StepChange Debt Charity – supplementary written evidence (FEX0096)

The Committee invited further evidence on three topics discussed at the oral evidence session on 18 October.

1. Examples of good debt collection practice among local authorities
2. Improvements that could be made to the Scottish DAS Debt Payment Programme
3. Delivering a co-ordinated approach to tackling financial exclusion in the context of “localism”

Examples of good collection practice in local authorities

In the oral evidence session, I noted research by the Money Advice Trust found no correlation between the extent of bailiff use by Councils and the amount of council tax collected. In fact, the research found that the ten councils who were the heaviest users of bailiffs had an average collection rate of 22% of old debts, compared to 31% for the ten lowest users[1].

It is important to recognise the variety of policies and practice across local authorities, and I am pleased to offer the following examples of good practice. However, I note that examples of good practice primarily support those who are failing to pay, rather than those who might be managing to pay but only with difficulty.

Case study 1: LB Lambeth introduces a new “Income and Debt” policy that stops the use of bailiffs and increases council tax collection rates

In April 2015, Lambeth council introduced a new policy for collecting council tax arrears from council tax support claimants. The policy brought in extra recovery measures for residents in receipt of council tax support and established the organisation “Advising London”, an independent debt relief agency. A significant number of steps were added to the standard council debt collection process:

• SMS reminders were sent to claimants.

• A further soft reminder letter (a communication tested to be non-threatening and in plain English) was issued if no payment or contact was received, including a flyer from Advising London inviting claimants to a debt advice surgery.

• A telephone call was made to claimants from either Advising London or the council tax team. A soft summons letter was issued if no contact had still been made.
• If no engagement was made after any of the above steps, a summons was issued, including a further flyer. Advising London advisers were present at the court hearing.

Lambeth’s use of  bailiffs to collect council tax arrears from council tax support claimants went from 3,244 uses in 2013–14 to zero in 2015-16. This was accompanied by a significant reduction in summonses from 8,933 in 2013-14 to 2,176 in 2015 -16 and an increase in collections rates for council tax support claimants from around 80% in 2014-15 to 93% in 2015–16[2].

Case study 2: Mendip District Council

Mendip District Council’s Scrutiny Committee reviewed its council tax collection processes in 2013, when Council Tax Support Schemes were localised. As a result they changed the way they collected council tax to maximise collection rates in the most cost-effective way. They introduced:

• More work through the “Shape Mendip” hub of 26 private, public and civil society organisations.

• Sign-posting to debt advice was included on all council tax correspondence sent out.

• They signed up to the LGA / Citizens Advice council tax collection protocol.

• A partnership with Citizens Advice to provide independent debt advice to those in financial difficulty.

• The council developed tailored individual repayment plans for those in arrears with the support of Citizens Advice and a credit union.

• They worked with the council’s housing unit to identify vulnerable clients.

• Bailiffs were only used as a last resort and people were encouraged to engage with the council as early as possible if they were in financial difficulty,

• The council aimed to use attachment of earnings and attachment of benefits instead of bailiff action.

The result of this was that between 2013-14 and 2015-16:

• The council tax collection rate increased from 97.6% to 98.2%.

• There was a 3,000 fall in warning letters issued.

• There was a 20% fall in summons.

• There was a 30% fall in liability orders issued.

• There was a 40% rise in arrears being paid through attachment of benefits.

Case study 3: Swindon Council

Collecting council tax is a key priority but is seen as a financial inclusion issue. One of the council’s 30 pledges is to “Provide early support for people in debt so that we significantly reduce the need to use bailiffs to recover council tax and other debts”. Swindon’s collection rate is currently 97.82%, a top performing council when it comes to collecting council tax and much improved over recent years.

Just two years ago around 14,500 people in Swindon were summoned to the Magistrates Courts for non-payment of council tax. The council worked very hard to reduce this number through text reminders and telephone calls to those in arrears. They invested £50,000 in directly telephoning and offering assistance to those council taxpayers who had been sent a paper reminder before any summonses were sent. The assistance included rescheduling payments and referrals to advice agency partners. As a result they reduced the number of summonses to just under 9,500.

