financial stress and programs which address inequality, promote educational opportunity and improve labour market engagement, including carefully designed programs to permit successful transition from reliance on transfer payments to increased engagement in the formal labour market, will all contribute to decreased likelihood of financial stress. These are large scale and difficult interventions to devise and implement, but they also are likely to have far-reaching and significant effects. A comprehensive program to address both the causes and symptoms of financial stress must consider how reforms of this nature might be conceptualised, refined and achieved. Midstream (or secondary) interventions are those which ensure compliance or identify faults in the regulatory system, including advocacy activities, education and promotion of safe financial practices for both consumers and financial service providers, and early intervention programs developed in conjunction with financial services providers, for example. Downstream (or tertiary) interventions are those intended to address the financial crises of individual consumers and families, including case work and direct support for budgeting and scheduling debt to avoid catastrophic consequences.

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Figure 2.2: Model of range of interventions available for addressing financial stress Upstream (or Primary)

Midstream (or Secondary)

Downstream (or Tertiary)

Policy, actions or initiatives addressing the root causes of financial stress

Interventions or activities enforcing regulation, collecting data, evaluating interventions, providing information or education, early intervention and advocacy

Interventions to provide support to those in crisis or to assist in remediation of existing difficulties

A comprehensive model to address financial stress (a simple version of which is set out in Figure 2.2 above) would recognise the need to address both the catastrophic consequences resulting from this complex interplay of factors, (i.e., the immediate or looming financial catastrophes of presenting clients) as well as the underlying ‘structural’ causes of such difficulty. These include the disabling effects of entrenched socio-economic disadvantage, the often complex legislative underpinnings of financial products, cultural and social barriers to comprehension of the implications of credit and differing cultural perspectives to money and credit. Developing a model to comprehensively address these parameters is not likely to be simple. Nonetheless, the broad ‘architecture’ of such a model is straightforward. Utilisation of fragments of such a framework would be expected to reduce its overall effectiveness but would address at least some elements of the complex array of factors giving rise to financial stress. The task of constructing such a model requires more than the utilisation of a paradigm which recognises the need for a range of interventions across multiple ‘layers’ of potential activity. It also requires adoption of an operational principle to underpin that paradigm. For example, adoption of a laissez-faire position with respect to the regulation of consumer finance markets and the provision of support to those experiencing financial difficulty would induce formation of a particular configuration of regulatory and legislative interventions derived from the principles embedded in that position. These would not be likely to resemble the interventions arising from utilisation of a public health model, since such a model is derived from the general principle that enlightened self-interest implies adoption of a social justice orientation, in which it is recognised that improvement in the heath and well-being of all groups within the population, and diminution of health inequality, is in the interests of all. The social justice position also has the advantage, arguably, of occupying a more ethically defensible position than the laissez-faire alternative which would be expected to reflect and entrench the interests of the relatively advantaged. Social justice as a broad concept rests amongst other things on the realisation that individuals from differing socio-cultural backgrounds will require differential levels of support to overcome relative ‘structural’ disadvantage, and that such support can be provided at a range of levels (see, for example, Politzer et al 2001). Such an approach has been adopted in many areas of supportive social practice, and in the context of FC services, the emergence of a social justice focus has been described by representatives of the Australian Financial Counselling and Credit Reform Association (AFCCRA), as generating the basis for a FC service model which constitutes ‘possibly the best practice in the world’ (Pentland 2006, 2). In order to better conceptualise a public health based model to address financial stress, we have developed a more detailed model which seeks to ‘flesh out’ the elements identified in Figure 2.2. This model is set out in Figure 2.3.

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Figure 2.3: Elements for a public health model to address financial stress Overall focus/ approach

Layer, target group

Strategy

Population protection against development of financial stress – health promotion

Primary, whole of population

Provision of general information about personal financial management, and credit education Provision of general advice about financial services and excess use of credit Reflexive regulation of personal financial markets and marketing, including monitoring of product development and regulatory responses as required Community strengthening programs including development of alternative credit and financial products, and improved income support systems Population level studies of extent of financial stress, with specific reference to socio-economic and demographic indicators etc Telephone/web information and advice service Regulation of advertising of credit and financial products Regular advertising of availability of financial and credit information and education programs, websites, and counselling services Embedded and continuing evaluation of policy and specific measures intended to reduce financial stress Product specific information, including ‘low-risk’ guidelines

Primary, those in financial stress

Data collection and analysis – financial services and product levels Specific product level prevalence studies Identification of relative risk of financial stress exacerbation, using industry and product specific data Telephone/web information and advice service Low cost debt consolidation and/or management system

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Figure 2.3: (continued) Effective pre-commitment system to avoid recurring debt and financial stress Early identification of emerging risks and management and reduction of associated harms – harm minimisation

Secondary, whole of population

Regular provision of data describing credit utilisation, prevalence of financial stress, including incidence of stress by mode of financial service, proportion of consumption estimated as attributable to high risk credit use, and relation to socio-economic characteristics of local areas Regular establishment and publication of harm minimisation goals expressed so as to be capable of systematic program, impact and eventual outcome evaluation Regular provision of survey data describing public attitudes towards and interface with financial services and credit Transparent reporting of extent of corporate and government revenue derived from high risk financial services and/or credit Development of independent research program to investigate financial stress and its consequences, causes and responses Provision of alternative funding to support low risk microcredit or similar activities

Secondary, those in financial stress or difficulty

Mandatory risk screening by financial service providers Support/welfare agency provider training and awareness programs Program to identify and modify/eliminate high risk product characteristics Modification of industry structure and licensing in light of data analysis Independently funded 24 hour telephone/web counselling, advice and follow-up services – particularly focused at early stage interventions Mandatory provision by product providers of information about independently funded advice/counselling services Independently funded gambling and financial advice/ counselling/treatment programs available at a variety of health and/or community service providers Regular advertising to promote risk factor awareness in support of early intervention

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Figure 2.3: (cont.) Treatment of established problems and management of associated harms – harm minimisation

Tertiary, whole of population

Development and implementation of licensing system allowing for revision at relatively short notice in light of continuing evaluation and product impact evaluation Regular published evaluation of harm minimisation goals and activities Review of bankruptcy and debt relief or repayment mechanisms to ensure fairness and effectiveness of legislated responses to financial difficulty and personal debt

Tertiary, those in immediate financial difficulty

Integrated planning and provision of support and care systems in association with a range of health/community care providers Provision of independently funded one-to-one support and counselling to ensure that those in financial difficulty make the best decisions having regard to their own situation Interventions developed for delivery in association with courts, including family law systems, etc Education and support programs to assist recovery of those who have experienced serious financial stress, bankruptcy or critical debt situations. Regular evaluation of and support for development of treatment interventions, to support establishment of effective practice

Sources: derived from Korn et al (2006) with additions by the present authors

The framework set out in Figure 2.3 is not intended to be exhaustive, but rather to provide an illustration of the various types of interventions which may be effective at multiple levels (in this case, we have identified three levels, primary, secondary and tertiary, analogous to the public health concepts of ‘upstream’, ‘midstream’ and ‘downstream’). No doubt others with particular and specific expertise in various aspects of the aetiology (or pathway to development) of financial stress, its prevention, and clinical/casework or educational interventions required to address it would add or subtract from this framework. But the important element we wish to introduce to this aspect of the project is the need to provide something against which ‘best practice’ may be assessed. In our view, the public health model has much to recommend it and provides for a comprehensive range of interventions at the preventative, remedial and clinical points along the continuum of financial stress and associated harm. Without such a framework, or something similar, it is difficult to understand how we can address the issue of determining what constitutes the best practice for financial counselling (or indeed any other service addressing any other socio-economically derived set of harms or problems). As we have already discussed, contemporary public health approaches as articulated by Baum (2005) (for example) also incorporate principles of social justice, derived from such important international declarations as the Ottawa Charter (WHO 1986). An important element of a social justice focus to address financial stress and its consequences is the awareness that, in a financial services environment of contemporary complexity, access to a full range of FC and analogous services is an important right, most notably for those likely to experience ‘structural’ socio-economic or cultural disadvantage in the

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context of their engagement with the financial services industry. This right flows from the increasing necessity of engaging with financial services in order to function effectively within the complex social and economic fabric of the contemporary world. Again, access to such services is arguably analogous to the widely held view in Australia and most other advanced economies that all people should enjoy universal access to health care services, including preventative services such as effective product safety and education programs, on the basis of need, rather than on the basis of capacity to pay. However, as Singh & Shelly (2005) point out, there remains a lack of understanding (as evidenced by gaps in the literature) around the links between the social and cultural dimensions of debt, credit and associated decision making. Further, an adequate approach to consumer protection in financial services requires the integration of issues of financial literacy, the circumstances of credit provision, and its regulation along with consideration of the social, cultural and behavioural components of financial decision making. Further, Singh & Shelly suggest that access to financial services including credit provision constitutes an important marker of social inclusion, but access to such products is differentially affected by relative socio-economic position. In other words, the extent of social exclusion may be closely related to the type of credit products which are available to individuals, with low income earners (for example) frequently excluded from access to low interest products and encouraged to utilise more expensive and sometimes marginal credit products or providers including personal loans, credit cards (used in this context as a form of credit rather than as a payment facility) or in some cases pay-day lenders or pawn shops. Singh & Shelly suggest that existing approaches to the management of debt are entirely individualistic, but that a more appropriate approach would take a four-pronged ‘holistic’ approach, incorporating education for consumers, provision of credit to the poor in a ‘safe’ way, including a regulatory system that supplies effective consumer credit, the curbing of exploitative industry practices, and the need for development of an improved understanding of the social, cultural and behavioural aspects of financial services and credit provision. In broad terms, such a ‘holistic’ approach amounts to broadly the same framework as the public health model discussed above. We have utilised this model in order to assess the relative effectiveness of Australian financial counselling services when assessed against other styles or models of such services in two other countries. Although our initial intention in developing this framework was heuristic (i.e., as a device for measurement or assessment) we also believe that the public health approach can provide a framework for goal setting and evaluation of services and systems, and can also be useful as a road-map for continuing service development and integration.

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3.

Aspects of Financial Counselling in Australia

3.1.

Evolution and key characteristics of the Australian model The financial counselling (FC) model prevalent in Australia has evolved since the 1970s from an “emergency relief ” model, where some form of short term material support was typically provided by a welfare agency to the individual (sometimes, in the past, requiring the application of some form of ‘worthiness’ criteria, and often in the form of vouchers or food parcels) towards a contemporary model intended to address both short and longer term financial difficulties, derived from a community development approach (Tennant, 2004; Pentland, 2006). Although such emergency relief continues to be necessary and to be provided, concepts of how best to address what might be regarded as the ‘structural’ factors inducing ‘chronic’ indebtedness have substantially altered, in the direction of a model derived from community development principles. Underpinning this community development model is a social justice philosophy incorporating ideas of empowerment, advocacy and the development and entrenchment of principles of consumer rights for low-income earners, and other vulnerable consumers. Financial counselling service providers, the national and state associations agree that FC services be provided free of charge, confidentially, and with no conflict of interest. Some hold the view that as a corollary, funds provided by the financial services industry, for example, banks, should not be utilised for casework. AFCCRA has recently engaged the financial counselling sector in discussion of potential conflict of interest in partnerships with industry, and there was a wide range of views on industry funding, particularly industry funding for casework (see www.afccra.org).The current policy of AFCCRA, the national peak body for financial counsellors, is that written agreements will govern its partnerships with industry to ensure that its independence and integrity is not compromised. Further, it appears to have been generally agreed that FC services should be focused on providing their services to low income, or other marginalized and vulnerable people (Pentland presentation to ITSA, 2006), in what is a characteristic aspect of the social justice philosophy underpinning the Australian FC service model – that is, that FC and other services have a role to play in redressing aspects of the inequities inherent in the broader social and economic system. Nonetheless, although the broad framework of the Australian model is drawn from the underpinning principles outlined above, supported by the 2004 amendments to the Financial Services Reform Act, the emphasis of this fundamentally social justice framework differs between states and territories. At the ‘coal-face’, its implementation also varies between counselling, para-legal and community development approaches (Barker, 2005). There are estimated to be between 450 and 500 Financial Counsellors operating in Australia, although some of these are part-time or volunteer workers (AFCCRA 2007). Further, a lack of enforcement for standardised accreditation of counsellors, and, up until very recently, no standardised education and training programs for counsellors across Australia (Barker, 2005), have tended to undermine the development of an agreed model for Australian FC services. These barriers have historically been compounded, at least potentially and probably in reality, by funding inconsistencies between states, the lack of standardised approaches to implementing services, the lack of national quality control checks and relatively limited evaluation of services. Each Australian jurisdiction provides financial counselling services, including the Australian government which provided about $2.5 million in funding to 41 organisations in each state and territory in 2007-08 (FaHCSIA 2008).

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This funding was doubled to $5 million per annum for four years from 2008-09 in the 2008 Federal budget. More recent developments addressing some of these concerns have included an allocation by the Australian Government of about $14 million to the Rural Financial Counselling Service (RFCS) from 2008-09, which has also been accompanied by requirements for structured case management, higher performance standards, mandatory qualifications and larger services that are more flexible to need (personal communication WB). State governments contributed a further $2 million to the RFCS in 2008-09. In April 2009, the Australian Government also announced an additional $1.75 million in funding for rapid training of additional financial counsellors, as part of a response to the global financial crisis (Macklin 2009). On 26 June 2009, additional funding of $12 million over two years for financial counsellors was also announced by Minister Macklin, as an element of the fiscal stimulus package announced by the Australian government in response to the global financial crisis. This funding is non-recurrent. State governments in Victoria, WA and Queensland have also recently announced additional funding for financial counselling services. In May 2009, the Australian Government also announced annual peak body funding of $240,000 for AFCCRA. Although FC services in Australia appear to be underpinned by a common philosophy, key characteristics and a broad legislative framework, the potential for achievement of a consistent best practice model has been compromised at least to some extent by practical difficulties associated with funding and other operational issues. These may have been addressed in part by recent initiatives discussed above (particularly in relation to the RFCS), but there is some inconsistency in a range of areas across the Australian states and territories. Rapid funding increases in response to specific circumstances such as bushfires or anticipated increases in unemployment due to the financial crisis, although welcome, may also not properly address some of the more significant structural issues relevant to the development of financial stress. They may also evaporate once the crisis is perceived to have passed.

3.2.

The example of Victoria: Financial Counselling and community development FC services operating in the southern Australian state of Victoria provide what might be described as the most progressive in terms of their implementation of a community development framework, underpinned by social justice philosophies of ‘empowerment, client focused services, client advocacy, human rights, structural advocacy, case management and community education’ (Barker, 2005). The community development model for Victorian FC services is accentuated by the educational content of the available financial counselling qualification, the Diploma of Community Services (Financial Counselling) and by materials produced by the Victorian peak body for financial counselling services, as well as through the relevant industrial award and available FC literature (Barker 2006). It is also said to be underpinned by Victoria’s approach to consumer advocacy and ‘client focused’ services, particularly in relation to the Consumer Credit Code, which has been largely determined by a research and policy environment determined by Consumer Affairs Victoria (CAV), a government agency within the Victorian Department of Justice (DoJ), which until 2008 provided funds for FC services in Victoria. CAV actively sought to engage social justice principles by conducting research into regulation of consumer credit, and the development of quality control standards. Responsibility for funding of FC services has recently passed into the problem gambling section of DoJ, an apparent consequence of the review of FC services undertaken in 2008 by the Victorian State Services Authority (see below). It is not yet clear what if any impact this intra-departmental transfer will have on the management or operations of FC services, although there has been some recent activity initiated by DoJ to address training and workforce issues. The Consumer Credit Review Report, released in 2005, produced recommendations for legislative

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amendments and policy redevelopment to tighten loopholes in the credit sector. These recommendations were focused on providing additional protection to marginalised and vulnerable consumers in Victoria, and targeted what were seen to be unjust and unfair credit lending practices (Financial and Consumer Rights Council, response to CCR, 2006; Consumer Credit Report, 2005). In addition, specific service areas for improvements were noted, including the need to develop quality control standards, and adopt more preventative strategies to address increasing demand for services (Consumer Credit Report, 2005). In response to the identified need for the development of a set of quality control standards, CAV released a model of quality control in 2007 to improve service provision and ensure consistency and accountably for a more unified and professionalised Victorian sector. The financial counselling standards developed utilise a community development model, underpinned by social justice principles. The key areas for assessment identified in these standards are: ■■

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service delivery, with a focus on professional development, client engagement, participation and development, and client individual assessment; community development, with a focus on client’s social environment and inter-sectoral approaches for client advocacy; and governance and management, with a focus on leadership, transparency, accountability and management (Barker, 2007)

These standards are subject to review, and were intended to apply to all services funded by the CAV to deliver FC services. (Beverly Kliger & Associates 2007). However, the full implementation of the standards is currently delayed due to a lack of resources. The commitment of additional resources is thought necessary to provide support for FC agencies (particularly smaller agencies) in the adoption of the standards. In 2008, the Victorian FC service system was delivered through 44 community agencies from welfare, religious and non-government sectors in receipt of funds from CAV. These agencies provide services to about 35,500 clients per year. DoJ funding provides about $5 million p.a. to Victoria’s service providers. In April 2009, DoJ announced additional funding of $2.9 million to employ an additional 11 FCs and 5 call centre staff. This initiative was also in response to the global financial crisis (DoJ 2009a) . In May 2009 another allocation of $1 million to employ 12 FCs in hub services was also announced. This initiative was intended to assist those affected by the Victorian Bushfires of February 2009 (DoJ 2009). Until recently, approximately 80% of FC funding was attributable to casework, and the remaining 20% allocated for community development, education and awareness raising, in particular for increasing awareness of FC services in the broader community (Bev Kliger & associates 2007; Personal Communication, December 2007). It seems clear that community development work is not as highly valued by the funder as casework. This view is reinforced by the changes made to funding arrangements in recent years. In 2007-08, for the first time, Victorian agencies could choose to apply their community development funds towards casework if they wished. For 2008-09, all funds provided by government were allocated to casework by default, and Victorian agencies wishing to carry out any community development activities were required to obtain approval for the re-allocation of funds prior to implementation (personal communication from AFCCRA, July 2008). This approach is not uncommon in other areas of practice and in other states, and may well be the only reasonable response to high and increasing levels of demand for services given the limited resources available, but may also tend to undermine the social justice and community development rhetoric of the FC sector in Victoria, as Barker (2006) notes. Specific services provided to marginalized and vulnerable consumers focus on: advocating on behalf of clients, providing information, intervention and reintegration services, and identifying emerging trends, systemic issues and regulatory failure (FCRC, 2006). Community service providers have noted, however, that despite the importance of awareness raising about FC services in the community, and

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utilising ‘preventative’ strategies to decrease the need for financial counselling, increasing awareness of the availability of FC services is likely to exacerbate the already considerable demand for services. For example, a recent qualitative study involving clients of FC services identified the waiting time for the first appointment (up to eight weeks was reported by some research participants) as a major problem in addressing what are frequently very urgent problems. FC service clients often do not make contact with a FC service until they are in serious financial crisis, and although this study reported that most clients regarded the FC service as making a huge difference to their circumstances, many felt that the long delay until they were first able to be seen added significantly to stress and anxiety (Blue Moon 2007). As might be expected, the need for improved levels of funding has been raised by representatives of national and state FC organisations, and directly by FC service providers (Tennant 2004; Good Shepherd 2005). Service provision in Victoria has also taken the approach of targeting some specific interest groups. In addition to generalist financial counselling services, DoJ provides specific funds for FC services targeted towards people experiencing financial difficulties associated with gambling problems. Although this technique targets problem gamblers within a specific context, this approach has been subject to criticism on the basis that the marketing of FC services to identified problem gamblers may limit access by such users, given that it constitutes a ‘one way’ access point to a specific needs group (personal communication, December 2007). Nonetheless, FC services provided to people with gambling-related financial difficulties do provide additional funding for FC services overall, and problem gambler specific services are generally provided by FC service providers who also provide generalist FC services.

