Written evidence submitted by the Debt Managers Standards Association Limited (DEMSA) [CTC 032]

Introduction

DEMSA has responded to a number of the questions in the call for evidence in the table below.

DEMSA full members are debt solution providers. DEMSA affiliate members include regulated debt advice providers (full and limited FCA permissions) and we have a separate category of membership for Insolvency Practitioners.

We have a number of associate members that are involved in FinTech and PayTech, which would include Open Banking and other payment services. Many provide services to local authorities, including income & expenditure tools, affordability assessments, income optimisation, benefit assessments, vulnerability assessments, omni-channel debt advice services and debt collection integration tools.

Debt solution providers generally deal with individuals or couples with unmanageable debt. We encourage consumers to engage in debt advice as early as possible and certainly before they borrow more and make the situation worse. The majority cover all legal jurisdictions in the UK. Some providers have specialist local community engagement and/or provide face-to-face services. This has historically meant that some advice providers have been better able to deal with some local authorities than others and can determine whether an informal debt solution (e.g. a DMP) can include some debt types that other authorities may not entertain.

Council tax debts will be less frequent in debt solutions like a Debt Management Plan (DMP) or Individual Voluntary Arrangement (IVA) for our members when compared to the profile of customers seen by Citizens Advice, Money Advice Trust (e.g. National Debtline) and Christians Against Poverty (CAP). This would relate to both the actual presence of council tax arrears in the first instance and, if present, the proportion of the overall debt this represents amongst typically upwards of 7 unsecured debts in a debt solution. Historically, the primary debts are multiple credit card, personal loan, mobile phone and retail credit debts. Council tax debts are treated as a priority debt unless the debt is historic (i.e. Another local authority or previous financial year). The statistics from PayPlan and StepChange at scale would be more representative of the prevalence of council tax debt. A key characteristic of our customer profiles (at the time of onboarding) will be that they have a surplus income and that meeting priority expenditure would be the initial goal of a financial review. Deficit budgets would normally be signposted to a MaPS funded free-to-consumer provider that is well versed in dealing with customers with no disposable income. Some customers may face temporary hardship during a debt solution and change in circumstance reviews would determine the ongoing suitability of their debt solution.

The StepChange 2020 yearbook showed an increase from 30% in 2019 to 36% of new customers with council tax arrears, with an increased average debt balance of £1,292.

According to the Money Charity in their December 2021 [1] report, debt remained the second largest advice category in November 2021 with 66,236 issues, behind Benefits and Tax Credits (85,060). Debt calls were 18.8% up compared with November 2020. The top 3 debt categories in November 2021 were fuel debts, council tax arrears and consumer credit debts.

The Payplan [2] end of 2021 report has shown that demand for debt advice has now risen above 2019 levels (28% increase in people coming to Payplan for debt advice in Q4 compared to the same period for 2019), which is one of the first acid tests for debt advice demand growth into FY 2022/23.

DEMSA members would typically deal with a higher proportion of private renters and homeowners than is the case with MaPS funded debt advice agencies. DEMSA has been engaged with MaPS and Cabinet Office around their initiatives for fairer and more consistent debt recovery practices by local authorities.

Consumer education is a prominent part of the work that the debt advice agencies undertake in ensuring that impacted customers are aware of where council tax debts sit in the overall pecking order. This has included breathing space assessments from May 2021 and whether the presence of council tax debts would warrant recommending use of the Debt Respite Scheme standard breathing space. Mental Capacity cases are typically referred to specialist providers.

Whilst DEMSA does not dispute the comment below from Clive Betts for customers approaching Citizens Advice, it is probably not reflective of customers approaching FCA regulated debt solution providers.

Clive Betts, Chair of the Housing, Communities and Local Government Committee, said:

"Council tax arrears is the most common debt problem which people approach Citizens Advice about. Covid-19 has also inevitably had a major impact on many household incomes with some residents suffering financial hardship, leaving them to fall behind on their council tax payments.”

DEMSA responded to the Cabinet Office ‘Fairness in government debt management: a call for evidence’ in September 2020. We have welcomed the previous MaPS work in the local authority space and the Cabinet Office best practice guide published in August 2021. It is still evident that there are significant inconsistencies in approach by local authorities. This was reflected in a session at the MALG conference in October 2021, where initial presentations by Sheldon Mills (FCA director) and Caroline Siarkiewicz (CEO of MaPS) were followed by contributions by HMRC and one of the more prominent local authorities (Southwark Council). The Southwark Council warned that forbearance measures had meant that many consumers in need of debt advice were not being signposted by local authorities because of pauses in collection activity and (more worryingly) that paused enforcement activity may just resume with no warning at the point where it was paused 18 months on. She confirmed that this could apply inconsistently across authorities, with some doing the right thing and re-engaging with indebted council taxpayers before taking action.

