Can the public sector improve collections, post Covid?

With millions outstanding in tax revenues and unpaid debts, local authorities and central government agencies are evaluating how they recoup their losses.

Around six million people across the UK have found themselves with bills they cannot pay as a result of the Covid-19 pandemic.

This figure, from Citizens Advice, was taken from a survey conducted among 6,015 adults between 29 June and 8 July. Since then, Britons have been faced with more job cuts and local lockdowns, so it is reasonable to assume that the number of people with unmanageable debts is even higher.

For local authorities, this poses an enormous challenge. Even before Covid-19, local authority finances were in a sorry state. An Institute for Government report, published in November 2019, attributed the financial difficulties of local councils to the previous decade of austerity, which saw councils such as Lancashire, Northamptonshire and Torbay take special measures to balance the books.

The arrival of the novel coronavirus, then, is particularly ill-timed, loading another financial burden on the already fully-stretched finances of local government authorities.

According to the Local Government Association, Covid-19-related costs and lost income by councils amounted to £3.2 billion between March and May alone.

Subsequent figures released by Moody’s Investor Services suggest that local and regional authorities in the five largest countries of Europe are collectively facing a shortfall of €77 billion.

Researchers found that the financial strength of UK local authorities is particularly weak and likely to require “the use of reserves to balance budgets” until the end of the financial year, at least.

 

A shift in thinking

Traditionally, public bodies have used the threat of enforcement agents and evictions as blunt methods to extract payments from indebted citizens. But, in June, as industries remained closed, people self-isolated, and the economic consequences of the pandemic were becoming clear, a temporary block on bailiffs seizing assets came into force, running until 23 August 2020.

During this period, the government launched its Fairness in Government Debt Management consultation, which seeks to explore how local authorities can work more collaboratively with citizens to maximise repayments, and minimise mental anguish to the customer.

“Fair debt management lessens the physical and mental impact on individuals struggling to repay what they owe, and the pressure on businesses and business owners,” the government report states.

Enforcement was previously the “go to” for most authorities until the Covid-19 outbreak. For many public bodies, the decision to appoint bailiffs and begin evictions may seem as a low-cost and efficient option.

In actual fact, it is anything but. Opting to use enforcement action at the earliest opportunity can bring a host of unintended consequences. The distress that the customer feels from such an interaction can have a lasting effect on their mental health. And, if evicted, it will be the local authority that will then be tasked with rehousing the individual or offering further support down the line. Local healthcare providers may also find they are tasked with rebuilding the customer emotionally after the psychological trauma of such an event.

According to the government’s Fairness in Government Debt Management report, working more collaboratively with customers can also improve returns to creditors “by avoiding the use of aggressive recovery techniques.”

A National Audit Office case study showed that employing the use of affordable repayment plans saved the creditors of one debt advice agency some £82m in one year alone.

Wokingham Council has become one of many local authorities to review its collection procedures, after it considered the impact that its methods could have on its residents and on its income.

 

Embracing a new approach

While enforcement techniques are coming back into play for local authorities, the Crown Commercial Service is urging decision-makers to use the new Debt Market Services (DMS) framework, which helps organisations better identify and understand customers in financial difficulty.

The framework — delivered through Qualco — gives authorities access to a government-approved centralised service of customer analytics, debt management advice, collections, error reduction tools, litigation services and, if appropriate, enforcement options.

“DMS uses analytics from credit reference agencies, and other sources, to understand consumer circumstances, meaning that local authority resources are focused towards delivering best value and returns,” explains Matthew Hooper, Senior Commercial Lead, Debt Management at the Crown Commercial Service.

“In addition DMS also saves valuable resources, and costs, by providing access to multiple best in class services delivered through a single supplier.”

Crucially, the DMS services are designed to treat customers fairly and they are open to all UK public sector organisations, including both central government and local authorities.

The DMS was established after its predecessor, the Debt Market Integrator (DMI), had established the need for best practice in government debt management. When the DMI was introduced back in 2015, the economy was in a very different position, but it did highlight the need for a more co-ordinated approach on collections throughout government, as well as a need to resolve inadequate data sharing between the private sector and public bodies. The DMI is now closed to new clients.

 

A fair, realistic approach

While the DMS framework can never totally remove the need for enforcement, particularly for those cases where all other forms of engagement with the customer have failed, it does offer public bodies the best possible chance of understanding the pain points of their customers. It also gives a clearer picture of those who can’t pay and those who simply choose not to pay.

Some believe that a supportive approach to debt management yields better results for creditors and for customers. The DMS allows public bodies a chance to access the tools which can enable successful outcomes for both parties.

As the UK focusses on getting the economy back on track, public bodies will need every bit of assistance to maximise their revenues, whilst at the same time embracing the Fairness in Government Debt Management initiative. It is only by harnessing the technological advances of recent years, better data analytical capabilities, and available insights into consumer behaviours that government organisations will be able to achieve this goal.