3.3.

Financial Counselling services for primary producers and rural populations The Rural Financial Counselling Program (RFCS) was initiated in 1986 on the basis of the perceived special needs of rural populations in the context of drought and other agricultural and economic factors. Until mid 2006, the program was delivered via 64 volunteer organisations, but following a review in 2004, the program was re-oriented for enhanced service delivery. The 2008-11 program utilises 14 service providers who employ about 120 rural financial counsellors. The number of rural financial counsellors has increased significantly in recent years as a consequence of the impacts to farm profitability due to prolonged drought (www.rfcs.gov.au). Significant RFCS Program reforms were implemented in response to a 2004 independent review of the program which highlighted deficiencies in the overall program governance and service delivery. Further program enhancements have been introduced since July 2008 to refocus the rural financial counsellor’s role away from providing short term drought relief assistance to building the capacity of clients to manage and adjust to the financial impacts of climate change and increased global competition. A case management framework has been developed to assist rural financial counsellors provide structured support to help clients identify their options, set goals and identify priority actions. Funds for specific financial issues including sugar industry reform in the wake of the Free Trade Agreement with the US in 2004, and changes to access to the Barrier Reef fisheries, were channelled through the Commonwealth Financial Counselling Program. AFFCRA/ABA/FaCSIA (2007) suggests that Aboriginal Australians have particular needs for FC services. As the most consistently socio-economically disadvantaged group within Australian society they are known to experience very poor health outcomes, and are also clearly at significant risk of serious financial stress. However, only a very modest level of service is provided to Aboriginal Australians, with only four specialist Indigenous financial counsellors operating in Australia. ANZ in partnership with FaHCSIA has developed a specific program for remote indigenous community members, MoneyBusiness,

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to address the financial exclusion of indigenous people6, and FaHCSIA in partnership with communities in the Cape York region of north Queensland, together with Westpac bank, has developed the Family Income Management program7. Two charities, Centacare and Caritas Australia, have also been supported by the Commonwealth Bank to develop and deliver a program for indigenous people in outback NSW intended to assist in overcoming financial exclusion and building financial awareness8.

3.4.

Fee paying models for addressing financial stress in Australia In direct contrast to the requirements of the Financial Services Reform Act, dealing with Australian financial counselling services (that is, providing free-of-charge services to consumers without conflict of interest and in the best interest of the client), fee-paying private sector models to address consumer debt have become relatively commonplace in Australia, as they are in other jurisdictions. A recent study suggests that such services tend to be focused (unsurprisingly) on profit maximisation, rather than the interests of consumers (CCLS & EACH 2005). Drawing on this, Pentland (2006) suggests that fee charging Debt Agreement Administrator businesses have grown ‘exponentially’ as a result of amendments to the Bankruptcy Act1966, specifically via the 1996 introduction of Part IX debt agreements which were intended to provide a vehicle for relatively low level debtors, or their friends or relatives, to act as administrators of the debt. These amendments have provided a basis for profit-motivated businesses to develop a market niche, to the extent that in practice most debt agreements are now administered by a broker acting on behalf of such a business (ITSA 2005, cited in Pentland 2006). Similarly, there has been substantial growth in companies (including some Debt Agreement Administrators) that offer debt consolidation and refinancing loans as a means of managing debt (Pentland 2006). There are also some signs of activity by fee-charging companies in the less lucrative area of arranging informal debt payment schemes, such as ‘Help You Pay’ (now no longer operating), ‘Clickthru Debt Management’ and ‘www.nobankruptcy.com.au’, for example. As already noted, Debt Agreement Administrator businesses were criticised by CCLS & EACH (2005), with particular criticisms focused on a failure rate of such agreements in excess of 50%, the use of ‘hardsell’ marketing strategies, the provision of poor and misleading advice, including debtors not being advised of their full range of options, the charging of excessive fees, and the apparent unsustainability of many agreements from their outset (CCLS & EACH 2005). Further, many private sector Debt Agreement Administrators were regarded as poorly trained and lacking the skills to provide adequate service to their clients. It is highly likely that the profit requirements of Debt Agreement Administrator businesses, as with other profit-focused models of consumer debt resolution, such as debt consolidation and refinancing schemes, and fee-charging for voluntary bankruptcy, act to generate a fundamental conflict of interest – that is, it is in the interests of such commercial businesses to maximise their business base, and thus their potential profit, rather than to minimise the costs to consumers experiencing financial difficulty. Given that many, if not most, such consumers are experiencing serious emotional, financial and related pressures, and are likely to be both ill-informed on their rights and options, and socio-economically disadvantaged, it is unsurprising that excessive fees, inappropriate refinancing, and unsustainable debt agreements will eventuate (Pentland 2006). In fact, it would be surprising if this were not the case. Amendments to the Bankruptcy Act that were intended to address many of these issues were implemented from 1 July 2007. However, we have not been able to determine the effectiveness of these amendments.

6 7 8

http://www.anz.com/aus/values/moneybusiness/default.asp http://www.facsia.gov.au/internet/facsinternet.nsf/indigenous/programs-fim.htm http://www.afccra.org/Documents_2007%20conference/filf%202007%20documents/Lynda%20Edwards%20Workshop%20 Indigenous%20Financial%20Awareness.pdf

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3.5.

Issues and limitations of the Australian model The material we examined suggests that the resources available to the FC sector in Australia are inadequate (AFCCRA/ABA/FaCSIA 2007, Tennant & Pentland 2007, Pentland 2006). This may have been at least partially addressed by recent funding initiatives as described above, but it is important to note that these were instigated in response to specific crises (the global financial crisis and in Victoria the February 2009 bushfires) and may be transitory. In any event, such funding initiatives are intended to address a spike in demand caused by the crises they address. We believe that a needs assessment focused on FC and like services would be a beneficial undertaking, but have been unable to identify any such study. Further, we have been unable to locate any published independent or systematic evaluation of FC service provision. This is a major gap in the existing literature, and is necessary to comprehensively assess the extent to which FC services are effective and efficient. Such evidence would also assist in determining the actual effectiveness of the Australian FC service model overall, underpinned as it appears to be by the social justice framework discussed above. This is despite the relatively well explored relationship between utilisation of credit services and associated levels of debt, and low incomes and poverty (Centre for Consumer Credit and Law, 2005; Griffiths and Renwick, 2002). We are unaware of, for example, current longitudinal studies in Australia focused on the efficacy of this model of FC service provision. For example, if the community development oriented social justice model of FC service provision, were effective (as is generally agreed in the available literature and anecdotally), it would be anticipated that measurable improvements would be achieved in relation to parameters of performance such as financial security and wellbeing, bankruptcy levels, and quality of life and relationships, including measures of participation in society, and mental health improvements. The lack of meaningful evaluation of community services is not uncommon – it is only relatively recently that evidence based practice has become accepted as the benchmark for establishment of standards in many clinical or practice based areas of professional activity. However even in broad terms the effectiveness of FC services does appear to be largely unevaluated, and Barker (2006) argues that funding rules applied to DoJ funded FC services in Victoria undermine the community development model in favour of an individualised casework based approach. A review of Victorian FC services was undertaken in 2008 by the State Services Authority. This review identified three key issues: growing financial hardship within Victoria, which is driving demand for FC services; an inconsistent approach to service delivery depending on whether the client had a gambling problem, rather than on the level of need; and variations and gaps in FC service management, leading to inconsistent provision of services across the state. The SSA made eight recommendations, as follows: 1. service accessibility—targeted wait times and evidence-based decision criteria are required to determine client eligibility for face-to-face and telephone support. 2. intake and assessment—formal, documented and locally responsive intake and assessment processes should be introduced. 3. service standards—consolidated service standards should be applied across financial counselling programs. 4. workforce—a workforce planning, training and development strategy is required to overcome workforce scarcity and secure future workforce supply. 5. prevention and early intervention—a whole of government approach is needed to preventing financial hardship and intervening early before a crisis point is reached. 6. emergencies and communities in crisis—the role of financial counselling services in emergency recovery efforts should be formally documented in Municipal Emergency Management Plans.

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7. integration with other social services—financial counselling service providers should be supported to join and formalise participation in local and regional networks to facilitate cross-program integration. 8. program consolidation—the generalist and problem gambling programs should be consolidated into a single administrative unit to strengthen consistency in areas such as standards, wait times, community development support and service reporting (SSA 2008). Interestingly the SSA report identifies the need for a whole of government approach, with a particular focus on prevention and early intervention echoing some elements of the public health framework. The FC sector is also grappling with questions about how to increase its funding base, and at the same time maintain its independence from the possibility (potential or real) of conflict of interest. In a period of restrained or constrained expenditure by governments, it is frequently difficult to obtain increased resources, particularly for activities that have been clearly perceived to be marginal to the core business of FC services – that is, for more upstream research, community development and advocacy activities, rather than casework. Tennant & Pentland (2007) indicate that industry funding has been utilised for a variety of purposes, including supporting FC sector conferences and the development of the Diploma of Community Services (Financial Counselling) (the specialist qualification for those wishing to practice as Financial Counsellors). Industry has also provided funding to some FC agencies for the development of hardship policies which are then adopted by industry. This growing relationship is not perceived to be unproblematic, however. Tennant & Pentland (2007) argue that although such relationships may undoubtedly permit the FC sector to influence industry in positive ways, especially given the growth of the corporate responsibility movement, there are serious dangers inherent in acceptance of funding from industry if that is used for funding casework, the independence of which from any perceived conflict of interest is regarded as paramount. This is a perfectly reasonable position to adopt but it is also arguable that the development of any financial relationship with vested interests places FC services (or any other service type) at risk of the perception of conflict. Given the tension between the underpinning discourse of community development in the Australian FC service model, compared to the actual practice of services to be heavily focused on casework (as Barker 2006 notes), it becomes important to pursue continuing systematic evaluation of the actual effectiveness of the Australian FC service model and the development of an evidence base to support both good practice and claims for increased funding. Perhaps more importantly, the systematic and continuous compilation of such an evidence base would also be important in demonstrating the independence and freedom from conflict of interest of FC services in the context of developing a relationship with some elements of industry.

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4.

International models for Financial Counselling or like services

In searching for international comparisons we discovered most literature in English emanated from the United Kingdom or North America. We have therefore focused on literature derived from these two sources for purposes of comparison of the broad model of financial counselling services. As noted above in section 2, we are predominantly concerned with identifying a framework to permit comparison of the range of services provided rather than focusing on specific practice models to address individual client needs, as important as practice models undoubtedly are. As with the previous section, we are fundamentally concerned with identifying the extent to which broad service models are consistent with a public health model, able to address and deliver services and interventions across the full range of possible and necessary interventions. It is also notable that the volume of literature emanating from the UK is, as far as we can determine, considerably greater than that available from either Australia or the United States. This of itself is an interesting phenomenon, demonstrating perhaps a greater official or government awareness of issues around financial exclusion and financial stress in the UK at present, than is the case in either the US or Australia. There is, of course, considerable overlap between Australia and the UK in terms of the types of services provided and the manner of their provision, and somewhat less overlap between both of these jurisdictions and services provided in the United States.

4.1.

United Kingdom

4.1.1.

Financial advice services in the UK – a snapshot

The fieldwork report prepared by Mandoki (2009) following her visit to Britain in 2009 provides a good summary of the structure of the regulatory framework for financial services in the UK. Mandoki reports that the approach adopted to regulation of financial services has typically leaned towards a light regulatory touch (certainly until the global financial crisis provided some impetus towards a more heavy handed approach to regulation). As in Australia, industry is regarded as well able to regulate its own activities, with some oversight from government agencies. Financial service providers are either licensed by government, or regulated by a quasi government authority (the Financial Services Authority), and are required to belong to an external dispute resolution scheme. However, there are distinctions, including the 100% industry funding of the UK Financial Services Authority, and the requirement (unlike Australia) that FC services be licensed. The UK approach to issues of financial stress is also supported by a high level commitment to principles of financial inclusion and support for the development by consumers of financial capability. Although these principles are implicit in Australian systems, they are not explicit and lack the UK government’s current commitment to ‘mainstream financial inclusion across all government departments by 2011’ (Mandoki 2009: 3). A diagrammatic summary of relationships in the British system of FC and related services to address issue around financial stress is presented in Figure 4.1 below.

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Figure 4.1: Diagrammatic representation of funding and responsibility for regulatory agencies, UK

Industry

Financial Services Authority

Financial Ombudsman Service

Financial Capability financial services industry

government

Debt Advice

Office of Fair Trading

Financial Inclusion Funding Responsibility

Source: Adopted by the authors from presentation by A. Mandoki 19 June 2009

Mandoki points out that the UK government has a higher level commitment to the development of improved levels of financial capability and financial inclusion than its Australian counterpart. Of course, the UK is not a federation and has fewer problems with jurisdictional issues than Australia. But, given the looming transfer of responsibility for consumer credit to the Australian Government, it is likely that more can be done to adopt some of the principles and adapt some of the activities currently being pursued in the UK. Mandoki also describes the advice or assistance services available to consumers in the UK, noting that a range of service modes are available, including face to face services, telephone, email and internet services. One organisation (CCCS), a charity funded by industry, offers a diagnostic tool online. These service modes appear to appeal to different demographics, and in addition a large fee for service for-profit sector is active in offering Debt Management Plans (an informal arrangement which has no equivalent in Australia) and formal Individual Voluntary Agreements, similar to Part IX Debt Agreements. Face to face services are principally provided by Citizens Advice Bureaux (CAB), although CCCS is currently developing a face to face service for high need clients, using its accumulated reserves. The CAB service most strongly resembles the Australian FC sector. Its client base is largely low income and marginalised. CAB are largely government funded. National Debtline, which offers telephone services, is funded 50:50 by government and industry; and Payplan and CCCS are funded entirely by industry. Mandoki argues that the UK experience of industry funding has not had discernible negative consequences – although in theory a conflict of interest could arise, Mandoki suggests that these services are client focused and although they tend to focus on debt repayment rather than what they see as debt ‘avoidance’ she suggests that conflict is absent from their practical dealings with client problems. Nonetheless, these services tend to challenge liability for debts much less than is the case in Australia. Whether this actually amounts to a reflection of inherent conflict of interest is an interesting question, currently unresolved. Training and qualification of counsellors is perceived by Mandoki as a serious limitation to the UK system. Requisite qualifications are variable and there is no accepted national standard for the UK as

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a whole. Training is very technically focused and not developed within a social policy framework, and little emphasis is placed on preventative work at the level of ‘money advisors’. There are also no current national standards of quality for money advice services, although both the issue of a national qualification and national quality standards are currently being pursued throughout the sector. Mandoki also argues that the UK model is somewhat fragmented and that de-fragmentation of the sector is a major challenge, a recent attempt to construct a common entry point for all services having failed.

4.1.2.