We would echo our response to Cabinet Office that there remains a significant divergence in approaches to council tax arrears and the support available to those who fall into council tax debt. There are some good exponents and some very poor exponents. This was reflected in the Guardian report [3] in August 2021 at the time of the best practice document being published. The Freedom of Information Act response showed that councils passed 281,380 households to bailiffs in FY 2020-21, of which 93,031 related to council tax arrears that built up during the course of that year. They also highlighted use by some councils using “attachments on benefits” for 117,492 council tax payers, deducting money from benefits to clear council tax arrears. The figures covered about two-thirds of England’s “lower-tier” – district or borough – councils (i.e. a widespread practice).

I am on the advisory board of the Vulnerability Registration Service (VRS), who work with a number of councils and the service providers (e.g. technology providers, approved providers on the Crown Commercial Service ‘Debt Resolution Service’ framework – closed 17/12/2021). A barometer of those committed to best practice is whether the authority has started to engage and embed some of the tools to better identify vulnerability and financial hardship in their core processes.

Some local authorities seem to have consciously kept council tax tariffs the same (e.g. Mansfield District Council’s Cabinet is proposing to freeze council tax for FY 2022/23 following confirmation that the council will receive a larger than expected grant from the Government [4]) into FY 2022/23 and others are committed to more significant increases (e.g. up to 5%) that will make financial hardship more acute for many, especially alongside energy cost increases. With inflation yet to peak in 2022, there is a risk that council tax will rise in line with inflation in some local authorities.

DEMSA is concerned around economic and post-pandemic factors that are generally outside of the control of consumers:

• Cost of living increases in the next financial year are likely to be significant and require consumers in financial difficulty to pro-actively assess affordability of critical expenditure items, including council tax. Consumers must have confidence that when approaching a local authority that they will be treated fairly and that early engagement will not penalise them

• Local authorities need to be especially careful if resuming collections and enforcement activity that may have been paused during the pandemic. TCF principles need to be applied to avoid unnecessary detriment

The concerns above are supported by the anecdotal comments at the MALG conference in October 2021 and the Local Government Finance Release [5] in October 2021. In FY 2020-21, local authorities collected a total of £32.2 billion in council tax, irrespective of the year to which it related. This was an increase of £0.6 billion, or 1.9%, over FY 2019-20. This was lower than in previous years due to a combination of more support given to taxpayers through discounts and use of local council tax support schemes because of the Covid-19 pandemic, which has reduced the amount due to be collected, and a lower rate of collection.

DEMSA continues to monitor the proposals for Council Tax Reduction Schemes (Prescribed Requirements) (England) (Amendment) Regulations 2022 [6] and phasing of ‘FY 2020-21 collection fund deficits: updated council tax calculation tool’[7].

DEMSA has replied to the following questions:

Do there need to be changes in the practice employed by local authorities to collect council tax arrears?
What examples are there of local authority best practice in respect of council tax arrears collection – and what has the impact of this practice been?
What is your assessment of the August 2021 government guidance on best practice for council tax collection?
Do there need to be changes to the legislation on the recovery of council tax arrears?
How do the different schemes of local authority council tax support affect council tax collection rates?

