EIC0481

Written evidence submitted by Indesser

Summary

• In response to the pandemic, the government introduced temporary forbearance on debt owed to the public sector. This forbearance must be eased fairly and flexibly to protect households and businesses in debt and ensure the sustainability of revenue for public finances.
• Applying the government’s principles from its COVID-19 recovery strategy, and building on the planning to ease forbearance in the financial sector, Indesser recommends the following smarter measures for fair and effective public sector debt collection:
• Informed by science: the planning to ease forbearance should be informed by data analytics and modelling to understand how the crisis has affected the ability of those in debt to meet their financial commitments, and how this could change in future. This analysis should be undertaken as soon as possible.
• Proportionality: a proportionate approach should recognise the critical contribution debt collection makes to funding public services. With the right analysis and approach, forbearance can and should be eased for those who can afford to pay what they owe.
• Fairness: treating people fairly means proactively offering different paths that reflect people’s individual circumstances. Ongoing blanket deferrals will not lead to the best outcomes for all households and businesses in debt.
• Transparency: the plan to ease forbearance should be communicated clearly and in good time to those affected.

• Looking beyond the immediate easing of forbearance, Indesser recommends the following actions to maintain improvement in the fairness and effectiveness of debt collection:
• Invest in research to evaluate the impact of having a single customer view of what each person owes across all public sector creditors.
• Launch a ‘Collection Innovation Challenge’ to inspire local authorities to invest in best practice debt management.
• Identify and use the best available data, technology and capabilities to ensure public debt collection is always best in class, especially for the most vulnerable.

About Indesser

Indesser was founded in 2015 following a competitive tender process run by Her Majesty’s government. In partnership with the Cabinet Office we offer a proven way to fairly, effectively and responsibly recover debt owed to the public sector. We provide a comprehensive range of debt management services to over 50 organisations in central and local government and the wider public sector, including counter fraud, data analytics, and collection. Indesser has collected almost £2 billion for the Exchequer.

Indesser is part owned by TDX Group. TDX Group is authorised and regulated by the Financial Conduct Authority (FCA). Indesser operates to FCA standards and is a Living Wage employer. Our latest annual report is available here: www.indesser.com/Indesser/media/site/Indesser-Annual-Review-2019.pdf

Terms of reference

This submission addresses the following questions in the terms of reference:

• What will be the impact on inequalities within society and how should the Government address inequalities that may have been exacerbated by the crisis?
• What will be the impact on the public finances?

Temporary forbearance on public debt collection and the impact on public finances

Before the crisis, public bodies were owed around £23.5 billion of outstanding debt by individuals and businesses. This includes, among other debts: unpaid taxes and fines, NHS charges, benefit overpayments, social fund loans, court confiscation orders, rent arrears and child maintenance[1].

Collecting this debt raises revenue for public services and maintains support for the tax system by helping ensure that all those who can, and should, contribute do so.

During the pandemic, the public sector acted quickly to pause proactive debt collection and create emergency breathing space for those who owed money. For example, DWP announced a 12 week pause on collection of £850 million of debt[2],[3]. The government also deferred tax liabilities that would have been due. Debt that is deferred typically becomes harder to collect. Among the liabilities deferred were:

• Self-assessment payments due to HMRC (projected revenue: £15 billion[4]).
• VAT payments due to HMRC (projected revenue: £30 billion[5]).
• Delaying reforms to the off-payroll working rules (projected revenue: £1.2 billion[6]).

Like all countries, the UK public finances are under pressure from falling revenue and unforeseen spending - the OBR’s reference scenario set public sector net borrowing this year at £273 billion[7]. However, to protect the economic recovery, the OECD and IMF both advise against easing fiscal support too quickly and introducing spikes in when debt liabilities become due[8],[9]. Many more households and businesses are vulnerable as a result of income shocks, unstable incomes, ill health, bereavement and other problems.

Applying the OECD and IMF advice to public sector debt collection means that forbearance should be eased intelligently and sensitively to raise revenue to fund public services while protecting those who cannot afford to pay.

Smarter measures: easing public debt forbearance responsibly

In making our recommendations about how to ease forbearance in public sector debt collection, we draw on the government’s overarching strategy for the pandemic and the emerging consensus in financial services about how to ease forbearance there.

The government’s COVID-19 recovery strategy sets out how it will ease the physical lockdown by introducing smarter measures. It is underpinned by principles that are also a useful guide for how best to ease debt forbearance, namely: informed by science, proportionality, fairness, transparency[10]. The strategy also emphasises the importance of tax revenue and sustainable public finances to fund healthcare and other services.

It is instructive to learn from how the financial services sector intends to ease forbearance for two reasons. Firstly, the debate is more advanced there than it is for public debt. Secondly, financial services firms, working to the standards required by the FCA, have led the way in developing best practice debt collection, which treats people fairly and protects the more vulnerable but also raises more revenue[11]. The Select Committee and the NAO found that such best practice is not universally followed across the public sector[12],[13]. A Centre for Social Justice (CSJ) report published this month reached similar conclusions, noting that, despite progress[14]:

• “Government debt collection continues to lag significantly behind that of the private and regulated sector. Advances in private sector debt collection show that proportionate and individually tailored repayment plans can both provide a sustainable ‘route out’ for those in debt while maintaining rates of recovery”.
• “Where government authorities decide not to commission private collection through Indesser [which operates to FCA standards] a two-tier system has emerged”.