The council encourages anyone having financial problems paying their council tax to contact the council as soon as possible by phone or e-mail. Since introducing these measures they have been monitoring the number of bailiff referrals and in 2015-6 6,104 liability orders were referred to bailiffs (a reduction of 1,899 from 2013-4).

As part of their work to help people on low incomes or facing other financial problems the council have been continuing to develop their relationships with voluntary sector organisations across Swindon to help people get the advice and support that they need.

The council have also been conducting research and have developed a Financial Inclusion Policy to work towards helping people maximise their incomes and manage their debts. In order to assist with this Financial Inclusion work the council and its One Swindon Partners appointed a Financial Inclusion Manager earlier this year. The post-holder has been working to promote Credit Union membership in Swindon (including a Save As You Earn Scheme), working with the Illegal Money Lending Team on Anti-Loan Sharking initiatives, has helped Citizens Advice to recruit two additional Welfare Advisors and has supported an Energy Switching programme aimed at low income households.  They are also supporting DWP work coaches help people into employment or better paid employment.

Case study 4: Manchester City Council

Manchester City council has improved its performance both current year and council tax arrears collection rates. It has seen:

• A steady reduction in cases passed to bailiffs

• Increases in the number of council tax arrears paid through an attachment of earnings order

• Increases in the number of council tax arrears paid through attachment of benefits orders

• Increases in the number of pending attachments:
• 8,000 in 2012-13
• 20,000 in 2016-17

They achieved this through:

• Early engagement with those in arrears.

• Writing all standard letters about council tax in plain English.

• Working with the Money Advice Trust on leaflets offering support.

• Providing contact details of Citizens Advice on all standard letters about council tax.

• Ensuring their call centre had only one automated option: otherwise people were put straight through to a human and all call centre staff had been trained in dealing with council tax and benefit issues.

• Sending five letters before passing a case to bailiffs.

• Automatically suggesting a repayment arrangement once a Liability Order has been issued.

They try to ensure they only pass the “won’t pays” (rather than “can’t pays”) on to bailiffs by:

• Developing a system that identifies those eligible for attachment of benefits automatically.

• Not making any referrals to bailiffs where an attachment of earnings or benefits order is possible.

• Providing discretionary payments where a claimant is ‘maxed out’ with attachment of benefits orders with DWP.

• Checking all sources for employer details and vulnerability, so that they can ensure attachment of earnings orders are issued where possible, instead of using bailiffs to collect the debt, and that bailiffs are not sent out to vulnerable people.

• Incentivising their bailiffs to arrange debt repayments by telephone, prior to visiting.

• Ensuring their bailiffs send a minimum of four letters and make three phone calls before a visit.

• Asking their bailiffs return any debts of less than £150 prior to enforcement.

Amendments needed to DAS to make a good Breathing Space scheme

In the oral evidence Lord Kirkwood asked if there was any reason why the Committee should not recommend the adoption across the UK of a model along the lines of Scotland’s Debt Arrangement Scheme.  I hope the committee will recommend a model along the lines of our “breathing space” proposal, details of which are in our earlier written evidence and also in the attached paper. The key thing is that DAS in its current form does not offer all the features and protections we would like to see to help people in problem debt stabilise their finances.

The StepChange Debt Charity team in Scotland have reported that the following provisions within the Scottish Debt Arrangement Scheme (DAS) have worked well for our Scottish clients:

• The statutory nature means creditors are obliged to stop interest, charges, and, importantly, to stop contacting clients. We know these contacts add to the stress and anxiety of problem debt, and can worsen the situation if people seek more credit to keep creditors at bay.
• The protection from court action reduces clients' anxiety and stress and helps them build financial stability.
• The Debt Payment Plan developed through DAS is usually free.
• Most debts can be dealt with including priority debts, such as council tax arrears, and business debts.
• The freezing of interest, fees and charges gives people clarity on exactly the amount of debt to be repaid and incentivises them to get debt advice earlier.
• The protection of assets means that clients don’t have to worry about their assets being sold, a major disincentive to solutions like bankruptcy.
• The approved money adviser provides the client with considerable support to get their finances back on track.
• Debts that were overlooked can be added into the Debt Payment Plan at a later date.
• The money adviser can ask for a payment break in the Debt Payment Plan of six months, if there is a drop in income of 50% or more, which allows the client some time to re-stabilise their finances and continue with their Debt Payment Plan.