DEMSA responses

Question	Comment
Q1 A1	Do there need to be changes in the practice employed by local authorities to collect council tax arrears? Yes. There needs to be more consistency and visible evidence of adoption of the MaPS recommendations and the ‘Council tax collection: best practice guidance for local authorities’ published on 16/8/2021. The ‘HMG Debt Management Vulnerability Toolkit’ was also published on 24/8/2021. This is becoming more closely aligned with the FCA vulnerability guidance published in February 2021, which will have been deployed by the consumer credit providers involved in a debt solution. Where there are multiple debts, a holistic approach is required. We are particularly concerned that limited lessons seem to have been learned from the pandemic in some areas, which may cause particular detriment if collections and/or enforcement action is fully resumed without warning and with minimal engagement with impacted customers. There need to be wider and more consistent affordability and vulnerability assessments. Many aspects of the HM Treasury consultation around regulating BNPL are applicable where the same higher risk profile customers may be involved. DEMSA responded to the HM Treasury consultation on 6/1/2022. In our response to Cabinet Office, we reflected that local authorities have been heavily scrutinised for use of enforcement agents before the pandemic and the pre-appointment processes not following the MaPS guidance. This behaviour is in part conditioned by the authority not being able to afford contingency fees from debt collection agencies where this appears the most effective way of recovering debts without the financial stress associated with enforcement agents/bailiffs. Engagement with debt advice agencies can be vary significantly ranging from a partnership approach to being confrontational. There is a much higher risk of consumer detriment where early engagement is not achieved. There needs to be universal adoption of the Standard Financial Statement (SFS). There needs to be consideration of fiscal policy to enable arrears management functions to be able to innovate with regard to collections approaches that balance effective recoveries with the equivalent of a TCF/Consumer Duty approach being adopted in the FCA regulated sector. Time-to-Pay arrangements need to be able to bridge financial years, as HMRC are now able to do. Much of this needs to be thought about in building a fit-for-purpose Statutory Debt Repayment Scheme (SDRP) by May 2024. Local authorities need to be involved in the product design at a representative level. Local authorities need to take advantage of shared data assets through the Digital Economy Act 2017 where pilots proved the value of using data shared by HMRC, DWP and other central government agencies. This should be accelerated nationally and shouldn’t be optional. Similarly, local authorities should access key vulnerability identification tools like the Vulnerability Registration Service (VRS), where this is common practice amongst the more progressive authorities. Consideration may need to be given to different household types, notably around some of the Local Government Finance statistics published in November 2021 [8]. In England, there were a total of 25m million dwellings as of 13 September 2021, an increase of 226,000 (or 0.9%) compared with 14 September 2020. Of this number, 24.3m dwellings were liable for council tax. This was an increase of 217,000 (or 0.9%) compared with 2020. There were 15.8m dwellings (63.1% of all dwellings) liable to pay 100% council tax as they are not entitled to any exemptions, discounts, or premiums. There were 8.6m dwellings that were subject to either a discount or to a premium on their council tax. Of these, 8.2m dwellings (32.6% of all dwellings) were entitled to a discount because they were occupied by single adults. There were 660,000 dwellings exempt from paying council tax, an increase of 9,000 (or 1.4%) compared with 2020. Exempt dwellings account for 2.6% of all dwellings. Cases where pre-COVID financial hardship is known should be readily identified. The challenge is identifying cases in the full liability group that may be experiencing financial difficulty or will do so in the next financial year.
Q2 A2	What examples are there of local authority best practice in respect of council tax arrears collection – and what has the impact of this practice been? There are many showcased case studies of public/private sector collaborations. The final quarter of 2021 featured these at many of the credit industry awards events. DEMSA would expect to see improved KPI performance in the following: Earlier notification by domestic customers before arrears management processes commence Higher engagement rates in the arrears management processes with effective and sticky time-to-pay (TTP) arrangements Higher engagement rates in debt advice because of the collaborative approach Ultimately, higher collection rates over different time periods, including cases where a longer period TTP is required and use of payment holidays Proportionate usage of standard breathing spaces to avoid cases being escalated to inappropriate recovery approached (e.g. Enforcement agents or attachments of income) Proportionate usage of forbearance measures available by legal jurisdiction Better affordability and vulnerability assessments True forbearance for the most in need where debt write off is the most appropriate course of action More effective data sharing compliant with UK GDPR
Q3 A3	What is your assessment of the August 2021 government guidance on best practice for council tax collection? Along with the Vulnerability Toolkit, we believe that it is an important step forward provided there is consistency in adoption and that this is monitored, potentially in a similar to the enforcement sector where there has been collaboration with the money & debt advice sectors. There needs to be a driver for wider adoption and monitoring of standards, much like there will be in the MaPS national debt advice contracts (Lot1) across the supply chain. Quality Management Frameworks seem important in this respect and measuring performance metrics across local authorities.
Q4 A4	Do there need to be changes to the legislation on the recovery of council tax arrears? Potentially yes, but effectively deploying the tools available may be more appropriate and timely in the short-term whilst the impact of the pandemic are still being felt and cost of living increases will become more acute in FY 2022/23.
Q5 A5	How do the different schemes of local authority council tax support affect council tax collection rates? No comment at this point.

Question

Comment

Do there need to be changes in the practice employed by local authorities to collect council tax arrears?

Yes. There needs to be more consistency and visible evidence of adoption of the MaPS recommendations and the ‘Council tax collection: best practice guidance for local authorities’ published on 16/8/2021. The ‘HMG Debt Management Vulnerability Toolkit’ was also published on 24/8/2021. This is becoming more closely aligned with the FCA vulnerability guidance published in February 2021, which will have been deployed by the consumer credit providers involved in a debt solution. Where there are multiple debts, a holistic approach is required.