The UK Action Plan for over-indebtedness

A report produced by the UK Dept. for Business, Enterprise and Regulatory Reform (BERR) (2007) provides a useful outline of the strategies adopted by the British Government to address issues associated with financial stress. This section draws on this document to outline the range of initiatives proposed and/or being undertaken in Britain. BERR (2007) reports that the UK Government developed an Action Plan in 2004 for tackling over indebtedness. This Action Plan has been updated, and reporting of the strategy is undertaken annually, and the plan has been somewhat altered. Nonetheless, it provides a good account of the thinking behind the UK’s current government-level approach to these issues. The plan, developed by a Ministerial working group, adopted fundamental requirements including: i) maintenance of a stable, well managed economy; ii) development and maintenance of an efficient, well regulated market for personal credit; and iii) access by consumers to appropriate information and advice about credit and debt. The Action Plan also incorporated a number of strategic action areas focused on consumer credit issues, including: i) access to affordable credit; ii) improving financial capability; iii) encouraging savings and asset ownership; iv) tackling poverty through promotion of employment; v) increasing consumer protection (through provision of necessary information to borrowers, prevention of malpractice and appropriate access to redress by borrowers); vi) supervision and enforcement of the financial services industry; vii) provision of debt advice; and viii) ensuring monitoring and evaluation of the strategy and its programs through the development of the Wealth and Asset Survey (WAS), which tracks household circumstances in relation to debt, and annual reviews which provide updated comparative analysis of the debt situation of households in comparison to previous years. Data to support understanding of financial circumstances is also systematically collected from intersectoral agencies, including the Bank of England (Financial Capability Survey, and Mori Financial Service Survey), and private sector finance management options, including statutory insolvency instruments (bankruptcy and Individual Voluntary Arrangements, or IVAs) and non statutory insolvency instruments (Debt Management Plans, or DMPs). The rate of utilisation of IVAs reportedly increased in the year to 2007 (BERR 2007), and this is thought to be a result of increased marketing and advertising of IVA’s by debt management companies and IVA providers, who must be insolvency practitioners licensed by a professional organisation or a government department. Similarly, the utilisation of Debt Management Plans has grown strongly over the medium term, although in the year to 2007, there was a 26% decrease in the number of DMPs utilised. This was originally thought to have occurred because of greater awareness of other available options, however the continuing decline in DMPs through 2008 and 2009 appears to be due instead to the global financial crisis – fewer clients have sufficient surpluses to enable them to repay their debts through a DMP (Mandoki 2009). This data was derived from the Consumer Credit Counselling Service which is the largest UK not for profit organisation dealing with consumer debt and financial stress. CCCS is entirely funded by the credit industry, and was founded by ‘major lenders’ (CCCS 2008).

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Data are also collected for the purposes of debt and financial stress monitoring by: assessment of the macro-economic environment (including assessment of the global credit market and interest rate trends), the micro level household economic situation with respect to debt to income ratios, the number of properties taken into possession (or repossessed), levels of, and rates of recoupment on debt write offs, the ratio of household debt to total assets, personal insolvencies, mortgage arrears, and the over-indebtedness characteristics of households (derived from the financial capability survey). At the individual level, a Financial Services Authority (FSA) survey also examines individual’s own assessment of their ability to service their bills and credit commitments. These data are reportedly collected within a holistic framework, underpinned by a household decision making framework. BERR (2007) also report that there is no generally accepted definition of over-indebtedness utilised in the UK. Broad definitions tend to be used – for example, if households are struggling to keep up with payments and are experiencing financial hardship as a result, they are regarded as over-indebted. However, some indicators have been developed to more formally define over-indebtedness. These include: 1. being at least 2 months in arrears on any one payment for any of mortgage, household bills or credit commitment payments; 2. households spending more then 50% of their gross income on total credit repayments; 3. households spending more then 25% of their gross income on unsecured credit repayments. BERR (2007) also report perceived causes of debt problems, derived from their data collection. These include a lack of essential financial skills, and sudden changes in circumstances, for example unemployment or serious illness, which leads to over-indebtedness derived from an unanticipated decline in income, especially for low income households. Low income levels for households have also (unsurprisingly) been identified as a source of problem debt, with families needing to borrow to meet regular needs or to meet payments on existing debt. In keeping with existing and parallel UK social policy, financial exclusion is also seen to contribute to the creation of problem debt. Social exclusion is related to the establishment of poor credit ratings, which in turn equate to difficulty in accessing mainstream borrowing, further leading to a reliance on expensive forms, or in some cases unlawful or unregulated sources of, credit (BERR 2007). The effects of over indebtedness, apart from financial stress, are also reported to include psychological and emotional stress, anxiety and associated illness, difficulties in obtaining affordable credit, and significant costs for society more generally, including decreases in productivity and health related costs and welfare benefits (BERR 2007). Socio-demographic variables associated with over-indebtedness include being single, although households with children under 16 years are more likely than single person households to experience over-indebtedness. Having a child, being a mortgage holder or being a tenant are also indicators of increased likelihood of over-indebtedness. Household gross income however is not an indicator of whether a household will find their debt repayments a heavy burden. BERR (2007) indicate that over-indebtedness is regarded by the UK government as requiring a coordinated response across a number of government departments. A ministerial group comprising Ministers from BERR, the Department for Work and Pensions (DWP), the Ministry of Justice (MoJ), the Department for Children, Schools and Families (DCSF), the Department for Communities and Local Government (DCLG) and HM Treasury was established to co-ordinate cross government action in the area, with the first Action Plan published in 2004, and the first Annual Report published in 2005. These activities were associated with a White Paper on consumer credit (2003) and subsequent drafting of a new Consumer Credit Bill, which became the Consumer Credit Act 2006. This legislation is still in the process of being fully implemented, and includes provisions to ensure adherence to EU standards on consumer credit (BERR 2008).

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BERR (2007) report that the 2006 Action Plan focused on the following areas: Poverty and Social Exclusion—the specific initiative in this category is the Financial Inclusion Fund, which provides £130 million for the period 2008-2011, in addition to £120 million already allocated. This fund provides: ■■

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Face to face advice via 16 partnerships with debt advice agencies in locations targeted to disadvantaged groups. More than 66,000 clients were reportedly assisted in 2006; Money Advice Outreach Pilots, involving 22 pilots in outreach locations including prisons, family and children’s and community centres and credit unions; Growth Fund for third sector lenders, involving support to community development focused financial institutions and credit unions to offer affordable loans and current account banking services to financially excluded people. This program is reported as having provided more than 46,000 loans totalling in excess of £20 million; Taskforce, which is a collaborative initiative in partnership with the banking sector to identify where further support is needed; Job Centre plus, which encourages participation in the formal labour market and is focused on raising the employment rate; Government strategy for older people, which involves pension credits, and reforms to basic state pensions and housing benefits; Introduction of the Pensions Act 2007, making state pensions more universal and generous; Social Fund, which in 2006-07 awarded 2.4 million interest free loans valued at over £688million to clients likely to be lone parents, younger people, tenants or people with a longstanding illness, health problem or a disability; Budgeting Loan Scheme, introduced in 2006, and under which the repayment rate for existing budgeting and crisis loans was reduced and the repayment period extended; and ‘Now lets talk about money’ campaign, an information provision initiative to raise awareness of the services available for financially excluded people.

Improving Financial Decision Making—This long term initiative to increasing financial Capability was first outlined in January 2007, and is in response to FSA data which shows that consumers lack confidence and capability to make effective decisions about money and credit. The initiative includes: ■■

■■ ■■

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Personal financial education in schools, with £11.5 million allocated to strengthen the existing program and develop a range of innovative curriculum resources; FSA commissioned feasibility study into the provision of a national generic financial advice service; A seven point program for schools, young adults who are unemployed, or are not taking part in education or training, using booklets, websites, and online resources, including a financial health check, ‘the debt test’; An FSA partnership development team, involving partnerships with organisations to reach lone parents, older people, carers, and disadvantaged women; Financial service industry collaboration, promoting financial education, through developing resources, and delivering a program through, for example, Citizens Advice Scotland and six member Bureaus, to provide financial education to vulnerable groups.

4. Savings and Assets—this area of activity was focused on developing access to savings and other personal assets for financially excluded individuals and incorporated a range of programs including: ■■

Savings Gateway, a government program to match savings as an incentive. The evidence suggests the overwhelming success of the initial program, with the possibility of extension;

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■■

■■

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Mortgage regulation and investigation, involving statutory mortgage regulation and FSA review on firms selling in the sub-prime market; a report on this is due for release in 2008; Individual Voluntary Agreements protocol is in development after the Office of Fair Trading outlined concerns over advertising. The Insolvency Service (IS) consulted on the introduction of a simplified IVA process, to reduce costs, increase accessibility, and provide better returns for creditors. ‘Understanding personal debt’ - The Government will undertake a review to increase understanding of interactions between macro economic factors and life events.

5. Responsible Lending, which focused on legislative and regulatory reform and enforcement, as follows: ■■

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The Consumer Credit Act 2006 included a new test to enable courts to look at the entirety of a relationship between the debtor and creditor to determine whether any circumstances arising from agreements were unfair to the debtor; The Act also extended the financial licensing regime to enable the OFT to act more effectively against rogue traders; From April 2008, the previous consumer protection threshold of £25,000 will be abolished; Information must be compulsorily provided to consumers regarding the implications of using credit card services compared to other alternatives;

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Development of a pilot program to target illegal lenders;

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Establishment of “choosing and using” website for impartial advice on credit cards;

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Development of money advice liaison group, including industry, money advice agencies and health professionals to investigate how individuals with mental health problems can be supported.

6. Utility Bills, seen as a key source of difficulty for many consumers, have also been the subject of integrated policy responses, including: ■■

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Energy supplies home health help line, which provides information on accessing tariff freezes, social tariffs and trust funds held by suppliers; Joint programs to provide gas and renewable technology to disadvantaged communities to address fuel poverty; Increased corporate social responsibility by energy suppliers, including updated guidelines from the water services regulation authority to deal with consumers in debt; Development of prepaid services for telecommunications, using a social tariff scheme.

7. Debt Advice is seen as a further key area of action, and includes development of Financial Inclusion Fund initiatives (as noted above), as well as: ■■

■■ ■■

Development of collaborative links between Community Legal Services and CCCS for the seamless transfer of calls to the most appropriate helpline, with alternative referral to CABs in some parts of the UK; Legal Services Commission now funds face to face debt advice for eligible citizens; Research currently being undertaken into the cost effectiveness of debt advice, with The Scottish Executive now also undertaking a study on pilot projects, on the basis that there is no single approach to the needs of all affected groups.

8. Debt Collection reform is focused on new measures enacted via parts 3 and 4 of the Tribunals, Courts and Enforcement Act 2007, which provides: ■■ ■■

Increased access to information for consumers and streamlined enforcement mechanisms; All creditors, including Government local authorities now use the same procedures and processes when enforcing judgments and debts owed to them by way of bailiff action;

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■■

Improvements in industry practices will be required, including establishment of complaint handling units, revision of standard letters, and prohibition on anonymous telemessages to debtors, etc.

9. Debtors to government and local authorities are also now in focus and initiatives include: ■■

Development of Good Practice Guidance for the prevention and management of rent arrears, for social landlords;

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Rent Arrears Pre-Action Protocol for landlords who are considering issuing court proceedings;

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Revision of the Code of Practice on overpayments in progress.

10. The Justice System is an important site for continuing development of initiatives and these include: ■■

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■■ ■■

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4.1.3.

Revision and simplification of the IVA regime, applying to cases where debtors owe less then £75,000 and the debt is not disputed. There will be simple majority voting (75%) at a paper ‘meeting’ of creditors, not involving a face to face meeting, and there will be no facility for creditors to make modifications to the proposal, making cases quicker and simpler to administer; MoJ registration of confiscation orders will be required; Reforms to the County Court administration order system involving long term debt schemes managed by the courts; Debt relief orders to be introduced for low income earners who have no assets and are excluded from the current available debt resolution procedures, because they have nothing to offer creditors; Introduction of enforcement restriction orders; Development of a piloted proposal for court generated Pre Action Notice (PAN), to improve engagement and hopefully avoid litigation by encouraging debtors to deal with debt earlier. (A qualitative study to measure the impact of PAN undertaken by researchers from Exeter University indicated no noticeable impact on encouraging engagement, but suggested that where a creditor issued a clearly structured letter before action, around half of the debtors would engage at that early stage); Establishment of pilot Department of Trade and Industry (DTI) Trading Standards for Specialist Money Lending Teams.

British research and associated information regarding financial literacy, illegal and high cost lending and money advice

There is ample evidence of a wide ranging and engaged debate in the British community on issues of the links between social and financial exclusion, and apparent acceptance of a broad based approach to dealing with these issues. The literature summarised below is largely independent of, or at times critical of, the official UK Government policy approach outlined above, but provides strong support for the view that a multi-faceted approach, involving ‘upstream’, ‘midstream’ and ‘downstream’ interventions and initiatives is required to address issues of financial stress, social exclusion and over-indebtedness (to adopt the British terminology). BMRB Social Research (2004) report that Citizen’s Advice Bureaux provide free advice on a wide range of topics, including money advice and debt counselling. The majority of CAB clients are low and middle income earners. The national strategy for financial capability is intended to provide people with education, information and generic advice to make financial decisions with confidence. This research explored what scope there is to expand the role of information and advice on financial issues with CAB. CAB are seen as a last resort for clients. Debt problems were a result of a variety of factors, including the inability to manage income, excessive expenditure, redundancy, relationship breakdown, domestic violence and depression. CAB Advisors felt most knowledgeable about issues such as debt and state benefits. They felt least knowledgeable about non state pensions, life insurance and investments. Most queries from clients were about debts and benefits. Clients’ views of the free advice received at the bureau

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were universally positive about service and staff. Clients were reportedly happy with the impartiality of service and the sympathetic, non-judgemental and understanding staff who were perceived as extremely knowledgeable and efficient. However, the bureaux were not identified as a place for obtaining financial information. CAB were perceived as places to obtain information on debts, legal issues, benefits and employment. CAB advisers were prepared to give generic information, but did not want to give product specific advice. They were also concerned that clear guidelines on the provision of such information should be established, and that information should not compromise the impartial and independent ethos of CAB. Advisers also indicated that extensive training would be needed to administer a generic advice service, covering a range of topics. The financial health check was viewed by advisers as positive. However there were concerns about suitability, accessibility, and the time and resources of the bureaux required for its successful administration. ECOTEC (2006) also focus on CABs, and report on the findings from an evaluation of the ‘Financial Skills for Life’ project, undertaken by CABs and funded by Prudential PLC. The objective of Financial Skills for Life was to test and develop the capacity of Citizens Advice and its member bureaux to organize and deliver preventative financial capability education. Whilst it was useful to draw on the experience of debt advice and other related experience, it was not necessary for trainers to have been debt advisers. Individual bureaux developed a lot of their own training materials. It proved essential to draw on local knowledge, to focus on “life stage” events, and to tailor materials to particular beneficiaries’ needs. Four topics were common to all nine pilots: budgeting, saving, credit and borrowing and managing debt. The evaluation considered bureaux to be most effective when training was delivered to a small group of people (10 or less) with shared needs and interests, where content was tailored to their identified interests, and use made of practical examples which had day to day and local relevance. Larger groups tended to result in training being done with less depth or relevance. Programmes held in familiar surroundings, and in “bite-size” chunks were also perceived as more effective. This was also the case where bureau workers were able to blend sound financial and local knowledge with good training skills and support workers in intermediary organisations as well as end users. This maximised bureaux appreciation of end user needs, had an important multiplier effect, and helped embed greater financial capability confidence within the intermediary organisation. The evaluation reported by ECOTEC (2006) also identified some significant outcomes for clients. Most immediately, individuals displayed greater confidence around personal finance, resulting in reduced financial exclusion. They: ■■

were better equipped to head off potential debt problems;

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showed a greater understanding of budgeting and savings strategies;

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had better awareness of government entitlements and sources of help, improving their access to housing and training opportunities and were willing to try new financial services and products.

Longer term assessment reported by ECOTEC (2006) suggested that these outcomes endured. Individuals surveyed some months afterwards showed they had changed their patterns of behaviour, had improved economic wellbeing, and increased their savings. They had also adhered to budgeting plans and continued to take effective measures to avoid debt; and felt empowered to avoid poor deals, exploitative lending practices and excessive borrowing. The CAB (2007) also reported on CAB clients reporting of mortgage arrears and other secured loans arrears difficulties. Most CAB clients seeking advice on mortgages and secured loan arrears were borrowing from sub-prime lenders at a comparatively high rate of interest, and had relied heavily on brokers’ advice, which frequently ended up to be inappropriate to the client’s circumstances and consequently unaffordable. Borrowers frequently didn’t understand the risks of home loans, and lenders didn’t check borrowers financial situation adequately. Such lenders were seen to take precipitate court action for possession rather then negotiate with the borrower. Sub-prime lenders were noted as being responsible

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for a level of possession actions substantially above their market share. CAB also report on the emergence of sale and rent-back schemes. Evidence suggests financially and emotionally vulnerable home-owners sell homes at less than their fair value, in return for a tenancy that offers little security of tenure. The Government Income Mortgage Insurance Payment Scheme is failing to keep CAB clients out of serious problems. Further, there is no equivalent to housing benefits to help homeowners in low paid work. CABs in England, Scotland Wales and Northern Ireland also collaborate with the Money Advice Trust, which provides the National Debtline, a free telephone advice service to individuals with debt problems. This service is promoted as ‘free, confidential and independent’ and operates on a freecall number between 9:00 am and 9 pm Monday to Friday and 9:00 am to 1:30 pm on Saturdays. The service provides a range of relatively detailed information for people in debt via its internet site and a self-help pack entitled ‘Dealing with your debts’. It also assists people with specific issues via expert advice and provides information about establishing Debt Management Plans. The service is operated as an element of the Money Advice Trust which is a registered charity, and is funding from a mixture of private sector donations and Government grants (Department for Trade and Industry, Department for Constitutional Affairs and the Scottish Executive). The Debtline service received more than 274,000 calls in 2006. About a third of those who access the service report debt levels in excess of ₤25,000, and two-thirds have debts to banks or credit unions, and/or involving credit cards (National Debtline 2008). An evaluation of Debtline was undertaken in 2006 (Illuminas Consulting Group 2006) and reported very high levels of success in addressing debt issues, high levels of satisfaction with services provided, and satisfactory maintenance of debt management arrangements entered into as a result of accessing the service. Atkinson (2007) reported on the financial capabilities of adults with literacy and numeracy needs. Financial capability is seen to be related to levels of qualification, which also suggests that financial capability is related to acquired skills. It is not appropriate to assume that people with literacy and numeracy needs would also have low levels of financial capability; however at a population level there appear to be differences in attitudes to forward planning between the working age population as a whole, and groups with numeracy and literacy needs. All groups are focused on short term planning. This means that they are less likely to manage if there is an unexpected change in income. There is a low level of product knowledge, despite groups purchasing a wide and increasing range of financial products. Consideration of all available options is not regularly undertaken. The consequence of the current situation is that vulnerable groups are more likely to be sold or to buy inappropriate financial products and services, and there is a strong case for improved consumer protection, especially in the case of those who are illiterate and/or have low comprehension levels. However, such protection can not be achieved in isolation. Consumers are not necessarily in a position to wait to acquire skills needed to purchase appropriately. A more immediate solution requires financial service providers to recognise the importance of being very active in supporting customers to a fuller understanding of the implications of purchasing specific products and the alternatives available to them. Gillespie et al (2007) reported on an evaluation of 11 pilot projects to provide advice for vulnerable groups in Scotland around money issues. A number of effective approaches to vulnerable groups were determined. These included adoption of a targeted approach, taking into account barriers, a lack of awareness of rights, and the need for refinement in methods of communication, delivery and location of such support and advice services. Effective measures were also determined to include allowing sufficient time for people to make choices and to work jointly with service user groups, or support local service workers to assist in making informed decisions and raise mutual awareness and learning between services. A holistic and proactive approach to advice was also indicated, including development of informal approaches to encourage building relationships. The study also suggested that the use of leaflets, briefings, and other information strategies to support informed decision making was important, but the key to success with these strategies was to ensure their accessibility to the end users, whose needs for information were frequently not met by such material in its usual form.