However, if a similar scheme, based on DAS, was introduced in England, Wales and Northern Ireland it should also address the aspects of DAS that have not worked so well:

• The initial breathing space allowed under DAS should be extended from six weeks. The current six week period in Scotland has been shown to be too short to stabilise finances or develop an affordable Debt Payment Plan for those in a position to do so. The latter usually takes at least 120 days from the initial application. A year's protection in the English and Wales scheme might not be needed by everyone but would provide a useful backstop
• Alternative: the proposed breathing space scheme for England and Wales offers protection in 3 parts….[while seeking advice, while setting up a solution and getting to a point when payments are possible, and while remaining engaged with a plan, submitting for regular reviews, and keeping up payments]. The proposal is that the first two protections would last for 6 months to a year, and the third indefinitely as long as the client remains engaged.  DAS has two limitations by comparison.  The first protection [intimation/moratorium] is limited to 6 weeks.  Our clients’ experience is that this is not long enough to navigate the process for establishing the plan.  We are asking the Scottish Government to increase this to a minimum of 16 weeks.  Secondly, DAS doesn’t allow a Debt Payment Plan to start with a period of zero payments.  Holidays are allowed at other times in the life of the plan.  Our breathing space proposal would allow people up to a year to stabilise their finances and begin making payments.
• Problem debt is seen by many as a stigma. The public register of DAS applicants acts as a disincentive for some people to apply. The register of those on the England and Wales scheme should not be publicly available. They are not receiving debt relief, but entering into arrangements to pay off their debts in full within a reasonable time period
• The lack of publicity for the DAS in Scotland has limited take up. The England and Wales Scheme should be more widely publicised to ensure early access, when debts are lower and less complex, and to ensure all those eligible can take advantage of the support provided before their debt problems spiral out of control

Given the localism agenda, how can a coordinated approach to tackling financial exclusion be achieved?

There is an opportunity at a local level to address many of the issues facing the financially excluded, particularly regarding debt collection, but it will require a unified effort and agreement on the key issues to address.

In addition to debt collection issues, which we have addressed above, at a local level, we believe the following are areas public policy could concentrate on to ensure a reduction in financial exclusion.

• Ensuring local welfare safety nets are effective in helping people to cope with and recover from income shocks without falling into unmanageable debt
• Strong local partnership working to facilitate and encourage greater local financial inclusion.
• Ensuring that debt vulnerable households have access to local affordable credit. In order to prevent them from having to pay a large premium through interest and charges for credit to pay for essential household items.

Effective local safety nets

In April 2013, parts of the discretionary Social Fund, including Crisis Loans and Community Care Grants were abolished and replaced by local welfare assistance schemes run by local authorities.

Previous research has found that the discretionary Social Fund provided an important social lending safety net as it was one of the most important sources of credit for those on very low incomes used by 21% of those in the lowest income quintile[3].

Our research suggests a decline in the use and accessibility of the Social Fund as a safety net since its localisation:

• Only 7% think they would be eligible for a local welfare loan. This contrasts with 21% who think they’d be eligible for a payday loan
• Just 5% know how to apply for a local welfare loan. But 12% would know how to apply for a payday loan.
• Only 2% of people believe they would get a local welfare loan quickly. Meanwhile 16% believe they would get the money quickly with a payday loan

Where people did apply, rejection by local welfare assistance schemes prompts people to turn to credit:

• 9% of people who applied for a loan or grant from the DWP or local welfare assistance scheme said that being rejected led to them taking out more credit
• 8% said they used credit because it was less embarrassing than getting help from benefits or local welfare assistance

This all suggests that there are issues with the awareness of the local welfare assistance schemes and that the accessibility and advertising of the availability of this support could be improved.

