05.11.18
Tackling problem debt
Source: PSE Oct/Nov 2018
Debt problems can have detrimental effects on people’s wellbeing, the economy and public services. Charles Nancarrow, director of regulation and trade at the National Audit Office (NAO), talks us through part of his organisation’s latest report into tackling problem debt.
Over-indebtedness, or problem debt, which is defined as the inability to pay debts or household bills, affects around 8.3 million people in the UK. It can adversely impact individuals by causing conditions such as anxiety or stress, and increase use of government services such as healthcare or state-subsidised housing.
The nature of problem debt has also been shifting, with debts owed to government becoming an increasingly significant issue for households. For example, the proportion of problems reported to Citizens Advice relating to government debts increased from 21% to 40% between 2011-12 and 2017-18, while for consumer credit it reduced from 52% to 33%.
As a provider of relevant government services and collector of taxes from individuals, such as council tax, the actions of local authorities can impact over-indebted people. Section four of our report looks at the impacts of debt management practices, compares debt management practices adopted by government creditors against retail lenders, and identifies potential barriers to the adoption of good debt management practices across government.
Interestingly, in assessing the impacts of debt management practices, we see evidence that good debt management practices both benefit individuals and boost collection rates. Research in 2014 estimated that tailored debt advice, support and affordable repayments saved creditors £82m in a year from 110,000 over-indebted clients – an average saving of £750 per person.
Lenders and debt collection agencies we interviewed also reported benefits from following best practice. By comparison, our modelling – based on a survey of debt advice clients – estimates that, for our sample, intimidating actions and additional charges were 15-29% more likely to make debts harder to manage and increase levels of anxiety or depression.
Despite evidence of good practice creating win/win scenarios, our analysis found that approaches to debt management are varied across government and lag behind the retail lending sector. For example, established best practice in how to assess affordability of repayments is used by only 19% of local authorities and is not used as standard by central government creditors. The Money Advice Trust also assessed English local authorities against five good practice criteria; our own analysis found that 74% of local authorities met fewer than three of these criteria, and only two met all five.
Our examination of potential barriers to consistent adoption of good debt management practices across government highlighted two common challenges. The first one is a lack of data sharing: due to IT systems and legal barriers to data sharing, government cannot identify individuals who owe money to different departments or have different debts within the same department. This risks poor value for money as there is nothing to prevent debt teams competing for repayments from the same person. The Cabinet Office is leading a pilot to identify a segment of debtors who owe money to more than one government organisation through the Digital Economy Act 2017 to support the case for more data sharing to prevent debt.
The second challenge is potential short-term incentives and funding pressures. Our analysis of debt charity data found that people report more problems with debts owed to government as the fiscal year progresses, a pattern not observed with private-sector debts. A number of stakeholders we interviewed considered that this could be affected by performance metrics (for example, in-year collection targets and league tables) and funding pressures at a local level creating incentives to pursue debts more quickly and aggressively than is best practice.
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