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Collard et al (2001) undertook an area-based study utilising community ‘voices’ to identify local residents’ priorities for financial information. A number of areas were identified including banking, loans, savings and financial services for specific recently arrived ethnic groups. A need for financial information and education was also identified. New basic bank account products such as ‘easy cash’ and ‘Step’ were highly supported, because they did not require credit checks, identity checks could be met by new arrivals and there was no risk of overdrawing, even though the accounts offered a small fee-free ‘buffer zone’. Accounts acknowledging cultural differences and marketed appropriately towards distinct cultural groups (i.e., providing accessible information) were supported. A report by the Department of Trade and Industry (DTI) (2006) focused on illegal lending in the UK. It reports that the UK credit market is the largest and fastest growing in Europe and features a diverse product mix and wide spectrum of pricing. It is also characterised by a substantial social lending sector, featuring both low cost, not for profit and interest free government loans and grants. Credit unions and community based lenders seek to provide alternative credit options to low income earners, compared to relatively high cost private sector lending. This so-called ‘third sector’ lending is largely funded through the Social Fund. Nonetheless, the use of illegal lenders is overwhelmingly driven by a lack of legitimate credit options. Amongst those surveyed, 82% claimed they use illegal lenders because they perceive no other option for obtaining credit. In the UK, those who have been turned down by a high cost lender are more then five times more likely than other credit users to turn to an illegal lender. The relative inaccessibility of the Social Fund and credit union loans, which tend to take longer to deliver funds than either home credit or unlicensed lenders and are inflexible because of pre-set conditions for access, explains in part why some borrowers can favour home credit or illegal money lenders over social credit. A significant proportion of applications to the Social Fund are rejected. Illegal lending in the UK appears to be concentrated almost exclusively in the most deprived micro-communities, involving small loans to some of the poorest individuals in society, leading the most chaotic lives in the most disadvantaged areas, and with a strong likelihood that borrowings will be expended in pursuit of substance abuse. This contrasts with the situation in Germany and France, where middle income earners are targeted by such lenders. There is probably better access to credit in the UK for high risk, credit impaired borrowers than in those jurisdictions. The regulatory environment in the UK provides for an ‘unfair credit test’ designed to prevent exploitative and extortionate relationships, and lenders are required to lend responsibility in order to be considered fit. However, there are no price controls. Lenders are free to price credit according to their judgement on the risk represented by the borrower. There is no prohibition on lending to individuals who have a history of problem debts. Only a small proportion of people are unable to access legal credit, albeit that the credit available to perceived high risk borrowers is often high cost. High cost home credit is the most importance source of credit on deprived estates, by a considerable margin. The higher the risk of the borrower, the more likely it is that home credit is the only available legal credit option. Users of illegal lenders either live in home credit excluded areas, have problem home credit debt or are too high risk even for the high cost lenders.There appears to be a hierarchy of credit choices in deprived estates, with interest free Social Fund loans at the top and illegal lenders at the bottom. Indeed, there appears to be significant overlap between Social Fund loans and loans obtained from illegal lenders. Most of those unable to access Social Fund loans are reported to go without credit, or turn to informal or legitimate lenders (home credit lenders) before resorting to illegal lenders. Further, most credit unions serve a different client group from home credit or Social Fund loans. Borrowers from credit unions on deprived states tend to be significantly more advantaged than those who borrow from high cost lenders or illegal lenders. Clearly, the greatest deprivation and credit exclusion occurs in the poorest micro-communities. DTI (2006) suggest that (prior to the global financial crisis) the UK consumer credit market had reached the practical limits of supply to high risk borrowers, with a shrinking of home credit supply through the withdrawal of lenders from the high risk borrowers in order to focus on more profitable customers.

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The home credit industry has been scrutinized by the Competition Commission, which concluded that as a result of price insensitivity on the part of consumers, and a lack of effective competition in the market, lenders are overcharging their customers. Home credit lenders are also moving away from a cross subsidy model. Thus, withdrawal of home credit to high risk borrowers will bring an increased demand for illegal lending. Specialist illegal money lending teams funded by the DTI on a pilot basis have shown considerable success in removing illegal lenders from the community. However, there is a need for a policy to balance potential benefits for the majority - low income credit prices - against the risks of higher costs and collateral damage for the minority exposed to illegal lenders. A targeted and focused expansion of the Social Fund may be the most effective vehicle to provide an alternative to the illegal lending sector in the face of these market developments. Community care grants might provide an appropriate focus, in that many of those who apply for a Social Fund Grant will fit the profile of those most at risk from illegal lending. The most effective strategy is perceived to be a regulatory environment which minimises illegal lending opportunities. Multi-disciplinary teams focused on individuals and those most at risk by supporting a targeted extension of the Social Fund will offer the greatest potential for significantly disadvantaged people in the most disadvantaged estates. DTI (2007) also undertook an evaluation of the illegal money lending pilots referred to above. This evaluation concluded that specialist standard training teams have been successful in increasing awareness and understanding of illegal lending in specialist police agencies and the public. Some of the greatest changes in terms of the perception of illegal money lending have arisen among the police. The teams have had considerable success in eliciting reporting of illegal lenders, although the prevalent climate of fear restricts witnesses giving evidence against illegal lenders. However, teams were largely unsuccessful in establishing effective partnerships within the money advice and credit union sectors. Credit unions did not see it as their role to proactively extend their activities to victims of illegal lenders. Collard and Kempson (2004) also reported that in Britain, people on low incomes borrow more often for necessities and use sources of credit that have high charges, given that access to ‘High street’ credit is still severely constrained for people on low and insecure incomes. They frequently borrow from sub-prime lenders with high annual percentage rates. People living in deprived areas suffer a double disadvantage, particularly in areas of high crime, as illegal lenders frequently do business there. Access to supported products provided by the Social Fund is severely cash-limited and only available to those on qualifying benefits. The cist of credit is not always the main consideration when people on low incomes decide where to borrow money. Simply identifying a source of finance is often a more important consideration. The authors argue that there is a need to extend the social fund to people on disability benefits who have no other source of income. Pleasance and Balmer (2007) report on a trial of the ‘Offer of Debt Advice’ scheme in England and Wales. A randomised trial was conducted to assess whether the offer of advice to those experiencing debt problems, and who had yet to obtain any formal advice, had a positive impact on their financial and general circumstances. The participants were drawn from 16 Jobcentres (welfare offices) in 13 areas of England and Wales. In all, 402 participants were included in the trial at its outset. At the 20 week follow-up, 234 participants remained in the trial. Results showed no significant difference in the rate at which intervention and control group respondents had resolved their debt problems at the 20-week follow-up, and the control group was significantly more likely to describe their financial position as “better” than at baseline. However, there was also evidence that the intervention group became more knowledgeable about their financial circumstances, more focused on dealing with priority debt, and more optimistic about their future prospects, relative to control group counterparts. The findings provide the first experimental evidence of a positive impact of the offer of debt advice. The study also highlights the difficulties of applying experimental methods in a social setting. One lesson drawn from the difficulties encountered in running this trial is that take-up rates are likely to be low for some forms of pro-active advice for sensitive problems among disadvantaged communities.

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Turley and White (2007) also report on the effectiveness of advice for people with debt problems. They undertook a study involving qualitative in-depth face to face interviews with 42 people, contacted through the Civil and Social Justice Survey. Causes of debt problems were identified as changing circumstances, including unemployment, illness, bereavement, separation from partners, poor money management, lack of understanding of how to manage finances, creditors’ behaviour and a lack of awareness of debt problems. Views of the severity of debt problems did not equate to participants’ level of debt, but rather confidence about debt resolution procedures, perceptions of other peoples’ debt, and creditor response to debt. The impacts of debt were seen to be difficulties with family and friends, health, employment, education, lifestyle and plans for the future. Generally, action was taken by respondents when creditors initiated correspondence of some kind. Actions and responses to this included arranging proposed payment plans, doing nothing, finding additional income by borrowing further, finding work, or claiming benefits. Advice, when sought, was gained via referrals from friends, family, or a respected professional person known to the respondent. Typically the CAB was the main source of advice mentioned. Otherwise, advice had been sought from a bank, building society, or a local council office. Those who sought CAB advice found advice was helpful, accurate, thorough and comprehensive. The physical accessibility of the CAB however was considered to be lacking. Provision of advice also improved respondents’ financial situations by helping to calculate realistic and affordable payment plans. Participants felt that advice should be given by a trusted source and in an independent, impartial and accessible way. Advice was also seen to play an important role in reassuring people and reducing anxiety, stress and depression. Informal help also has a crucial role providing additional emotional support and guidance. Williams and Sanson (2006) undertook a study for the Ministry of Justice into the impact of debt advice from not-for-profit agencies in Britain. This was one of four studies conducted as part of the Impact of Debt Advice Research Project (IDARP). The other reports were undertaken by the Legal Services Research Centre. It was a prospective study, conducted over three stages. Clients were identified and interviewed at the time of accessing advice services. They were then re-interviewed after six and 12 months. The findings are not held to be representative of all debt advice clients, or of the impact of advice from all debt agencies. The results of the study show indicators of problems experienced by participants and general patterns of change. At the 12 month period after receiving advice, respondents had less debt then they did at initial interview, and respondents’ level of knowledge about their debts was shown to have increased. Also at the 12 month stage, the majority of participants reportedly felt more in control of their finances and more knowledgeable of their financial matters overall than at the initial interview. A majority of clients kept debt to arrangements made although 15% reported difficulty in doing so. About 7% reported that they had not kept to such arrangements. Most felt that their debt problems had been resolved to some extent (59%) and 36% felt that they had completely sorted out their problems. Money worries affected respondents’ lives in a number of ways, with 95% reporting that their health had been affected to some extent as a result of their money worries. Additionally, 45% reported that financial problems affected their relationship with a partner. Overall, respondents reported improved health and well-being after receiving advice, fewer reported difficulties in living normally while experiencing current problems. Levels of worry remained high, but participants spent less time worrying about their debt problems than at the outset. Some improvements in personal relationships were also reported. There is evidence of the need of continued proactive support throughout the entire lifespan of debt, to enable clients to build their confidence to take a continued active approach to debt. More clients contacted creditors following advice, but still felt that if they had to go through the process again, they would still require the support of a debt advice service. The study indicates that the consequences of over-indebtedness are wide ranging, and a number of publications have drawn attention to the impact that debt problems have on individuals, the local as well as the broad community, and the public sector. Despite research on debtors’ characteristics, and

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the nature and scale of their problems, there is a literature gap on the impact that receiving advice has on people’s lives. The research cites a literature review carried out by Williams (2004), which notes this paucity of evidence, although it points to some anecdotal evidence on the impacts of advice. Little empirical evidence is available to demonstrate conclusively what the benefits of credit or financial counselling or debt advice actually are, or to quantify the monetary value of such advice. Williams (2004) also suggested that the paucity of systematic analysis and quantitative research also extends into the effects of financial or credit counselling in Australia and North America. The Consumer Credit Counselling Service (CCCS) (2006) provides a statistical yearbook reporting on its activities and noting trends in over-indebtedness and similar indicators. This document reports that IVAs (see above) are the fastest growing form of insolvency, but the number of these did not match the number of those filing for personal bankruptcy in 2006. Bankruptcy amongst the elderly has reportedly increased dramatically in 2006. CCCS reports that a small proportion of their clients have ‘extreme’ debts, i.e., ‘unsecured debts of more than ₤100,000, debts involving 16 or more credit cards and debt to income ratios of more than 66:1. The Foundation for Credit Counselling (FCC) is the organisation holding and providing funds to support the CCCS and provides an Annual Review. FCC (2006) provides a further report on the activities of CCCS noting that the organisation provides debt advice through virtual internet counselling, telephone help-lines, telephone counselling sessions, and a subsidiary company which provides DMP and IVA services. CCCS operates 10 network centres in the UK. Strategies are largely focused on internet counselling and sharing information with creditors. ‘Debt Remedy’ internet virtual counselling reached over 68,000 users in 2006. The report indicates that 30 online users cost the same amount as a single telephone counselling session. Virtual counselling provides debt remedy, and associated debt advice. It is only available to UK citizens. Nearly 300,000 people contacted help-lines in 2006, and over 35,000 telephone counselling sessions about payments and plans were made in 2006 The subsidiary company established 35,000 DMPs in that year. DMPs are thought to be flexible and relatively straightforward arrangements, with payments electronically handled, and 40% of repayment proposals sent to creditors are provided via the internet. Creditors can access proposals and information about plans, track payments, and check balances via web-based accounts. In April 2007, a new subsidiary company was established to deliver IVAs. This company is reported to offer cheaper fees and to be more transparent in its dealings than other IVA providers. This company will contribute all its profits to the charity (CCCS). CCCS now also works in collaboration with the Community Legal Services (an arm of the Ministry of Justice) to provide a more seamless system of legal advice and free services. Moorhead and Robinson (2006) studied how effectively the staff of 12 solicitor firms and advice agencies dealt with the financial difficulties of their clients. They report that clusters of problems occurred in 40-50% of clients, common clusters involving housing, benefits, debts and relationship breakdowns. Other significant problems with clients included interrelated problems with home-ownership, mental health, domestic violence, employment and homelessness problems. Help and legal representation typically leave the clients feeling more informed and calmer, with reported reductions in stress levels and associated health problems. However, advisors often failed to expose the extent of clients’ problems during interviews and, when faced with problems outside their expertise, frequently were unable to deal with them seamlessly. Specialist’s own organisations often lacked specialist skills in the full range of problems presented by the client. Advisors’ understanding of holistic advice provision appeared to be confined to notions of “putting client’s problems in context”. Broader notions of holistic practice, such as tackling social as well as legal problems, were not accorded much attention by practitioners. The Office of Fair Trading (OFT) (2004) reported the results of a study into debt consolidation arrangements in the UK. The study, announced in mid-2003, included a consumer survey, an analysis of complaints, and a review of advertising and marketing material for products which could be used for

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debt consolidation. The OFT also consulted consumer advice organisations, lenders, brokers and trade associations. The study was undertaken in the light of growth in the marketing and use of credit for debt consolidation. The study was also intended to inform the OFT’s enforcement of the Consumer Credit Act 1974 and the Regulations made under it, and developments in the regulatory framework governing consumer credit. The study found that better financial awareness among consumers and clear, accurate and relevant information from credit providers are required to make the use of debt consolidation fairer and more transparent. The study’s key findings include: ■■

■■

■■

two thirds of borrowers who consolidated debts obtained information from only one provider, although shopping around can save money; many borrowers, particularly those in financial distress, are unaware of other alternatives that are open to them, such as negotiating with creditors themselves or getting help from free debt counselling services; borrowers do not, in the main, give due weight to factors such as the length of the term of the loan and the total cost of repayments when deciding on debt consolidation.

The OFT (2004) study identified potentially unfair practices, such as lenders requiring existing customers to take out consolidation loans as a way of dealing with a debt problem, volume overrider commission arrangements for some credit brokers and approaches to lending that stress speed of decision and no ‘awkward questions’ which may not be consistent with responsible lending. Collard (2007) reports on progress toward financial inclusion in the UK, noting that low income consumers still face problems accessing and using basic bank accounts, including those established to meet the needs of financially excluded people. The report notes that the credit union moment has progressed to provide transactional banking and money advice. However, membership remains low as a proportion of the general population. Whylley et al (2000) had earlier reported on the then limitations of credit unions as replacements for banking services We also identified a number of evaluations of specific financial counselling and debt initiatives, reported in Jones (2006), ECOTEC (2007), Mathew (2007), Gregory (2007), Illuminas Consulting Group (2006), Gillespie et al (2007), and the Scottish Executive Social Research (2007). Additionally, we identified a number of papers addressing issues substantially addressed by other papers already summarised in this section, notably Collard (2006), Kempson (2002), Wallace and Quilgars (2005), McComick et al (undated), Jones (2005), and the Financial Services Authority (2006).

4.2.

