Government debt management practices need to change

Ed McDonagh, StepChange Senior Public Policy Advocate, explains why a joined-up approach that puts fairness at its heart would make all the difference to improving Government practices

A long-awaited consultation on government debt management closed on Monday. The evidence from the experiences of our clients is clear — government methods of debt recovery are archaic. The efforts of public bodies to recoup money tend to entrench peoples’ problems rather than alleviate them, making it harder for people to repay and causing considerable knock on costs for all involved.

Various government departments and organisations have responsibility for collecting debt. The most common debts to government we see are council tax arrears owed to local government, Universal Credit advance payments being repaid to DWP and tax credit overpayments being repaid to HMRC.

What is particularly striking about the people we see with debts to government is how much more precarious their situation is than other clients. Last year, 46% of them had a negative budget after all their essential spending was accounted for compared to 30% of other clients. 57% had an additional vulnerability compared to 48% of other clients.

Given the fragility of their circumstances, it’s even more important for public sector creditors to approach debt management holistically, and with due care and consideration. However, government practices are far worse than those we see in regulated commercial markets. Vulnerable customers are particularly poorly treated: 69% did not have an affordability assessment and only 17% felt that government took account of their vulnerability. Over half of the clients we surveyed were forced to take out credit as a result of the repayment demands of government creditors

It has long been accepted in regulated markets that this is not a sustainable way to collect money. The FCA’s rules for financial service providers are based on a principle of treating customers fairly and explicitly state that firms should not pressurise a customer to pay a debt in an unreasonably short period of time or increase existing borrowing. This contrasts with the DWP’s own guidance which states that deductions from benefits will be ‘almost certain to cause some hardship and upset for them (individuals in debt) and their family.’[1]

Evidence from our clients demonstrates the hardship caused by the actions of government creditors. 93% of respondents in a recent survey of our clients with debts to government had found it difficult to pay for essentials because of debt recovery activity.

What needs to change?

While we still see problems in regulated markets, in general, approaches to forbearance are more consistent because there is an infrastructure able to set standards, monitor compliance, and address bad practice.

There is no similar framework to ensure good debt management practices across government. Fairness Principles introduced in the Digital Economy Act 2017 were adopted only as ‘best practice guidelines’ rather than a set of binding rules for public sector creditors to follow.

A chronic lack of data recording means very little is known about the outcomes for people being pursued for money by government. There is also an absence of data sharing between departments. As a result, individuals can find themselves subject to multiple forms of collection activity from different parts of government while opportunities for early identification of vulnerabilities or affordability problems are missed.

Communications often threaten escalation rather than signposting people to the help they need to pull themselves out of debt. Regulations in local government even incentivise escalation. Collection action moves quickly to bailiffs who receive their highest fee for visiting someone’s home rather than resolving debt problems at an earlier stage through an affordable repayment plan.

These problems reflect a culture where there is a lack of consideration for the circumstances of individuals who owe money to government. Too often the assumption is that people are at fault for finding themselves in the position they are in rather than facing serious financial hardship and, more often than not, additional vulnerabilities.

Government should use a debt management bill to build on and embed the fairness principles, along with the oversight needed to ensure improved outcomes for financially vulnerable people. This should include agreed approaches to affordability like standardising the use of the Single Financial Statement and include close monitoring of key data points like the proportion of eligible individuals receiving additional vulnerability support.

This should be accompanied by a debt aggregator responsible for debt management across government. This system would consolidate all government debts to give public sector creditors a ‘single customer view’ allowing them to see all debts owed by an individual in order to set fair and affordable repayments across all their debts.

There are also vital immediate changes that need to be made to shift the practices of individual government organisations. Most pressingly, council tax regulations need to be changed to prevent costs escalating so quickly for those who fall behind. An independent regulator is urgently needed to oversee bailiff activities. Poor practice is endemic in this sector and for any future framework of government debt management to be a success, bailiffs need to be brought into a system of regulation with oversight and strong sanctions for malpractice.

It is heartening that the Cabinet Office has deemed it necessary to review government debt management practices. The Treasury Select Committee and National Audit Office have both called for root and branch reform, a recommendation echoed across the advice sector.

However, the exercise will be worthless unless it leads to concrete actions. People like StepChange client and former welfare adviser Chrissie will remain mired in difficulties without major changes: “I’m not someone who has ever been in this position before, especially considering I was an employment advice/welfare worker until I lost my job, but I still cannot find my way out of this. What must it be like for people without my background if I cannot do it?”

● Read our full response to the Cabinet Office’s call for evidence here.

[1] Department for Work and Pensions (2019), Benefit overpayment recovery guide, p37 paragraph 5.70.