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Using private sector solutions to address the public sector’s problem debt crisis 11 SEPTEMBER 2018

Using private sector solutions to address the public sector’s problem debt crisis

Last week the National Audit Office (NAO) issued a report into tackling problem debt. Its insight into government debt collection practices and statistics about UK personal debt made for some interesting reading:

  • 8.3M over-indebted people in the UK
  • 40% of reported debt problems relate to debts owed to government, up from 21% 6 years ago
  • £248M estimated impact on public spending to care for people whose vulnerabilities have been worsened by debt
  • 4 in 10 people in the UK cannot manage their money properly
  • 600,000 estimated number of people who cannot get access to much needed debt advice
  • £18Bn – estimated personal debt owed to government, utilities, landlords and housing associations
  • Government is struggling to understand and collect debt

HM Treasury (HMT) has overall policy responsibility for personal debt and has high level responsibility for preventing problem debt from occurring and minimising its impact. HMT has oversight of the Financial Conduct Authority (FCA) and Money Advice Service (MAS) in this regard, but lacks any formal powers to bring government departments together or hold delivery partners accountable.

The NAO identified that:

  • collection of government debt is inconsistent across central government bodies and local authorities
  • two of the largest four central government departments are not able to identify personal debt from overall debt data
  • due to significant data issues it is not possible to get a single customer view of an individual’s debt position
  • only 19% of local authorities use best practice promoted by MAS in relation to affordability of repayments
  • it appears certain local authorities increase intensity of collections activity to meet budgetary commitments and to offset funding reductions,
  • with a drive to collect as much revenue as possible, sometime driven by short term incentives.

Learning from the private sector

Reading these problem statements reminds me of retail banking and financial services a few years ago. However, since the FCA was launched, vast improvements have been made, such as: debt collection targets based on cash collected have disappeared; most organisations have a view of the overall indebtedness of a customer both within its own organisation and externally (via bureau data); all organisations we deal with have embraced standard affordability measures that give focus to priority debts; signposting to money advice agencies is commonplace, and vulnerable customers now have a high profile focus.

I could go on, but I think we can all state with certainty that, whilst the FCA still has work to do, it has been a force for good. Firms now take more time to speak to customers and work with them to set up affordable repayment plans, more money is being collected as a result of plans that have a much higher propensity to keep and instances of treating customers unfairly are reducing, for example the proportion of typical credit card holders who say they were treated unfairly is at 21%, vs. 52% for bailiffs and 35% for local authorities.

On paper, it looks as though some central and local government bodies are falling foul of practices that the FCA has already ruled out for private sector firms, and probably to their own detriment. Indeed, the NAO’s analysis states that intimidating actions and additional charges are 15% – 29% more likely to make debts harder to manage and increase levels of anxiety and depression. This will also undoubtedly have a knock-on effect on private sector firms who end up picking up the pieces of a customer made vulnerable as a result of this type of activity.

On the plus side, the NAO’s report identifies various initiatives including the Cabinet Office’s Digital Economy Act 2017 which allows specified public authorities to share data (pilots to be completed by 2020) and the Fairness Group which is a forum to examine governments debt management practices and make recommendations on how to improve them.

The Treasury Select Committee concluded this year that the government “could make a significant difference to the burden of problem debt by bringing government debt collection practices into line with industry best practice.”

Don’t reinvent the wheel – the solutions already exist

We should not underestimate the problem of transforming central and local government collections practices and all that entails, however we should also not reinvent the wheel. The government can learn a lot from the private sector in this regard and perhaps should also hold itself to the same standards it is expecting from private sector firms.

The task will be huge – there are hundreds of local authorities for example – so maybe a prioritisation exercise is in order and the creation of a “prototype” model that can then be rolled out.

Arum have been working to transform collections practices and capabilities in retail banking, financial services and utilities for years and is now working with government departments within the Credit & Collections ecosystem. The answers and solutions are already there. It needs a firm strategy, commitment, budget, accountability and a robust compliance framework to make it happen and to make it sustainable.

Nick Walsh
Principal Consultant

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