We are particularly concerned that limited lessons seem to have been learned from the pandemic in some areas, which may cause particular detriment if collections and/or enforcement action is fully resumed without warning and with minimal engagement with impacted customers. There need to be wider and more consistent affordability and vulnerability assessments. Many aspects of the HM Treasury consultation around regulating BNPL are applicable where the same higher risk profile customers may be involved. DEMSA responded to the HM Treasury consultation on 6/1/2022.

In our response to Cabinet Office, we reflected that local authorities have been heavily scrutinised for use of enforcement agents before the pandemic and the pre-appointment processes not following the MaPS guidance. This behaviour is in part conditioned by the authority not being able to afford contingency fees from debt collection agencies where this appears the most effective way of recovering debts without the financial stress associated with enforcement agents/bailiffs. Engagement with debt advice agencies can be vary significantly ranging from a partnership approach to being confrontational. There is a much higher risk of consumer detriment where early engagement is not achieved.

There needs to be universal adoption of the Standard Financial Statement (SFS).

There needs to be consideration of fiscal policy to enable arrears management functions to be able to innovate with regard to collections approaches that balance effective recoveries with the equivalent of a TCF/Consumer Duty approach being adopted in the FCA regulated sector. Time-to-Pay arrangements need to be able to bridge financial years, as HMRC are now able to do.

Much of this needs to be thought about in building a fit-for-purpose Statutory Debt Repayment Scheme (SDRP) by May 2024. Local authorities need to be involved in the product design at a representative level.

Local authorities need to take advantage of shared data assets through the Digital Economy Act 2017 where pilots proved the value of using data shared by HMRC, DWP and other central government agencies. This should be accelerated nationally and shouldn’t be optional. Similarly, local authorities should access key vulnerability identification tools like the Vulnerability Registration Service (VRS), where this is common practice amongst the more progressive authorities.

Consideration may need to be given to different household types, notably around some of the Local Government Finance statistics published in November 2021 [8].

In England, there were a total of 25m million dwellings as of 13 September 2021, an increase of 226,000 (or 0.9%) compared with 14 September 2020. Of this number, 24.3m dwellings were liable for council tax. This was an increase of 217,000 (or 0.9%) compared with 2020.

There were 15.8m dwellings (63.1% of all dwellings) liable to pay 100% council tax as they are not entitled to any exemptions, discounts, or premiums.

There were 8.6m dwellings that were subject to either a discount or to a premium on their council tax. Of these, 8.2m dwellings (32.6% of all dwellings) were entitled to a discount because they were occupied by single adults.

There were 660,000 dwellings exempt from paying council tax, an increase of 9,000 (or 1.4%) compared with 2020. Exempt dwellings account for 2.6% of all dwellings.

Cases where pre-COVID financial hardship is known should be readily identified. The challenge is identifying cases in the full liability group that may be experiencing financial difficulty or will do so in the next financial year.

What examples are there of local authority best practice in respect of council tax arrears collection – and what has the impact of this practice been?

There are many showcased case studies of public/private sector collaborations. The final quarter of 2021 featured these at many of the credit industry awards events.

DEMSA would expect to see improved KPI performance in the following:

Earlier notification by domestic customers before arrears management processes commence
Higher engagement rates in the arrears management processes with effective and sticky time-to-pay (TTP) arrangements
Higher engagement rates in debt advice because of the collaborative approach
Ultimately, higher collection rates over different time periods, including cases where a longer period TTP is required and use of payment holidays
Proportionate usage of standard breathing spaces to avoid cases being escalated to inappropriate recovery approached (e.g. Enforcement agents or attachments of income)
Proportionate usage of forbearance measures available by legal jurisdiction
Better affordability and vulnerability assessments
True forbearance for the most in need where debt write off is the most appropriate course of action
More effective data sharing compliant with UK GDPR

What is your assessment of the August 2021 government guidance on best practice for council tax collection?

Along with the Vulnerability Toolkit, we believe that it is an important step forward provided there is consistency in adoption and that this is monitored, potentially in a similar to the enforcement sector where there has been collaboration with the money & debt advice sectors. There needs to be a driver for wider adoption and monitoring of standards, much like there will be in the MaPS national debt advice contracts (Lot1) across the supply chain. Quality Management Frameworks seem important in this respect and measuring performance metrics across local authorities.

Do there need to be changes to the legislation on the recovery of council tax arrears?

Potentially yes, but effectively deploying the tools available may be more appropriate and timely in the short-term whilst the impact of the pandemic are still being felt and cost of living increases will become more acute in FY 2022/23.

How do the different schemes of local authority council tax support affect council tax collection rates?

No comment at this point.

January 2022