Credit and debt counselling arrangements in North America We discovered a much lower level of reporting and discussion of issues around debt, and financial or credit counselling in North America. This reflects comments by Williams (2004) reported above. Material we have discovered is reported below. The Fair Trade Commission, in submissions to a US Senate review (2004), outlines its role and mandate for the protection of consumer interests in the credit industry: In particular, the enforcement of the FTC Act, which prohibits unfair or deceptive acts that are in, or affect, commerce, telemarketing and consumer fraud and abuse. FTC also enforces the Consumer Protection Act, the Credit Repair Organisation Act and other relevant legislation. Recent FTC initiatives include the “do not call” registry for telemarketers, law enforcement against fraud and deception targeting work at home schemes, internet schemes, online auction fraud, deceptive sub-prime lending, advance free credit scams, and deceptive weight loss scams, as well consumer privacy and identity theft. The FTC Act excludes entities that are not organized to carry on business for their own profit, or that of their members. The FTC does not have jurisdiction

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under the Act over credit counselling agencies that are bona fide non-profit organisations. The FTC must prove that a credit counselling company is in fact a for-profit entity in order to then prove that the company violated consumer protection laws. FTC (2004) further reports that actions taken by the FTC revolve around law enforcement, anti-fraud education to consumers, and co-ordination with other government law enforcement agencies. Typically, Credit Counselling Agencies (CCAs) engage with consumes to manage current financial difficulties, and teach financial skills for the future. Historically, these have been small community based, non profit organisations, providing consumers with individualised advice and assistance. Traditional CCAs charge nothing, or solicit modest contributions from clients to help defray their expenses. CCAs can also be funded through creditor’s fair share contributions. Methods that CCAs traditionally employ include giving simple advice and guidance on managing finances, advising when a consumer should consult with a bankruptcy attorney and assessing consumers’ financial situation for issuing a Debt Management Plan (DMP), under which consumers pay off their unsecured debts by making single consolidated monthly payments. DMPs are beneficial in that they forestall consumer bankruptcy. Some creditors will reduce interest rates and waive certain charges. Most creditors and some state laws require CCAs to be non-profit entities before they can arrange DMPs. However there are concerns that some CCAs evade these requirements by setting up non-profit entities that funnel profits to forprofit affiliates. DMPs generate revenue for CCAs in two ways: creditors voluntarily rebate funds to CCAs from ‘fair share’ contributions; and some CCAs solicit ‘contributions’ or donations from DMP enrolees through upfront and monthly fees. However these voluntary contributions have turned into “de-facto” mandatory fees, by automatically deducting a proportion of contributions from consumers without adequate disclosure. Further, changes in the credit counselling industry have given rise to large, high technology organisations that aggressively market their services to consumers using telemarketing, broadcast and print advertisements, as well as internet advertising. CCAs now frequently operate as selling agencies of DMP providers without assessing consumers’ financial situations. This has resulted in an increase in troubling practices and associated complaints made about the industry. Complaints now commonly include: ■■

misrepresentation about fees or voluntary contributions;

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promising results that can’t be delivered;

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abuse of non profit status;

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false advertising regarding counselling services;

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failure to pay creditors in a timely manner, or at all;

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failure to abide by telemarketing laws; and

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breaches of the privacy and security requirements of relevant legislation.

FTC (2004) also report law suits filed against Debt Negotiation Companies (DNCs) and Credit Repair organisations. DNCs are not CCAs. They do not offer credit counselling or enrol consumers in DMPs. Problems noted with these organisations include misrepresentation of the amount that consumer debt may be reduced by, and failure to disclose the impact of negotiations on consumer credit reports. The FTC has adopted an education strategy to encourage consumers to choose CCAs that offer counselling and education, not just DMPs. The FTC is also working with the Internal Revenue Service (IRS) to take steps to ensure that CCA tax exempt status will be granted only if associated organisations providing DMPs have also incorporated significant education and counselling initiatives. The Washington Post reported in 2006 that the Internal Revenue Service has concluded that more than 30 credit-counselling firms, accounting for more than half of the industry’s revenue, are not entitled to tax-exempt status. Steven T. Miller, commissioner of the IRS’s tax-exempt and government entities

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division, said the agency is seeking revocations for a combination of reasons. In some cases, “we do not believe they are providing sufficient education to the debtor,” he said. “Or regardless of what they are providing, too much money is being siphoned out of these organizations and going into the pocketbooks of the CEOs and for-profit affiliates.” Unless a firm announces that its tax exemption has been revoked, the only way for the public to know is through the revocation listings that the agency periodically posts. Industry officials say the revocations could affect the economic viability of many entities because much of their funding is dependent on their tax-exempt status. About half of the industry’s funding comes from banks and credit card issuers that pay the counselling firms a percentage of money recovered through repayment plans drawn up by counsellors. Up to now, most banks have insisted that the counsellors be tax-exempt to receive the funds, known as “fair share” in the industry. Loonnin and Plunkett (2003) on behalf of the Consumers Federation of America and the National Consumer Law Centre report on current activities of credit counselling organisations in the US. In 1993, there were about 200 credit counselling organisations in the country, with 90% affiliated with the National Foundation for Credit Counselling (NFCC). By 2002, there were more then 1,000 credit and debt management organisations, most of which are independent agencies. About 150 are members of the NFCC, comprising about 1300 counselling officers. ‘Newcomer’ agencies include both entirely new organisations, as well as older agencies which have adopted the business strategies of the newer players. Business strategies include: flexible hours, phone and internet counselling, and electronic payments systems. Common problems associated with new players in the industry include lack of face-to-face contact with customers due to phone and internet, resulting in a lack of personalised, individual budget advice and lack of ability to adequately assess clients’ financial situations, as well as a movement away from education and counselling strategies, with an excessive reliance on DMPs. Further, some agencies are associated with aggressive and sometimes deceptive marketing practices, with many agencies now only willing to place a small proportion of clients’ unsecured debt into management plans. This leaves clients to manage the rest of their debts with their other creditors. Newcomer agencies are also thought to impose higher costs for services and to have close connections to the ‘for profit’ sector. Some apparently NFP organisations are establishing or have developed close ties with ‘for profit’ lenders, including payment processing centres; these connections allow some NFPs to direct excess revenue to for-profit affiliates. Other recent changes in the industry include creditors decreasing ‘fair share’ contributions to financial counselling organisations, with disproportionate impacts on counselling services, and some experiencing severe financial difficulty. At the same time, other CCAs appear to be generating large profits. Other problems include the imposition of creditor restrictions on ‘fair share’ contributions. These restrictions affect the accreditation of the CCA, the level of fees charged and criteria that CCAs must meet before creditors will accept proposed DMPs. These polices have increased administration overheads and reduced options at counselling agencies. Credit requirements had tended to reward agencies who provide a higher number of DMPs at low average cost. Thus, the majority of agencies now charge fees for service. A number of not for profit agencies appear to be charging more then necessary to cover their expenses and provide quality services. According to NFCC, clients with more intractable problems such as a gambling problem, other domestic problems and mortgage foreclosures are now regularly referred to other agencies or to bankruptcy. NFCC agencies provide regular education at offices and respond to requests to speak at schools. However, more recently, the number of multi-service agencies has declined. Non NFCC agencies have generally never provided education in the first place. Currently, a minority provide education materials (five out of 40 surveyed). Four of those agencies charged for materials on debt management. Lonnin and Plunkett (2003) also report problems with DMP-only business strategies, including a

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reliance on DMP revenues and on creditors who can come to control the DMP business. The DMP strategy is not necessarily in the consumer’s interest, as it is intended for short term debts. The NFCC reports that actual completion of DMPs is just 26%. Bankruptcy is regarded as a last resort, but some consumers may lose important rights if they delay filing for bankruptcy. Bankruptcy reorganisation allows bankrupts to pay back both secured and unsecured loans - giving consumers the ability to pay off cars and homes. In some cases, the DMP agencies submit payments on their own agency schedule, so that consumers incur a late payment fee for each account every month. Nearly every agency in the field has a not for profit tax exempt status and most state laws that regulate debt management strategies exempt at least some not for profit organisations. Agencies use not for profit status as a marketing tool, indicating respectability, appealing to consumers’ trust. However, the authors suggest that one of the greatest abuses in the industry is that many not for profit CCAs now operating should never have received such certification. New proposed changes to the bankruptcy laws to enforce compulsory education prior to undertaking bankruptcy are supported by Lonnin and Plunkett (2003). However, they are concerned that unless the legislation makes provisions to investigate counselling organisations practices, including the fees they charge, the effect of the law will be to increase the exposure of consumers to disreputable credit counsellors. They also indicate that there is virtually no federal regulation of the industry and generally ineffective state regulation. The IRS and state charity regulators have done very little to weed out forprofits ‘in disguise’. They recommend that the IRS should aggressively enforce standards, that Congress and the states should address abuses by CCAs including prohibiting false and misleading advertising and referral fees, and require CCAs to disclose adequate information about their services, fees, bankruptcy options, and the potential unsuitability for some debtors for DMPs and financial arrangements with lenders. Further, they recommend that agencies be prohibited from receiving a fee for service from consumers until all creditors approve DMPs; give consumers 3 days to cancel an agreement; impose a cap fees on fees charged; and provide consumers with the right to enforce the law in court. They also suggest that trade associations should enforce strong public best practice standards and that creditors should increase financial support to CCAs. CCAs are also the subject of concern expressed in reports by the National Consumer Law Center (NCLC). NCLC (2004) report that while many US states have strengthened existing debt management laws or enacted new laws, and most of the laws require credit counselling companies to obtain registration or licenses in order to operate, nearly all states exempt non profit organisations from the general prohibition. Survey research conducted shows that seven of the eight states surveyed reported no enforcement actions for licensing violations, and of 25 companies surveyed, only 52% complied with state licensing laws by declining to provide services in states where they were not licensed. No consumer credit companies unaffiliated with the NFCC or the Association of Independent Consumer Credit Counselling Agencies (AICCCA) complied with state licensing laws. It was estimated that 870 not for profit agencies were operating in this field in 2004, and 8% of these were affiliates of neither NFCC or AICCCA. In order to address the perceived shortfalls with credit counselling companies, a four pronged approach was suggested by NCLC (2004). Firstly, legislation should go beyond licensing and address matters such as fee limits and bond requirements; secondly, self regulation may have some benefits but is insufficiently robust and thus needs to be bolstered by (thirdly) rigorous enforcement and oversight; and finally, creditors should only affiliate or associate with companies prepared to comply with state laws and meet other minimum quality standards. NCLC (2007) addressed the perceived shortcomings of bankruptcy education and information provision in one state (Massachusetts). New bankruptcy legislation introduced in 2005 requires consumers to obtain counselling from a not for profit organisation when filing for bankruptcy, and to

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complete a final education course prior to receiving a final bankruptcy discharge. A number of issues were identified in practice, including limited access to information about counselling and education, with such information being mostly available on-line only, and in English; some issues with cost; and limited access to information about outcomes or options other than bankruptcy. Further, some agencies appeared to provide incorrect advice, and no data were available to determine the effectiveness of such measures on the financial wellbeing of consumers, or the impact of such training or education on consumer behaviour, outcomes or decision making. The United States Government Accountability Office (GAO 2007) also undertook a study related to the effectiveness and impact of these measures. This study concluded that the intended purpose of the legislation (the 2005 amendments to the Bankruptcy Act regarding counselling and education of consumers contemplating bankruptcy) were probably not being met. The Act provides that pre-filing counselling should provide an analysis of the client’s current financial conditions and the factors that led to it, as well as an individualised budget analysis and assistance in developing an appropriate action plan. The Bankruptcy Act describes pre-filing credit counselling as an “individual or group briefing (including briefing by telephone or internet) that outlines the opportunities for available credit counselling and assists … individuals in performing a related budget analysis”. On average, non profit organisations should provide between 60 to 90 minutes for such briefings. Not for profit credit counselling organisations are prohibited from providing legal advice. Further, debtor education is defined by the Act as an “instructional course concerning personal financial management”. It is required to average two hours in duration, including provision of written information and instructions on four topics: budget development, money management, wise use of credit and consumer information. According to data reported in this study, debtors commonly fulfil these requirements by telephone or via internet. Agencies did not discourage clients from filing for bankruptcy and very few clients appeared to be entering into repayment plans administered by these agencies. It was not clear if the intended purpose to provide consumers with more choice about bankruptcy and alternative solutions was being met. Anecdotal evidence suggests that by the time consumers receive pre-filing counselling, their financial situations are dire, leaving no alternative but to file. Further, the program’s statutory responsibilities do not include tracking and monitoring outcomes. Other anecdotal evidence suggests that debtor education generally is more useful in improving debtors’ financial literacy than pre-filing briefings. GAO (2007) also report that the Bankruptcy Act stipulates that providers charge “reasonable fees” and offer services without regard to an individual’s “ability to pay”. However, neither ‘reasonable fee’ nor ‘ability to pay’ are defined, “in order to give providers the flexibility to respond to market conditions”. Education thus typically costs around $50 per session. In October 2006, 153 counselling and 268 debtor education providers were approved. In person counselling and education were not readily available in many parts of the USA. But where it is available, the majority of debtors seek to fulfil the Act’s requirements by telephone or the internet. GAO (2007) also report that culturally and linguistically diverse (CALD) populations face particular challenges in accessing counselling and education. Debtors failing to fulfil the pre-filing counselling requirement can face a variety of consequences, including delays in receiving the automatic stay that prevents creditors from continuing to seek payment. Such debtors are therefore seriously disadvantaged by the lack of suitable and accessible services. GAO proposes that outcome tracking measures are required to assess the impact of the Act’s requirements, and that definitions of such concepts as ‘ability to pay’ are needed. Some other US studies have demonstrated the relative efficacy of credit counselling (as opposed to compulsory pre-bankruptcy counselling0. These include Kim, Garman, and Sorhaindo (2007) and Staten, Elliehausen and Lundquist (2002). The latter suggest that research shows that counselling alone is beneficial for consumers as evidenced by their improved repayment behaviour. They also suggest that

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credit counselling clients fall into specific categories: including those whose financial situation is not so fraught that, with assistance, they can resolve debt situations; those whose situation is such that they require a debt management plan; and clients who need the protection of bankruptcy, and therefore the assistance of specialist attorneys and subsequent compulsory pre filing counselling and education.

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5.

Formal or ‘clinical’ models for Financial Counselling service provision

5.1.

Role of formal or ‘clinical’ models of Financial Counselling practice in determination of best practice benchmarks As discussed in section 1.0 of this paper we were initially interested in investigating formal (or ‘micro’) models underpinning provision of FC services. However we believe that, although such considerations may be useful for establishing an evidence base to support practice improvement, the key issue with which this paper must contend is the overall effectiveness of FC approaches (the ‘macro’ level). An assessment of this must be based on an FC model’s capacity to comprehensively address multiple levels of activity, including creating a safe environment for consumption of financial services, ensuring that financial products are as safe as reasonably possible from the perspective of consumers, ensuring reasonable standards are met and enforced, and that consumers who experience difficulties are assisted to resolve those difficulties in a timely and effective way. Addressing multiple layers of the complex environment requires that an effective FC service system will be configured to influence legislation and regulation, industry practice, consumer awareness and the development of a safe environment for consumption of the plethora of consumer financial products and services, as well as provide specific services to individual consumers in difficulty – services which might be termed ‘clinical’, or, in contemporary public health terms, ‘downstream’ services. This approach derives from the adoption of a public health approach as outlined in section 2.2 of this paper. In this context the importance of such ‘clinical’ services is maintained, but rather than constituting the entire focus of FC services, it emerges as a specific component of the full range of FC services required to provide a comprehensive approach to addressing financial stress. The purpose of establishing a public health derived model for FC services is to develop an idealised conception of how models for FC services may be effectively assessed or evaluated. The ‘ideal’ FC service derived from a public health model is, in essence, a benchmark for assessment of the extent to which particular approaches to FC service provision constitute best practice, and to identify specific areas for improvement or action. Overwhelmingly, and unsurprisingly, formal or ‘clinical’ models for FC services (reported below in section 5.2) appear to be focused on working with individuals and are accordingly ‘downstream’ in nature, although some of those summarised below are not in this category. However, given that the practice of specific FC services may vary according to client needs, it would be anticipated that competent and adequately trained and supported FC staff would be aware of a range of appropriate approaches to meeting the needs of their clients. This can only be tested through systematic evaluation or review of the practice of specific services, and we are unaware of any such evaluation in the Australian context. Thus, although we intend to identify a range of clinical service models it is not these that form the focus for development of a best practice model for FC service provision. Rather, we believe that any best practice model should properly incorporate a range of activities focused across the spectrum of available areas for action, including clinical service provision, but also including more ‘upstream’ environmental, preventative and educational activities intended to reduce the incidence of financial stress and minimise the need for clinical service provision.

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We also identified a series of models for evaluation or assessment of FC service effectiveness, and these are reported in section 5.3 of this review.

5.2.