Strong local partnership working

There are examples of strong partnership working at a local level to build a coordinated approach to tackling financial exclusion. These involve local authorities working with local partners from both commercial and non-profit organisations. There are two further examples below:

Case study 1: Sheffield Money

Sheffield Money came out of the Sheffield City Council Fairness Commission. It is an innovative idea involving a council funded broking service working with community lending partners to provide loans and other financial services to local residents. It partners with various local financial services providers including a CDFI, credit union, white goods provider and basic bank account provider to offer a wide range of services. It provides a website, city centre store and a phone application service to offer a range of services and quick access to loans in as little as 15 minutes. Debt advice is embedded in the scheme with a debt advisor available at the store. Sheffield Money is only in its first year of operation so its impact is not known but it is expected to save residents on the lowest incomes £20 million in a year by reducing their reliance on high cost lenders.

Case study 2: Leeds council and local credit unions

Leeds Council has developed a wide-ranging financial literacy and financial inclusion strategy and the city has built a strong credit union movement. [4] Leeds City Credit Union has built a partnership with Lloyds Bank. Together they have piloted a customer signposting relationship so that if a loan applicant to Lloyds Bank and Halifax branches and Leeds are declined they are signposted on to Leeds City Credit Union to identify if they can provide them with a loan or other financial support. If the customer is identified as having debt problems they will be signposted on to StepChange Debt Charity. This holistic and coordinated approach helps the financially excluded in the city get appropriate support.

There are clearly innovative examples of how local government can play a significant role in tackling financial exclusion in their local areas. We would encourage local authorities to coordinate, learn from each other and develop best practice in working with local partners to encourage encourage greater local financial inclusion.

Access to local affordable credit

Many of the most financially excluded and financially vulnerable struggle to access forms of credit that they are able to sustainably manage and repay. There is a case for greater provision of alternative affordable credit safety nets for those where commercial credit is not viable. In many cases these could be most effectively offered at a local level.

There are examples from both the UK and overseas about how to operate such schemes, which we touched upon in our original submission.

Case Study 3: Australia Good Shepherd microfinance

Good Shepherd Microfinance has teamed up with National Australia Bank and the Australian government to provide low income consumers in Australia with access to a no-interest loans scheme (NILS). The programme has provided loans to over 125,000 people who had previously been excluded from mainstream credit. It works through local community organisations and has three high street store locations.

Good Shepherd Microfinance provides a range of other financial services alongside the no-interest loan scheme including a low interest loan scheme, savings and insurance products. An evaluation of NILS found that the scheme improves the lives of particularly vulnerable Australians. NILS clients are three times more likely to be severely financially excluded. The loans improve economic and social outcomes as more than a third of clients reported increases in savings levels and financial independence and nearly three quarters experienced positive changes in their standards of living, stress and anxiety levels. The evaluation also found that NILS was able to divert many clients away from high cost credit products like payday loans and goods rental services (known as rent-to-own in the UK).

Case Study 4: Ireland’s microcredit scheme: It Makes Sense loans

A partnership between the Credit Union Sector, the Irish government’s Department of Social Protection, the Citizens Information Board, and not-for-profit groups, has created a pilot microcredit scheme. The aim of the scheme is to reduce dependence on high interest moneylenders. The scheme was launched in November 2015 and is running out of 30 local credit unions across the country. It provides small sum loans (between €100 and €2,000) at low interest rates (maximum interest rate of 12%). Loans are available to people getting certain social welfare payments and can be repaid through deductions from these social welfare payments. Loans are to be granted within 24 hours of making the application (and becoming a credit union member).

The government needs to look at new ways to provide greater access to more affordable credit safety nets for the most financially vulnerable, including looking at international examples of no and low interest loan schemes.

9 December 2016