Abstract
Local authority debt now runs into many millions of
pounds and with consumer borrowing at an all time high, it finds itself in
direct competition with demands for credit card repayments, mortgages and other
loans.
But not only do councils have a huge challenge on their hands to collect debt,
they also have to do it against a backdrop of changing legislation.
New government policy on dealing with consumer debt in a more debtor-centric
manner is having a major impact on collection strategies.
The author explores the issues now facing local authorities and looks at how
revenue management services can now support more efficient debt collection.
In essence, there needs to be both carrot and stick if our councils are to be
able to collect the revenues that will provide public services.
Consumer debt at an all time high
Recent surveys of borrowing show consumer debt is at an all time high.
Doubling over the past seven years, it now exceeds one trillion pounds, meaning
that every man, woman and child in the UK now owes an average of £17,000.
The combination of mortgages, bank loans and credit cards to finance the
live-now, pay-later culture is taking a huge toll. It is now estimated that one
in ten struggles with credit card payments and more than £1 million is borrowed
every four minutes.
The National Consumer Council claims that approximately six million can’t keep
up with credit repayments, whilst the Citizens Advice Bureau have seen 44% more
people needing debt advice over the past six years.
At the same time, personal disasters hit the headlines, such as that experienced
by Tony and Michelle Meadows of Merseyside, who saw their £5,750 loan escalate
to £384,000.
Local authorities bearing the brunt
It is not surprising, therefore, that our politicians see
this as one of the biggest single issues on their agenda.
But bearing the brunt of our modern easy-credit nation is the local authority.
Debt for council tax, housing and sundry services runs into many millions and
has to compete with the demands of credit card repayments and other loans.
So not only do councils have a huge challenge on their hands to collect debt –
the revenues that will provide our public services – but also increasingly they
have to do so against a backdrop of a changing legislative environment that, on
the face of it, appears to favour the debtor.
In Scotland, in particular, the picture painted of court officers, with the full
authority of the law, trying to access people’s assets and to recover debt, as
some kind of affront on human rights, fundamentally shifted public opinion and
therefore government thinking in terms of debt collection.
The Scottish Executive changed the legislation to a more debtor-centric process
whilst at the same time not only maintaining but increasing the pressure upon
Local Authorities, to collect revenues owed.
The need for greater sophistication
The answer, therefore, has to be in a greater sophistication in the approach to
debt and more understanding of risk management.
Forced by political change, this is what is beginning to happen in Scotland.
A report in January 2004 published by the Accounts Commission showed that
Scotland’s local councils have improved their council tax collection levels to
the highest figure since 1996.
Across Scotland, councils collected more than 91% of the council tax due in 2003
- £1.38 billion from a total of £1.5 billion with collection levels improved in
29 of Scotland’s 32 councils.
Since local government reorganisation in 1996, councils have collected 93.7% of
the money due to them.
In pure statistical terms, debt collection seems very simple.
However, the reality is very different and local authority debt is hugely
complex.
In many Authorities, for instance, tax-payers have become recalcitrant debtors
having progressed through the poll tax as non-payers, encouraged by members of
the then Opposition and continued the habit through the years of Council Tax.
The poll tax legacy sowed the seed that debt, and more specifically Local
Authority taxation debt, was socially acceptable.
There are for example, taxpayers who repeatedly fail or refuse, despite Councils
best endeavours, to make benefit applications with the result that so many who
should be receiving help are instead billed at maximum rates.
There are also those who move house without notifying the council as well as
those who simply take no responsibility for their debt whatsoever.
So whilst moves to make our legislation more debtor-centric to help those
struggling to pay bills is a positive step, we have to guard against a utopian
idealism that suggests everyone who is in debt wants to do something about it.
In Scotland, under the Debt Arrangement Scheme (DAS), debtors will now be able
to draw on the guidance of a new type of government approved money adviser who
will arrange personal repayment programmes with their lenders, without the need
to go to court.
The scheme protects debtors from their creditors and is aimed at providing an
alternative to trust deeds and personal bankruptcy.
Almost 200 money advisers have undertaken training for the new scheme and
applications for accreditation are being assessed with a target of 150 in place
across Scotland early in 2005.
Many local authorities are rightly embracing DAS enthusiastically, but there is
still a nagging fear that simply driving people to find money advice is missing
the point.