Summary of formal/clinical Financial Counselling models Our review of the available formal literature yielded a number of clinical practice models for conceptualising financial counselling at the direct service level, and in some cases for evaluating or assessing the effectiveness of such services. These are summarised in this section. Gorham (1998) and Titus (1989) describe a ‘systems theory’ model, in which inputs, categorised as resources and attitudes, are thought to be linked to specific outputs, categorised as goals and demands. Specific financial management inputs include age, marital status, educational attainment, and employment status, and specific outputs are focused on adoption of recommended financial management practices, including adoption of concrete activities such as financial record keeping, goal setting, development of spending and repayment plans, etc. Kerkmann (1998) suggests an adaptation to financial counselling practice of Prochaska’s transtheoretical stages of change model. This model explains that financial counsellors need to incorporate the concepts of the five stages of change when working with their clients: pre-contemplation, contemplation, preparation, action and maintenance. Grable (1999) proposes a model for financial help-seeking behaviour derived from Suchman’s health care seeking behaviour model. This model proposes that individuals move through a series of stages when seeking assistance for financial difficulties, as follows: (i) the individual shows particular behaviours that have a positive (saved money for a specific purpose) or negative (overused credit) impact on their life; (ii) the individual evaluates his/her behaviour and decides on whether it has any positive or negative consequences; (iii) the individual decides whether to seek help or not; (iv) the individual makes a judgement as to who to approach to seek help. Danes (1995) proposes a family resource management conceptual framework, that stresses the importance of the environment in making decisions affecting financial circumstances. Factors thought to be relevant to decision making include family situations and internal processes. Family decisions are thus thought to be made in an environment of interrelated conditions which can be addressed via financial counselling practices. In a similar context, Bagorozzi 1980 proposes a ‘self-control model’ via which financial counselling services may empower the client to take responsibility for managing their finances. Schuchardt (2007) examines a number of theoretical approaches to financial counselling, including the following: 1. Human Ecological Model, which postulates that individuals actively influence and are influenced by their environment in an interdependent (or reflexive) manner. Four layers are postulated within this system: the microsystem (immediate family and friends), the mesosystem (consisting of the interaction of different microsystems), the exosystem (groups, organisations or entities that influence the microsystem), and the macrosystem (i.e., the socio-cultural surrounds that influence all systems, including cultural values, social environments, political ideologies and economic markets). This model suggests that financial decisions can be made via the reciprocal interactions between families and the environment. 2. Family Management Systems theory, postulated initially by Deacon & Firebaugh (1988), combines the human ecological model with systems theory. In addition to the aspects of the human ecological model discussed above, systems theory also describes inputs (demands and resources), throughputs (when demands and goals are clarified) and outputs (action taken and feedback used to assess the success of the system).

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3. The Discounted Utility Model posits that in a situation where an individual is provided with several options to respond to a specific financial situation, they will choose the option that has the greatest utility, keeping in mind that income will be a limitation to people’s ability to choose. This utility is derived from the perceived effect the option will have on the individual’s capacity for current and future consumption. 4. The Life Cycle Hypothesis of Savings postulates that individuals essentially establish a consistent average level of consumption of financial assets, when assessed over time, assuming that they inherit nothing at birth and have no liquid assets when they die. The hypothesis suggests that young people will borrow money to gain skills and education. People at mid-life will work to repay early debts and save for retirement. When individuals retire, they will slowly run-down their savings. There are obvious and readily observable limitations to this hypothesis. These limitations include the likelihood that many retired individuals may save money to transfer it to family members, intergenerationally or otherwise. Such intergenerational transfers may be inputs, outputs, or both in the case of some individual circumstances. Further, individuals are rarely in a position to precisely calibrate the rate of expenditure of retirement savings against their demise, whether anticipated or actual. 5. The Behavioural Life Cycle Hypothesis is a theory of self-control, initially proposed by Thaler & Shefrin (1981), which suggests that individuals may be construed as either ‘planners’ who are primarily concerned with lifetime planning, effectively postponing or delaying consumption, or ‘doers’ who are essentially concerned with maintaining present activities and consumption. This hypothesis has been extended to incorporate the proposition that individuals may be either short or long term planners who may identify a number of reasons for deferral of consumption, and may utilise multiple savings accounts to operationalised these different goals. 6. The Theory of Reasoned Action proposes that individuals behave according to their conscious intentions, which are seen to be influenced by their attitudes and subjective norms. Similarly, the Theory of Planned Behaviour postulates that perceptions of the capacity of individuals to actually control circumstances are involved in determining actual behaviour, a proposition which is thought to be useful in explaining behaviours that may be influenced by multiple internal or external factors. 7. A Household Finance model was initially proposed by Campbell (2006), and suggests that household financial decision making derives from two opposed categories. The first of these, ‘positive household finance’ suggests that household financial decisions originate in a clear understanding of the competing decisions to be made and their consequences. The second category of decisions, ‘normative - prescriptive household finance’, rely on ‘rules of thumb’, and are derived from intuition and experience. Campbell then utilises these categories to establish a process for analysis of the goals and directions of the household’s decision making process. Porter (1993) proposes the ‘Porter Conceptual model of financial wellbeing’ (represented diagrammatically below) in which personal characteristics are thought to relate to a range of attributes (defined as ‘objective’, ‘perceived’ and ‘evaluated’) via a system of comparison in which derived ‘standards’ are utilised. This system of attributes, in conjunction with personal characteristics, may be utilised to produce an assessment of financial well-being as its outcome. Williams (1996) discusses a Choice and Exchange Theory initially proposed by Nye (1978). This theory argues that when individuals are faced with difficulties, they tend to make decisions based on four parameters, being (i) the range of alternatives available, (ii) the costs of these, (iii) potential rewards associated with each alternative and (iv) likely outcomes. When faced with a diversity of alternatives, the individual will tend towards decisions based on the competing costs and benefits of each alternative, based on the particular outcomes thought to flow from each. Williams also proposes that there are a range of concerns and behaviours associated with the experience of financial difficulty which may translate into productivity losses.

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In this context, Lown (2000) refers to Garman’s (1997) proposal that it is important for employers to accept responsibility for providing financial education for their employees to forestall such productivity effects and improve employee morale and performance. Martin (2007) summarises literature detailing financial counselling in a range of settings including group, workplace and individual. Barker (2006) analyses and categorises (according to socio-politically determined criteria) a number of Victorian practice models or styles of financial counselling, including the following: ■■

Community development model, referring to Ryan (1985, 1996, 1999);

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Individual case-work service delivery model (Pentland 1997);

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Debt-repayment-social work model (Ryan 1985, 1996, 1999);

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Social work-development model (Ryan 1985, 1996,1999);

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5.3.

The Victorian Problem Gambling Program’s integrated model of service, a model which incorporates specific problem gambling counselling, community education, financial counselling for gamblers and their families and the ‘Recovery Assistance Program’ which assists problem gambling service users with funds for childcare, transport and medical costs, food, clothing and the stabilisation of housing.

Models for assessment or evaluation of Financial Counselling effectiveness We identified a number of frameworks utilised for assessment or evaluation of the effectiveness of financial or credit counselling services and these are summarised in this section. Hartarkska (2005) discusses the relationship between mortgage termination and credit counselling using a competing-risks framework. This framework requires estimation of the relative values of prepayment and default options, including limitations placed on the diversity of offers from borrowers, ‘trigger’ events, and costs for transactions. The evaluation model explores the client’s understanding of the value of money and interest rates, etc. In this study, individuals who received financial counselling showed greater improvement in prepayment behaviour and default behaviour, as compared to those who did not receive counselling. Hartarkska (2006) also subsequently utilised an ‘option-based’ framework to understand the effects of

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credit counselling. The option-based framework suggests that individuals will make a decision to terminate a mortgage based on financial reasons alone (rather than the consequences for their housing situation). The mortgage loan value is based on the borrower payments and the value of the options available to the borrower. Individuals who undertook counselling showed a lower rate of default (referred to as the ‘default hazard ratio’) and were regarded as responding more actively when incentives were provided to maintain their situation. Both the studies reported by Hartarkska appear to posit a model of rational consumer behaviour which may well not be applicable to the full range of financial counselling situations. Elliehausen (2007) utilises various data to assess the effectiveness of one-on-one credit counselling, concluding it is beneficial to client’s behaviour over three years, relative to individuals who did not receive the counselling. The model of counselling assessed has two objectives: firstly, to offer assistance with advice in reducing the immediate debt problem; and secondly, to enhance the clients’ skills in gaining access to borrowing information, planning and budgeting skills in the long term. Two evaluation models were used. The first of these, the ‘selection’ model utilised credit bureau data. With other variables held constant, a number of variables were positively linked to the incidence of counselling: a larger number of accounts, higher consumer debt relative to income, larger numbers of credit bureau inquiries, active and new revolving accounts, and more bank card usage. Credit delinquencies were perceived to be triggers for help seeking behaviour. The second model, identified as the ‘evaluation’ model proper, utilised a range of parameters to show credit ‘performance’ and demonstrate that counselling does improve the client’s credit profile within a three year period, in contrast to those people who did not receive counselling. The parameters assessed included the ‘summary measure of creditworthiness’, debt usage, three measures of revolving account use and payment performance. Assessment of these parameters was held to provide explanation of a significant proportion of debt behaviour, and demonstrate an improvement in creditworthiness associated with counselling, as well as to demonstrate the possibility of predicting credit worthiness based on past credit use and payment behaviour. Muske (2004) reports a small qualitative study based on interviews with seven families and their financial counsellors. The evaluation model utilised an assessment of the FC management system to identify a number of parameters of FC practice, including the following: ■■ ■■

■■

■■

■■

■■

■■

■■ ■■

■■

System. Each FC tended to use their own process to perform day-to-day activities. Financial planning. Clients reported that they did not tend to use a budget, nor make use of the budgeting tool offered by the FC, tending to use ‘mental management’ to assist in controlling their cash-flow. Multiple accounts. The FCs used multiple accounts to identify an early warning signal about the family’s financial situation. Use of visual cues. FCs help clients use visual cues (such as calendars or leaving bills in a well used area of the house) to help remind clients to pay bills etc. Use of automatic repayment systems to automatically withdraw money from a bank account without having to remind themselves about the bills etc. This saved client’s time, energy etc. Debt. This was viewed by the clients as a normal part of daily living. Once one debt was paid, they tended to put themselves further into debt. Saving money was generally neither valued nor practised by clients. Mental management. FCs use previous experience and mental triggers to help clients to control their cash-flow. Motivations. A number of tools were used to support client behaviour change. Control. A regular schedule for addressing financial matters assisted clients to get a better idea about their financial situation. Short-term safety. FCs helped clients find ways to create a sense of security with their finances. For

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example, asking the clients to write out cheques at the beginning of the month for anticipated expenses. ■■

■■

Comfort. FCs helped clients to find ways to cushion mistakes, or provide support when financial problems arise. Range of focus. Clients tended to view finances with a range of between one and three months, and tended to have little focus on longer term goals.

Xiao (1994) studied savings behaviour and financial needs using a ‘hierarchy of needs’ model. Family financial needs are effected by perceived family ‘richness’ status. When families have met their financial needs for survival and security, their needs (or expectations) expand to include higher levels of expenditure and consumption, etc. Sumarwan (1992) discussed a family resources management framework to explore factors including the relationship between socio-economic status (SES), financial management behaviours and satisfaction in handling financial emergencies. In this model, variables included age, household size, employment, education and marital status. Throughputs included behaviours such as budgeting, saving, credit, debt repayment and utilisation of financial insurance. Outputs included satisfaction with financial management, satisfaction with savings, and the perceived standard of living or level of income.

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6.

Qualitative research with informants in Australia

6.1.

Research with expert participants We undertook research with expert participants from differing perspectives (consumers, system level experts and financial counsellors) using the methodology described above (s.1.2.3). The themes which emerged from these discussions were arranged in a number of topics and these are expanded in the sections which follow. Where relevant we have identified differing perspectives amongst the groups of expert informants.

6.1.1.

Harms associated with Financial Stress

Expert informants identified a number of dimensions of harm. Financial counsellors identified social isolation, destructive behaviour including drug and alcohol use, lack of adequate shelter and homelessness, inadequate nourishment, effects on mental and physical health, and relationship issues including domestic violence. There were also felt to be impacts on children’s education and wellbeing generally, and in some cases on the work performance of those affected by financial stress. System wide experts suggested a range of similar harms including family breakdown and separation, job loss, loss of assets, and an inability to afford essential services. Further, this group identified issues of ‘community stress’ (increased social difficulties resulting from the broader effects of a population segment experiencing entrenched financial stress), as well as personal stress. One participant suggested that “people lose a sense of control over their lives and decision making can become focused on financial issues.” Others commented that financial stress induces “emotional, physical and mental stress”, and another argued that “financial stress skews family priorities away from children’s security and may in some cases be contagious – [that is] intergenerationally transmitted”. Consumer participants also commented on the effects of financial stress on wellbeing. One participant suggested that financial stress caused “reactive depression”. Others commented that they felt it was associated with high levels of personal stress, and in some cases paranoia. More prosaically, participants commented that “… I couldn’t afford food, financial counsellors gave me food vouchers… mentally I went down” and that “I felt alone, like no-one understood my problems”. Participants thus identified the major harms associated with financial stress as personal but with some significant social consequences. Mental health issues, as well as physical health issues were prominently identified as consequences of financial stress. However family breakdown and negative consequences for children were commonly cited as important issues. Further, a number of participants suggested that increased rates of substance abuse and homelessness were also associated with financial stress.

6.1.2.

Drivers of financial stress

System wide experts argued that the drivers of financial stress included “increased lending and not enough regulation around responsible lending” along with “changes in the culture around saving versus consumption”. One argued that increased rates of mental illness had contributed to increasing financial

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stress in the community. Others suggested that cultures had changed along with incentive systems: “we are a purchase now society” said one and another commented that “some of the policies for first home buyers get people into mortgages who wouldn’t normally be ready to afford them”. Increasing rates of unemployment and ready access to relatively high interest consumer credit were seen as key along with perceived lack of adequate levels of income support for those who did lose their job. Consumer participants also commented on structural factors inducing financial stress. Income support payments were seen as “not even close” to being adequate to meet minimum needs. Another interviewee commented that the banks did little to ensure people did not enter into unrealistic obligations “they [banks] would give me a credit card at the drop of a hat”. It was also not clear to some consumers what their obligations actually were – these needed to be made as clear as possible before consumers entered into credit arrangements. For some, other government obligations had induced serious stress. “There needs to be more affordable fines and the option of doing community work (to pay them off )” commented one participant whose financial difficulties had been compounded by multiple traffic fines. Another suggested that fines should be means tested. Financial counsellors commented that in their experience increasing interest rates had induced serious financial stress in households which were already too highly geared. The very ready availability of credit (many argued that credit was much too available during the period prior to the current global financial crisis) had been an important factor in encouraging many people to build unsustainable levels of debt (including increasing demand for housing which had pushed housing prices to very high levels). Increased rates of unemployment, seen as likely over the short to medium term, would bring a wave of crises associated with too much debt and a diminishing capacity to service it. A relatively wide range of factors were seen as being implicated in increasing levels of financial stress, although there was a general consensus that lending practices had been somewhat lax in recent years and that many consumers had become overextended as a consequence. Cultural and structural factors were also seen as important, however. Expensive housing and a culture of ‘instant gratification’ fuelled by ready credit were important factors. Inadequate income support payments as well as inflexible penalties imposed by courts were also seen as important structural factors leading to increased rates of financial stress.

6.1.3.

Effectiveness of financial counselling services

All participants commented on their perceptions of service effectiveness for financial counselling in Australia. System wide experts commented that FC services were widespread throughout Australia, and generally very effective. “There are some well developed models (in Australia) about how to provide financial counselling assistance” was one comment. However, “financial counsellors work in a negative environment, it’s a tough gig, so considering the circumstances it works very well” said one participant. FC service staff were also perceived as being very committed and supportive of their clients: “they advocate really well for the client”. Early intervention was critical to success, however: “if they (consumers) get in early, there is a good chance of a good outcome” according to one participant. However, there were barriers to this in many cases. “Often people aren’t aware that they (FC services) exist”. This was seen to be because “governments have taken very little notice of the financial counselling need… [FC services] are not well funded.” Further, “they (FCs) are often tucked away where middle class people wouldn’t think to go”. Although the free to user service provided by FC services was seen as a real positive, the lack of a secure and well resourced funding base for FC services was seen as a threat to their success. “Some of them (FCs) have only month by month existence because they don’t know where the funding is going to come from”. Participants also felt that there were not enough services. All participants cited a lack of resources as a major impediment to improving the services offered by FC services. “First and foremost the limitation is the lack of resources and funding for the financial counselling sector which has an

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impact on reach and their ability to provide sustained support.” Importantly, “wages are so low that they inhibit the ability to attract appropriately skilled staff ”. Financial counsellors themselves saw FC services as well networked and counsellors as well trained. They felt that FC services generally were supportive and empowering of clients, and that services were provided in a respectful and trusting way. The emphasis of FC services on providing a ‘holistic’ service to clients was identified as an important aspect of the Australian system. Key benefits of FC services were seen to be giving people an improved understanding of how to manage their money, and achieving success in avoiding loss of assets and mitigating other effects especially in relation to health and wellbeing generally. However, counsellors believed that they were seeing only a very small proportion of those who could use assistance – perhaps as few as 5% of those experiencing serious financial stress. Consumer participants echoed this positive view quite strongly. “It stopped me from going to jail” said one. Another argued that “it got me out of a fair amount of debt; it took the stress out of it”. The approach taken by counsellors in addressing relevant issues was seen as very important. “They help you to help yourself ” said one, and another participant commented that “they get to the cause of why it is actually happening” “They were more concerned about me… they helped in a step-by-step way”. The holistic service philosophy mentioned by financial counsellors was also seen as a plus by consumer participants, one of whom commented that “the financial counsellor is more than a financial counsellor to me”. However, one participant reported that FC services did vary to some extent in their approach and effectiveness, reporting some difficulties at an FC service seen previously. “It depends on the individual you see”, was this participant’s comment. Participants also commented on the difficulty in getting access to FC services, a number of consumer participants suggesting that it had taken them many years to gain access, during which time they had developed major difficulties. This was a result of a combination of factors – a lack of awareness of the availability of FC services, denial of the likelihood of looming difficulties, and a mistaken belief that one could ‘muddle through’ such difficulties. “You always think you can dig yourself out” said one interviewee. Overall, there was very strong support from all participant groups for the effectiveness of FC services. Major concerns were expressed about the funding base and resource limitations which meant that FC services tended to be able to deal with only a fraction of those who could make good use of FC services. The location of FC services in agencies not frequented by ‘middle class’ consumers was seen as something of a limitation. Financial counselling services however were very much seen as highly effective and if accessed at an early stage in the development f financial stress, could be extremely effective at avoiding catastrophic consequences and thus limiting resulting stress and harm. There was reasonable support for the holistic approach generally adopted by Australian counsellors and undoubted support for maintaining access to FC services at no cost to the consumer client.