In financial services, the FCA introduced temporary payment deferrals and forbearance. The FCA’s position on COVID-19 related forbearance is clear:

• Payment deferrals are temporary; debt is not written off. The FCA described them as “financial bridges” to help consumers and small businesses adjust[15].
• Deferrals are “intended for those who might otherwise have been in good financial standing but have suffered a temporary income shock”[16]. They may not be the best outcome for all consumers, in which case “firms should without unreasonable delay offer other ways to help those customers, for example by offering shorter payment deferral periods or reduced payments and interest”.
• When a deferral ends, firms should make fair decisions about which consumers can afford to resume debt repayments. “Where a firm does not reasonably expect a consumer to be in a position to resume payments”, the regulator expects them “to consider and offer forbearance in accordance with [the FCA’s] existing requirements”, rather than offering a further deferral[17].

UK Finance published data that showed that while many consumers had sought and been granted payment deferrals, the proportion was relatively low so far. The relevant FCA guidance came in to force on 14 April. By 30 April, 696,700 deferrals had been granted on 51 million personal credit card accounts and 469,300 deferrals had been granted on 9 million personal loan accounts[18].

Building on the government’s principles, the evidence from the FCA and UK Finance, and the 73,000 interactions we have with those in debt every month, Indesser recommends the following smarter measures to ease forbearance on public sector debt collection fairly and effectively:

• Informed by science: the planning to ease forbearance should be undertaken as soon as possible. It requires complex data analytics and modelling to understand how the crisis has affected the ability of those in debt to meet their financial commitments, and how this could change in future. It also requires new approaches to proactively identify and support vulnerable households. Indesser’s analytics team combines over 150 data variables to identify 18 types of vulnerability and find the fairest outcome for each person[19].

• Proportionality: a proportionate approach should recognise the critical contribution debt collection makes to funding public services. While blanket pauses on collection were appropriate to provide breathing space quickly, not all of those in debt need it. With the right analysis and approach, forbearance can and should be eased for those who can afford to pay what they owe.
• Fairness: ongoing forbearance will not be the best outcome for all households and businesses in debt. Treating people fairly means proactively offering different paths that reflect people’s individual circumstances. Some of those who were already behind on payments, or whose financial position has suffered lasting damage, need contact from creditors to agree alternative solutions rather than further deferrals.
• Transparency: the plan to ease forbearance should be communicated clearly and in good time to those affected.

On 18 May, the Cabinet Office stated “that the Government Debt Management Function will be launching a Call for Evidence in due course to gather views on the current debt management approach”[20]. So looking beyond the immediate easing of forbearance, Indesser also recommends the following actions to drive further innovation in the fairness and effectiveness of debt collection:

• Invest in research to evaluate the impact of having a single customer view of what each person owes all public sector creditors.
• Currently, a public sector body collecting a debt can see how much an individual owes private sector creditors by checking their credit file. The public body can use that information to inform a responsible debt collection plan, tailored to the individual’s circumstances and ability to pay.
• But the Public Accounts Committee and the NAO both found that there is no way to see how much the same person owes to other public sector creditors (or in some cases, what else the person owes to the same public body). The NAO concluded that this means “there is nothing to prevent debt teams competing for repayments from the same person”[21]. The Public Accounts Committee recommended “departments share information and coordinate their debt management activities with a view to developing a single view of what each debtor owes to government as a whole”[22].
• Indesser has long promoted the merits of evaluating a tool that would give a single view of the debts someone owes across the public sector. We were pleased to see this recommendation put forward by the CSJ and will shortly publish an article explaining how the single customer view could progress in practice[23].
• Identify and use the best available data, technology and capabilities to ensure public debt collection is always best in class, especially for the most vulnerable people.
• Launch a Collection Innovation Challenge to inspire local authorities to invest in best practice debt management.
• The Challenge would be a Dragons’ Den style competition to harness external expertise and data analytics to help local governments collect more of the billions of pounds owed to them, while helping citizens resolve their problem debts.
• It would build on the success of the Treasury’s Rent Recognition Challenge and Affordable Credit Challenge.
• It would help overcome the main barriers the NAO identified holding back the adoption of good practice debt management in the public sector: a lack of data-sharing, short-term incentives and funding pressures[24].
• It can be launched quickly to deliver innovation that will benefit those in debt and increase local government revenue.

We recommend the Collection Innovation Challenge focus on local governments as they face particular challenges:

• The LGA estimates that local governments have been allocated cash funding for only a quarter of the £9.6 billion and £12.8 billion they need to finance spending this year[25]. Council tax arrears alone rose from £2.5bn in 2014-15 to £3.2bn in 2018-19[26].
• The Committee, NAO and the Money Advice Service highlighted local government as the sector where debt collection most frequently falls below best practice[27],[28],[29]. Local authorities’ use of bailiffs rose by over 20% across debts from 2014-15 to 2019[30]. Yet vulnerable people are more likely to behind on LA debts and other household bills than other debts[31].

In April 2019, the then Minister for Local Government, Rt Hon Rishi Sunak MP, recognised that “collection rates can be improved without resorting to the unfair treatment of vulnerable people” and committed to “pushing forward work to make the council tax collection system fairer and more efficient – so people are treated with compassion while services get the funds they need”[32]. Initial evidence from the debt advice sector suggest this work in now more urgent than ever – an estimated 7.2 million people have missed a council tax payment already or expect to do so[33].

For more information on how Indesser is helping public sector organisations of all sizes to respond to the pandemic, please see our website: indesser.com/resources

May 2020