6.1.4.

Funding base for Financial Counselling services

There was some discussion by participants around issues of the most appropriate funding base for FC services. One industry expert commented that “I don’t think we (the finance industry) has a role in funding [FC services]… I think we make a better contribution elsewhere… to get out into the community and educate… and to have the right products in place…”. Another argued that the finance industry should play an arms length role funding FC services. System wide experts also commented that there was a need for greater clarity on the roles played by federal and state government funding of FC services. Although consumer participants were less familiar with funding arrangements for FC services, they all agreed that provision of assistance for people with financial difficulties should be a government responsibility. Financial counsellors also agreed on this point. Lack of research into effectiveness of FC services had contributed to continuation of an inadequate funding base, and the resulting long waiting lists were seen as a direct consequence of limited funding.

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There was thus quite strong support for the Australian government taking a greater role in funding FC services. There was also expert support for clarification of the roles and responsibilities of the state and federal governments in this respect, not least to ensure greater certainty of funding and thus enhanced continuity of services. The issue of industry funding of FC services was also touched upon with those commenting generally not supporting such a role for industry. Systematic evaluation of FC service effectiveness was also seen as an important way to highlight the benefits of FC services and thus support increased and more secure funding.

6.1.5.

Training, qualifications and recruitment of financial counsellors

System wide experts commenting on existing training arrangements for financial counsellors believed that it was presently not adequately provided. One commented that this may have its origins in the relatively insecure nature of FC service funding at present. “If it was on a more sustainable footing, there would be the ability to train more people” commented one person. There was a view that training needed greater consistency across states, and that the skills and expertise of financial counsellors “should not be over-professionalised, perhaps there should be more assessment of skills on the job”. Financial counsellors themselves argued that opportunities for training are quite limited and should be expanded, and that little information was readily available to provide details of training for those who wished to pursue such opportunities. The training should not only be expanded but much better publicised. Lack of career paths in financial counselling was also seen as an impediment to recruiting more staff to the job, along with inadequate remuneration. The overall lack of resources, low paid nature of financial counselling work, and the lack of core funding for organisations such as the peak body (AFCCRA) were also seen as barriers to increased recruitment of counsellors. Consumer participants did not comment on counsellor training and career issues. Generally training opportunities were seen to be limited and not well publicised. The training was not itself subject to criticism but limitations on its availability and little effort made to promote both training and financial counselling as a career were seen as major difficulties. This was seen to be compounded by poor career paths and modest remuneration which, along with limited training opportunities, were seen to limit the uptake of financial counselling as a career choice.

6.1.6.

Reforms and enhancements required to address financial stress more adequately

System level experts contributed a range of suggestions to improve the current mechanisms available to deal with financial stress. These included major enhancements to the FC service model such as making it ‘universally available at a reasonable cost”, including a suggestion that FC services “should just [be] a normal thing in the Medicare office or Centrelink or in every major shopping centre”. It was clear that participants believed that FC services needed “a more sustained funding and resource base”. However, the service network also needed a greater spread of service provision, given unequal access and frequent lack of service integration. Some participants also argued for more upstream reforms, including positive credit reporting, “proper assessment of the borrower’s ability to pay”, “targeted education with advertising campaigns” and encouragement of a much more developed culture of responsible lending. In particular, participants argued that “pre-approved credit should be banned” and that lenders should be obliged to deal with hardship systematically and appropriately. Online and telephone support services were seen as a possibility, although it was suggested that online and phone support have a role, but won’t take the place of face-to-face services Nonetheless, “little things can turn into big things could be caught so much more quickly if people had a number to call… [the service] could provide advice to stop people from getting into trouble”. Others argued that “I have my doubts about online as a sole primary vehicle for delivering financial counselling. I can see the phone as an important role”. Telephone and on-line services

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were generally seen as complementary to existing services, rather than substitutes. Taking account of current economic conditions, one participant argued that “with the current financial situation… financial counselling is going to see a whole new market of users who may be more amenable to telephone and web based services”. Another argued for effective triage services: “it would be good to be able to screen every client to assess the type of service they need, some may need face-to-face but others may only need web or telephone” and the multi mode approach was strongly supported by another. “In terms of developing a culture of early action, having information available in different forms where people are going to see it is important”. System wide experts also had a diverse and broad ranging set of views in relation to necessary reforms at the system wide level. These included increasing obligations on lenders to lend more responsibly, which was echoed by an industry participant: “There are some things we (banks) can do around modifying our products, we can be more upfront and actually work with the consumer”. Other key areas were seen to be better regulation of credit, enhanced consumer education, better role modelling by lenders - “we (banks) need to help [fringe] lenders lend more responsibly”. Positive credit reporting was supported by some interviewees - “we need a modified version of comprehensive credit reporting… so we don’t have to rely on what the customer tells us…we currently only know about the bad things, not the good things”. There was also support for big scale thinking on financial stress, with participants arguing for long term goals to avoid large scale financial stress through a diversity of approaches. Advocacy for change to existing systems was also seen as a “more efficient way of addressing financial stress than giving people advice”. The current review of pension benefits needed to include other benefits. The role of governments in addressing financial stress was also highlighted. “Government should fund a certain amount of free financial counselling places either in the not for profit sector or as part of a government department” said one. “I think the Federal Government needs to take a greater role. Financial counselling does not have a coherent national focus” was another view. However, some participants felt that the Australian Government may not currently be “equipped with the practical detail that the states have had to deal with over the years.” There was also some concern that the call for greater regulation was counter productive. One participant argued that “the vast majority of people manage their finances well, it seems like overkill to regulate more” and that “most problems are not with the big banks it is with that second tier of lenders.” Fringe lenders in particular should be subject to greater scrutiny to ensure that they’re “captured under the regulatory regime in ways they aren’t adequately captured at the moment”. One specific area of concern was the need to improve the way complaints were handled. There was a need to improve the arrangements for handling complaints, and this was also a concern expressed particularly in relation to the fringe lending sector. The legislative basis for regulating fringe lenders was also seen as a major issue. Fee regulation was also proposed by some participants. In terms of approaches to improving consumer understanding of financial issues, education was seen as an important field for future development. “Education has a particular role in reducing stress. We need to get it into schools” said one participant, and another argued that there was a “need to target 18-25 year olds who will be in trouble in a few years”. Others supported this view, but suggested that “there is no magic answer to financial stress, some of it goes to increasing people’s financial literacy and financial understanding over time.” For another participant, “I believe financial literacy is driven through family, you mirror what your parents have told you”. There was not universal agreement about the effectiveness of education programs – it was seen as difficult to design and implement, and social marketing was not seen to be very effective in the absence of culture and regulatory change. Nonetheless, amongst system wide expert participants, there was general agreement that education initiatives could usefully be focused on young people, especially if they were combined with practical experience. Other key messages were

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seen as providing good information about what services were available, and where they could be found. Financial counsellors echoed these views and supported financial literacy initiatives starting at school level, along with information about how the various systems that operate in the financial services industry actually work – not just credit, but debt recovery, court processes, bankruptcy and so on. Counsellors also supported expansion in the mode of service provision but were strongly of the view that face to face services should be retained and strengthened, given that for many clients who lacked self-advocacy skills they were the only way to address problems. Consumer participants echoed these views strongly – although a phone service may have helped initially, there was a strong view that face to face service was necessary for many clients, particularly those with more limited personal resources and advanced problems.

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7.

Conclusions

7.1.

Feasibility of determining best practice in financial counselling services Based on our review of the available literature from the three jurisdictions we have examined, it is clear that there are differences in the approach of each to addressing issues of financial stress. The contemporary Australian approach, built around FC services, is founded on a social justice model that looks to maintain a distance from finance service providers, in order to guarantee as far as possible the avoidance of conflict of interest. It also encompasses co-operation with regulators and sections of the financial services industry in order to develop a better understanding of the nature and causes of financial stress and indebtedness, and to achieve (from a consumer’s perspective) better regulation and legislative frameworks to address issues of financial stress and debt. In some aspects of these latter activities, the Australian FC sector accepts funding from sections of the financial services industry, being mindful of what it sees to be the need to maintain complete independence at the casework or ‘clinical’ level of operations. The FC system currently operating in the UK takes a somewhat broader view, if considered in its entirety. Although FC services similar to those operated in Australia are provided by Citizens Advice Bureaux and credit counselling specific agencies (in large part funded by the financial service sector), the UK government has adopted a whole of government policy approach in which a focus on ‘financial exclusion’ has been highlighted. The intention of this policy and the range of measures described above (as derived from the literature and Mandoki 2009) is to provide a basis for reducing financial stress and utilising access to financial services as a means to ensure greater social cohesion. In very broad terms, this approach might be thought to reflect the longstanding commitment of the British Labour Party to overcoming entrenched social disadvantage. In the United States, credit counselling and debt restructuring are operated on what amount to a business basis, despite certain provisions of federal legislation which require financial counselling agencies to be not for profit organisations. There appears to be limited cohesion in the regulation of financial counselling or like services, and little current interest in development of a wholesale consumer education or harm prevention approach as regards the provision of credit and related financial stress, etc. Based on what we have divined from our reading of the relevant literature, the British system provides services and interventions across a range of levels from upstream to downstream. The US approach cannot properly be characterised as a system, relying as it does on essentially commercial operators whose motivations are frequently heavily conflicted, and lacking the commitment of government to adoption of upstream interventions, although this may change under the Obama administration. In any event, an international comparison of financial counselling systems is possible. The Australian system is most like the system which operates in the UK, although recent developments in the UK under the rubric of reducing or eliminating financial exclusion, have made that country’s approach more closely resemble the public health framework we assembled above than is presently the case in Australia. In the UK, there is a clear commitment to involving government in policy, legislative, regulatory and enforcement activities which are focused on reducing the causes of financial stress as well as addressing the symptoms and providing clinical and other support for those who require such services. However,

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it is at the ‘sharp’ (or downstream) end that the UK system might be thought of as less well developed than its Australian counterpart. Although we are not aware of any evidence that actual financial counselling services in the UK are operated largely in the interests of credit providers, the mere fact that such services depend in large part for their survival on the good will of such providers leads to at least the apprehension of both a conflict of interest and the possibility of services being provided other than in the best interests of affected consumers. Certainly, the Australian system has avoided this, although it lacks a comprehensive whole of government approach and has so far failed to develop as comprehensive a range of measures as appear to have been introduced or are being considered in the UK. We believe the present review highlights the distinctions between the Australian system of financial counselling and those which prevail in two important and highly comparable jurisdictions. Can we assess which system is best and which worst? Based on this review, and if we utilise the public health framework we have developed as a basis for comparison, no single system provides services at all levels and in a comprehensive way. The current UK system appears to provide the best fit, but there are some issues with the tertiary or downstream layer of this system. The best practice model probably consists of much of the UK system with the Australian downstream component grafted on to it. But of course, such a system does not, as yet, exist.

7.2.

Best practice framework Based on the research undertaken for this project, we believe that the most appropriate comparison for assessing the overall effectiveness and quality of the Australian system of financial counselling is with the system operating in the UK. Strictly speaking, we are comparing systems to address financial stress and its consequences, rather than just financial counselling service systems. This is a consequence of our adoption of the public health model. Figure 2.3 sets out a framework for comparison, using the three broad domains of upstream, midstream, downstream as discussed above. What this framework seeks to highlight is the extent to which it appears that the Australian and UK models apply available interventions or strategies within each domain. This permits comparison and, to a certain extent, assessment of the ‘comprehensiveness’ of each system. It should, of course, be remembered that these broad public health domains represent something of an artificial division – in reality, it is sometimes difficult to determine the most appropriate category for specific interventions or actions, and the health and wellbeing of populations is formed by factors occurring along a continuum from emergency assistance to individuals, to the effects of cultural, political and social beliefs and actions, many of which defy easy categorisation. Nonetheless, as a heuristic (or analytical tool), the framework of upstream, midstream and downstream categorisation is useful. Figure 7.1 highlights selected areas of activity in the UK and Australia to assess the relative strengths and weaknesses of each system. These assessments are derived from our review of literature, consideration of Mandoki (2009) and our qualitative research in Australia.

7.3.

Conclusions Our overall conclusion, based on this comparison is that the Australian system performs well on a number of parameters, particularly in relation to the downstream provision of services to those experiencing financial stress. However, this is offset to a limited degree by upstream and midstream factors, where it

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is strongly arguable that the UK system is better evolved than its Australian counterpart. This largely derives from the ‘whole of government’ approach adopted by the UK around issues of financial exclusion/ inclusion, driven by somewhat distinct social circumstances. The needs of the UK population in relation to avoidance and minimisation of the impacts of financial stress are in many respects similar to those of the Australian population, although in some important ways are quite distinct (for example, access to bank accounts). This does not mean that solutions that are effective in the UK will be effective in Australia. However, there are important ‘structural’ gaps in the Australian system that undermine its effectiveness. These include the lack of a research agenda and infrastructure, and inadequate and inconsistent data collection. On this basis we conclude that the Australian system performs well in face to face counselling provision, has a strong and growing capacity for advocacy, is free from conflict of interest and provides a high quality and professional service. However, it is chronically underfunded, lacks career pathways, has limited training opportunities, and is hampered by a relative lack of upstream and midstream activity, including a coherent whole of government approach to financial stress, lack of research and evaluation support, and incoherent data systems and collection. We have identified what we believe to be the strengths and weaknesses of, and opportunities and threats, facing the Australian system of addressing financial stress, and this is set out in figure 7.2. In summary, the Australian system of financial counselling is of itself of a high standard, and probably represents world’s best practice. However, it sits within a system intended (albeit, unconsciously) to address financial stress which is itself in need of some improvement if it is also to be regarded as representing world’s best practice. However, many of the necessary elements required to achieve such status are in place or available, and the Australian system could be upgraded relatively quickly. This requires a commitment from government and the financial services industry, but is highly achievable. A public health framework provides an excellent paradigm for conceptualising such a system, and may be readily adapted to identify and support the design of all the necessary elements, Development of a best practice system to address financial stress is in the interests of all Australians. It has enormous potential to assist many Australians to improve their financial, physical and mental wellbeing, and to improve economic and financial efficiency. It is, in our view, an important element of any nation-building agenda.

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Figure 7.1: Comparison framework for services to address financial stress – Australia and UK Domain

Country

Strengths

Upstream

Australia

•

Centralisation of credit regulation

• Acceptance of need for national approach and strategy • Acceptance of important role for FC services • Improving relationships between key agencies

Weaknesses • Fragmentation of responsibilities derived from federal system • Lack of whole of government approach (FS impact assessment lacking, spread of responsibilities, for example) • Inadequate income support in some cases (under review) • Confused policy re: housing provision, costs and incentives • Widespread gambling opportunities

UK

•

Whole of government approach

• Established research agenda • Well developed strategy for financial inclusion

•

Significant exposure to financial crisis – related to reliance on FS industry and previous inadequate supervision

•

Self-regulation of industry

•

Bankruptcy law in need of review and amendment

•

Lack of evaluation culture

• Established governmental and regulatory structures • Action plan subject to periodic review and amendment • Social justice orientation in strategy • Careful introduction of gambling liberalisation Midstream

Australia

•

Reasonable enforcement processes for FS industry

• Improving education and financial literacy agenda

• Lack of national service standards for FC

• Funded peak body

• Lack of research infrastructure and research agenda

• Expanded training opportunities

• Inadequate and fragmented data collection

• Established and accepted FC philosophy

• ‘Culture of silence’ on financial matters

• Advocacy activity established • Good dialogue with some FS industry sectors UK

•

Regulatory enforcement well understood and established

• Education and financial literacy activity established • Data collection reasonably established

• Reliance

on self-regulation

• Unclear enforcement processes in some sectors • Lack of service standards for FC • Lack of FC qualification and training

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Domain

Country

Downstream Australia

Strengths

Weaknesses

• Consistent approach to service provision

• Lack of multi-mode services

• FC training and qualification well established • Well regarded services • Culture of professional FC services

• Lack of service availability in some areas • Lack of service density • Lack of finding security • Service focus on most disadvantaged – excessive targeting? • Not mainstreamed

UK

• Multi-mode service system

•

Fragmented service sector

• Financial health tools readily available

•

Potential for conflict of interest

•

Uncertain funding base

•

Volunteer base for much FC activity – lacking professionalism?

• FC services widely available • Well regarded services • Relatively mainstream services

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Figure 7.2: Strengths, weaknesses, opportunities and threats – Australian system for addressing financial stress

Strengths

Weaknesses

■■ Face to face financial counselling is best practice

■■ Funding remains largely insecure and fragmented

■■ Increasing resource commitment from governments, especially in light of financial/economic conditions

■■ Training opportunities are variable

■■ Strong support from government and significant industry members, and the community sector ■■ Lack of conflict of interest ■■ Established networks and peak body ■■ Standardisation of credit regulation underway

■■ Service quality and standards require improvement ■■ Focused largely on downstream activities ■■ Lacks systematic evaluation and goals especially national goals ■■ Lacks research agenda and infrastructure ■■ Lacks whole of government commitment and strategy ■■ Regulation of some lenders needs work ■■ Financial counselling career structure not attractive ■■ Financial counselling services lack integration and are not seen as mainstream

Opportunities

Threats

■■ Recovery phase offers scope for regulatory reform

■■ Insecure funding may evaporate post recovery (especially in difficult fiscal environment)

■■ Strong interest in improving financial regulation and sustainability of consumer credit ■■ Technological innovation favours diversification of service modes ■■ Expansion of sector likely to improve visibility and public awareness, and training opportunities ■■ Improved funding may drive improved scale and efficiency ■■ Blue sky research opportunities

■■ New modes of delivery may bypass and eclipse face-to-face delivery on ‘efficiency’ grounds ■■ Education/financial literacy programs may supplant regulatory reform and direct financial counselling services ■■ Lack of research and evaluation is a critical problem ■■ Increase in ‘for-profit’ sector may increase financial stress ■■ High levels of consumer debt, inadequate income support and expensive housing loom as major problems

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References

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behaviors, financial stressor events and health’ http://www.afcpe.org/doc/Vol1427.pdf Accessed 22/1/2008 La Cava, G. & Simon, J. (2005). “Household debt and financial constraints in Australia.” Australian Economic Review 38: 40-60. Lown, J. M. and Ju, I.-S. (2000). “Adapting Western Financial Education And Counseling Models For Use In South Korea.” Financial Counseling and Planning 11(1). Macklin, J. (2009) ‘Media Release: $1.75 million for financial counsellors’ http://www.jennymacklin.fahcsia.gov.au/ internet/jennymacklin.nsf/content/fin_councillors_pack_2april2009.htm. Accessed: 10/04/2009 Marks G N, 2007. ‘Income Poverty, Subjective Poverty and Financial Stress’ http://www.facs.gov.au/research/prp29/ sprp29.pdf Accessed: 21/1/2008 Martin, M. (2007). A Literature Review on the Effectiveness of Financial Education, Federal Reserve Bank of Richmond - Research Department. Mathew M, 2007. ‘A Literature Review on the Effectiveness of Financial Education’ http://www.richmondfed.org/ publications/economic_research/working_papers/pdfs/wp07-3.pdf Accessed: 22/1/2008 McCormick J, Chapman M & Elrick D, 2005, ‘Thrifty Scots? Steps to Improve Financial Literacy’ http://www.prudential. co.uk/prudential-plc/cr/library/research/scottishcouncil/scottishcouncil.pdf Accessed: 22/1/2008 Morehead R & Robinson M, 2006. ‘A Trouble Shared’. http://www.dca.gov.uk/research/2006/08_2006.pdf Accessed: 22/1/2008 Muske, G. and Winter, M. (2004). “Personal Financial Management Education: An Alternative Paradigm.” Financial Counseling and Planning 15(2): 79-88. National Consumer Law Centre, 2004. ‘Credit Counseling in Crisis update: Poor compliance and weak enforcement undermine laws governing credit counseling agencies’ http://www.consumerlaw.org/issues/credit_counseling/ content/cc_enforcement.pdf Accessed 22/1/2008 National Debtline (2008), ‘Press Office’ webpage http://www.nationaldebtline.co.uk/media_information.php#mi4 ‘What is National Debtline?’ PDF download http://www.nationaldebtline.co.uk/pdf/ndl_details.pdf and ‘Key Media Statistics’ PDF download http://www.nationaldebtline.co.uk/pdf/media_statistics.pdf all accessed 2 September 2008 Nutbeam, D (1998) Health Promotion Glossary, World Health Organisation Geneva http://www.who.int/healthpromotion/ about/HPR%20Glossary%201998.pdf ) accessed 19/06/07 Office of Fair Trading, 2001. ‘Debt Management Guidance’ http://www.oft.gov.uk/shared_oft/business_leaflets/ credit_licences/oft366.pdf Accessed: 22/01/2008 Office of Fair Trading, 2004. ‘Debt Consolidation: A report on an OFT Study’ http://www.oft.gov.uk/shared_oft/ reports/consumer_protection/oft705.pdf Accessed: 22/1/2008 Pentland, J. (2006) Financial Counselling: The Current and Changing Landscape, Financial and Consumer Rights Council, Melbourne Pleasence P, Buck, Balmer NJ, Williams K, 2007. ‘Changing Fortunes: Results from a Randomized Trial of the offer of debt advice in England and Wales http://www.lsrc.org.uk/publications/Impact.pdf Accessed: 22/1/2008 Politzer R, Yoon J, Shi L, Hughes R, Regan J, Gaston M. (2001) ‘Inequality in America: the contribution of health centers in reducing and eliminating disparities in access to care’. Med Care Res Rev. 2001;58:234-248 Porter, N. M. and Garman, E. T. (1993). “Testing a Conceptual Model of Financial Well-Being.” Financial Counseling and Planning 4: 135-165. Public Money and Management, February, pp.13-20, viewed 13 April 2008, http://www.blackwell-synergy.com/action/

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showPdf ?submitPDF=Full+Text+PDF+%2868+KB%29&doi=10.1111%2Fj.1467-9302.2007.00550.x Reserve Bank of Australia 2009. Indicator Lending Rates F05 http://www.rba.gov.au/Statistics/Bulletin/F05hist.xls Accessed August 2009 Rich N, 2004. ‘Unfair fees: A Report into Penalty Fees Charged by Australian Banks http://www.govanlc.com/ clcv20unfairfeesreport.pdf Accessed: 21/1/2008 Schetzer, 2007. ‘Drowning in Debt: Experiences of People who seek assistance from Financial Counselors’ – obtained from personal communication with AFCRRA. Schuchardt, J., Bagwell, D. C., Bailey, W. C., Devaney, S. A., Grable, J. E., Leech, I. E., Lown, J. M., Sharpe, D. L. and Xiao, J. J. (2007). “Personal Finance: An Interdisciplinary Profession.” Financial Counseling and Planning 18(1): 61-9. Scottish Executive Social Research, 2007. ‘Evaluation of Greater Easterhouse Money Advice Project: Financial Education on Programme’ http://www.scotland.gov.uk/Resource/Doc/195738/0052476.pdf Accessed: 22/1/2008 Singh S & Shelly M, (2005). ‘Decisions about personal debt amongst families at risk: Personas and Scenarios’ http:// mams.rmit.edu.au/w8ugjtyrci0w.pdf Accessed: 21/1/2008 Singh S, McKeown P, Myers W, & Shelly M, (2005). ‘Literature review on Personal Credit and Debt In Australia’ http:// mams.rmit.edu.au/fjefpb2zv2q7.pdf Accessed: 21/1/2008 State Services Authority (2008), ‘Review of Government funded financial counselling services’ http://www.ssa.vic.gov. au/CA2571410025903D/WebObj/Review_FinancialServices/$File/Review_FinancialServices.pdf Accessed: 7/08/2008 Sumarwan, U. and Hira, T. K. (1992). “Credit, saving and insurance practices influencing satisfaction with preparation for financial emergencies among rural households.” Home Economics Research Journal 21(2): 206-227. Tennant D & Pentland J, 2007, ‘Partnerships with Industry and Conflicts of Interest’ http://www.pc.gov.au/__data/ assets/pdf_file/0005/63797/sub062.pdf Accessed 21/1/2008 Tennant, D 2006. ‘The dangers of taking the consumer out of consumer advocacy’ http://www.afccra.org/documents/ Thedangersoftakingtheconsumeroutofconsumeradvocacy.doc Accessed: 21/1/2008 Tennant, D. 2004. ‘Financial Counselors: An emerging professional group or an endangered species? Paper presented at the Financial Counselors Association of WA, Conference. http://www.consumersfederation.com/documents/ FinancialCounsellingWAConfOct04.pdf Accessed: 21/1/2008 Turley and White, 2007. ‘Assessing the impact of Advice for People with Debt Problems’ http://www.lsrc.org .uk/ publications/bmrb.pdf Accessed: 22/1/2008 Wallace A & Quilgars D, 2005. ‘Homeless and Financial Exclusion: A literature review’ https://www.york.ac.uk/inst/ chp/publications/PDF/hlessfinexcfinalrep.pdf Accessed: 22/1/2008 Wesley City Mission, 2006. ‘Financial Stress and its impact’ http://www.wesleymission.org.au/centres/creditline/images/ attachments/financial_stress_report.pdf Accessed: 21/1/2008 Wilkinson R, Pickett K. 2009. The Spirit Level: Why More Equal Societies Almost Always Do Better, Penguin Books Harmondsworth UK. Wilkinson R. Pickett K. 2006. Income inequality and population health: A review and explanation of the evidence. Social Science and Medicine; 62(7): 1768-1784 Williams K, Sanson A, 2006. ’12 Months later: Does advice help? The impact of Debt advice http://www.justice.gov.uk/ docs/impact-of-debt-advice-report.pdf Accessed: 22/1/2008 Williams T, 2004. ‘Review of the Research into the Impact of Debt Advice’ http://www.lsrc.org.uk/publications/ impactlitrev.pdf Accessed: 22/1/2008

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Williams, F. L., Haldeman, V. and Cramer, S. (1996). “Financial Concerns And Productivity.” Financial Counseling and Planning 7: 147-56. Wilson D, 2002. ‘Payday Lending in Victoria: Research Report’ http://www.consumer.vic.gov.au/CA256902000FE154/ Lookup/CAV_Credit_Research/$file/payday.pdf Accessed: 21/1/2008 World Health Organisation (WHO) (1986) The Ottawa Charter for Health Promotion, http://www.who.int/hpr/ NPH/docs/ottawa_charter_hp.pdf Accessed 14/7/08 Xiao, J. J. and Noring, F. E. (1994). “Perceived Saving Motives and Hierarchical Financial Needs.” Financial Counseling and Planning 5: 25-45.

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Appendix 1: System level experts consulted

Colin Neave (Financial Services Ombudsman) Keryn Myers (Westpac) Peter Kell (ACCC) Gordon Renouf (Choice) Corrine Proske (NAB) Caroline Bond (Consumer Law Action Centre) John Riley (FaHCSIA)

Appendix 2: Interview guide for system level experts and financial counsellors

We’d like to start with a brief explanation of the project and what we’re hoping to discover. This study aims to: ■■

Identify how the Australian model of financial counselling differs from overseas models.

■■

Explore the strengths and weaknesses of the Australian versus overseas models.

The findings of this study will help inform the Australian Financial Counselling & Credit Reform Association Incorporated (AFCCRA) and Australian financial counselling organisations as to how well the Australian model measures up against overseas models. These findings may then be used to suggest modification of government and organisational policy in relation to financial counselling. When we talk about the Australian model of financial counselling we were initially focused on the actual system of individual service delivery as it currently operates in Australia. This is largely a ‘client-driven’ system in which individuals or families experiencing financial stress seek the assistance and advice of trained financial counsellors to assist with what is generally a pressing crisis. However, it has also become very clear that we need to consider how other systems, as well as elements of the financial system, may be utilised to avoid or minimise the potential for financial stress, to intervene at an early stage in the development of financial difficulties, or to give advice and assistance to those likely to experience financial stress before the onset of a crisis. In undertaking the project we have explored systems operating in the United States and in the UK, and have compared these ideas to those currently operating in Australia. We have also proposed a ‘public health’ style model to comprehend the elements which might be useful in developing a comprehensive approach to minimising financial stress and addressing its consequences as efficiently and effectively as

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possible. Such a model incorporates upstream activities (including policy change, and effective regulation and enforcement) as well as educational and information elements (midstream) and downstream measures to address the needs of those in crisis. We would like to continue by asking you some questions about your own experience and background: 1. Position: 2. Years in this position: 3. Self-identified expertise: 4. Nature of your interest in financial counselling and associated services/regulation: We would like to continue with some questions about your own views on the current Australian system of financial counselling: 5. What do you feel are the principal harms associated with personal or family financial stress or crisis (henceforth ‘personal financial stress’) in Australia? 6. Are you familiar with the current arrangements for face to face provision of financial counselling services in Australia? 7. How effective do you believe these services are? 8. What do you regard as the strengths (if any) of the current Australian system of financial counselling? 9. What do you regard as the weaknesses (if any) of the current Australian system of financial counselling? 10. Do you believe that the current training arrangement for financial counsellors are adequate? If not, how do these need to be changed? 11. What (if any) would be the most important reform you could initiate in the current Australian system of financial counselling? 12. How would this reform be implemented? (i.e. what level of government, funding issues, who would undertake the reform process, how would it be delivered, etc). 13. Does the finance industry have a role in funding financial counselling services? If so, what aspects should e funded? If not, why not? 14. Do you believe that people experiencing personal financial stress are likely to be amenable to, and effectively supported by, on-line or telephone based counselling services, or to web-based crisis information? If so, would you regard provision of such services as a priority? 15. Would the provision of web-based, on-line or telephone based financial counselling/support services be likely to reduce, increase or have no effect on demand for face to face financial counselling, in your view? 16. What do you think are the key drivers of personal financial stress in Australia? 17. Do you feel that these drivers are likely to become more or less significant over the next 12 to 18 months? 18. How do you think these drivers might best be addressed? 19. To what extent do you feel that current economic circumstances will contribute to increased prevalence of personal financial stress in Australia over the next 18 months? 20. Do current economic circumstances warrant specific action by government to address personal

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financial stress over the next 12 to 18 months? If so, what measures might be most effective? 21. Do you believe that any specific legislation or regulation should be amended to address issues of financial stress? If so, what legislation or regulation do you feel needs to be amended, and how? 22. Do you believe that community education, information, or advertising campaigns or programs are effective tools in lessening the likelihood of personal financial stress? 23. If not, do you feel that such campaigns or programs have any role in minimising financial stress or crisis? 24. If you feel that such campaigns or programs do have a role, do you feel that current arrangements to educate or inform the public about personal financial issues are adequate? If not, how would you suggest modifying these, or what programs campaigns do you believe might be more effective? 25. Do you believe that there are any specific social groups who are more likely than average to experience personal or family financial stress? If so, what defines such groups? 26. If you do believe that certain groups have higher risk of experiencing personal financial stress, do you support specific programs to address the factors leading to this enhanced likelihood of financial stress amongst members of such groups? If so, can you suggest what those measures might be? 27. Are you familiar with any overseas models for addressing the causes of financial stress, and/or in providing support and assistance to those finding themselves in such circumstances? If so, what do you feel are the most useful such models, or elements of such models, and would they be suitable for application in Australia? 28. Which, if any, level of government do you feel properly has principle responsibility for addressing issues of personal financial stress? 29. Are financial institutions responsible for minimising personal financial stress? If so, how best should this be achieved? 30. Does the provision of personal credit require greater, or less regulation? If so, how? 31. What measures or reforms would be most effective in reducing levels of personal financial stress in Australia? 32. What measures or reforms would be most effective in reducing the harm associated with personal financial stress in Australia? 33. Are there any remaining issues you would like to raise?

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Appendix 3: Interview guide for consumer group discussion

AFCCRA Research Project Financial Counselling - Comparing the Australian model internationally. Interview guide Service Users

1. How effective do you feel FC services have been for you? 2. What were the areas where FC has been most helpful for you? 3. Were there any areas where FC wasn’t as helpful as you may have wished? If yes, what were these? 4. Was the waiting time to access FC services appropriate? If not, did it cause you any additional difficulties? If so, what were these? 5. How did you find out about FC services – (note this replicates Basic info question, but we want a bit more detail if possible) – did it involve social networks, referral, word of mouth, advertising etc. Does this seem to be an appropriate way to learn about FC services? 6. Have FC services helped improve your understanding of financial matters? If so – how? 7. Do you feel that your level of understanding of financial issues was part of the issue that lead you to seek FC assistance? 8. Please elaborate on the reasons you believe were the main reason for your experiencing financial difficulties. 9. What have been the health effects for you of financial difficulties? For your family? 10. How long were you experiencing financial difficulties before seeking help from FC services? 11. Do you believe that your situation NOW would have been better had you obtained FC assistance earlier? 12. Would you have accessed information about financial difficulties online or via a telephone service if it had been available? 13. Do you think enough is done to assist people to deal with financial difficulties? What more could be done, do you think? 14. Do you think enough is done to assist people to avoid financial difficulties? What more could be

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done, do you think? 15. Which level of government do you believe should be mainly responsible for helping people with financial difficulties? 16. Do finance companies have a role in lending more responsibly? If so, what areas do you feel should be looked at? 17. Do you feel the law is about right when it comes to addressing financial difficulties? If not, how should it change? 18. Have you ever used a commercial debt consolidation service? Did it help you or make your situation worse? 19. Do you believe credit cards should be regulated differently? If so, how?

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Appendix 4: ABS Indicators of Financial Deprivation and Stress

The ABS indicators of financial deprivation and financial stress were as follows, extracted from Appendix 2 of ABS (2002): FINANCIAL STRESS QUESTIONS IN THE 1998-1999 HES These questions were asked of one person in each household. The person was either the reference person or their spouse, randomly picked. Note that the questions were introduced as relating to the household’s ‘standard of living’, rather than ‘financial stress’. SAVING EXPERIENCE Over the last 12 months, which of the following best describes your household’s financial situation? •

Spend more money than we get

•

Just break even most weeks

•

Able to save money most weeks

•

Comparison with standard of living 2 years earlier

•

Better than 2 years ago

•

The same as 2 years ago

•

Worse than 2 years ago

•

Not applicable

INABILITY TO AFFORD NOMINATED ITEMS Which of the following do members of your household usually have? •

A holiday away from home for at least one week a year

•

A night out once a fortnight

•

Friends or family over for a meal once a month

•

A special meal once a week

•

Buy new and not second hand clothes, most of the time

•

Spend time on leisure or hobby activities

•

No/none

For each item which you don’t have, is it because •

Don’t want it

•

Can’t afford it

•

Other reason

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ACCESS TO EMERGENCY FINANCE If all of a sudden you had to get $2000 for something important, could the money be obtained within a week? •

Yes

•

No

Which of the following sources could your household use? •

Own savings

•

Loan from bank, building society or credit union

•

Loan from finance company (high interest)

•

Loan on credit card

•

Loan from family or friends

•

Loan from welfare or community organisation

•

Sell something

•

Other sources

If more than one possible, which would be the most likely to be used? OTHER FINANCIAL STRESS INDICATORS Over the past year have any of the following happened to your household because of a shortage of money? •

Could not pay electricity, gas or telephone bills on time

•

Could not pay for car registration or insurance on time

•

Pawned or sold something

•

Went without meals

•

Unable to heat home

•

Sought assistance from welfare/community organisations

•

Sought financial help from friends or family