A similar scheme in Sweden showed that the people who chose such personal
repayment programmes were those who already seek advice, in effect the minority
of current debtors.
Without the balance of an appropriate enforcement regime and the political will
to implement it, it is perhaps difficult to see how the majority of serial, “can
pay won’t pay”, debtors can be brought into line.
The net result is that, with the odds now stacked against them, Scottish local
authorities have to learn to be smarter.
They now commonly use highly sophisticated outsourced specialist services,
working on a commission only basis.
Debt collection has taken on a more modern approach, becoming an extension of
revenue and credit management with increasing emphasis on early intervention
techniques, where debtors are treated as customers.
For the recalcitrant debtor or even just the uninformed, early intervention
strategies are the key going forward.
And debt risk management is now about proactive systems and procedures including
a structured series of telephone calls, email, even text messages if it suits,
personal visits and online payments. With the right kind of operatives, well
trained and knowledgeable, more debt is recovered and those people who should be
on benefits are profiled, identified and dealt with accordingly.
The increasing sophistication of the sector in Scotland has also led to
innovative initiatives and new collaborations with the wider credit industry to
bring about success.
Sophisticated taxpayer and debtor profiling has successfully been implemented by
Stirling Park for a variety of initiatives, such as identifying which of a
council’s customers are more likely to sign up to direct debit schemes.
With the support of Scottish Water, a number of pilot programmes have seen
significant success in getting people to sign up to regular payment plans.
The exercise may, for example, use a council’s own bank
of information to data mine payment history and trends , demographics and
geo-demographics to profile debtors in line with their age, sex, class,
lifestyle habits, family incomes, disposable income and propensity for home and
car ownership.
By overlaying an analysis of payment history, employment
and bank account ratios the analysis throws up the type of taxpayer which can be
related directly to a “payability” ratio.
The most likely to convert to direct debit payment can then be identified and
are targeted by highly trained staff, who explain by telephone the advantages of
this form of payment.
By converting cash payers to regular automatic
settlement, the risk of falling into a cycle of debt can be eliminated.
But councils have historically been slow to move.
Whilst they want money in as quickly as possible they are
under constant pressure to place cost as a determining factor in the provision
of service to the extent that some tenders for local authority debt recovery
services in Scotland put a disproportionately strong emphasis on cost over
service provision.
A shift in mindset
However, a shift in mindset and an understanding of risk management is now
beginning to take place.
A number of councils have had the foresight to
fundamentally change their debt management strategy in light of the legislative
and public environment.
Without enforcement, debt collection is a very different
matter.
All very different, also, to the current English system of in-house recovery
teams and/or Bailiffs.
In England and Wales debt recovery is put out to
Bailiffs, who more often than not work on a fee basis rather than commission and
the ultimate sanction for the debtor could be imprisonment.
The Bailiffs act on behalf of the council to recover a debt, either by an
arrangement or by enforcement such as removing and selling a debtor’s assets.
Generally, once the Bailiffs have become involved any
arrangement must be made with them.
If the debt remains outstanding following Bailiff action the council will issue
a legal notice requiring the individual to attend a committal hearing.
At the committal hearing the person must declare their
means in front of magistrates who then determine the next stage.
This may be a suspended Committal Order pending payment
or ultimately could mean prison for up to 90 days.
Two main issues
The first is that once the debt is handed over the
Bailiff, timescales for collection are very much in the hands of that Bailiff.
The second is that being solely fee-based there is no
incentive for the Bailiffs to invest in technology and set up efficient systems
or complimentary services that enable collection up front and prevent
enforcement.
Additionally, there is the critical factor that whilst
the debtor is forced to pay the, generally excessive, Bailiff charges he is
further unable to meet payment of the council’s debt.
In deciding policy for local authority debt, the key has to be a co-ordinated,
partnership approach, which recognises and helps prevent individuals becoming
burdened with debt through early intervention, as well as repayment programmes,
but which also understands the legitimate needs of the creditors.
Sophisticated profiling can focus the appropriate
collection strategy to the identified tax-payers, even if this includes
enforcement. We may not always like it, but as well as the carrot, there
sometimes has to be a stick.
Jonathan Lewis is the Managing Director of Stirling Park LLP, part of the Intrum Justitia Group, Europe’s largest credit services company.
Stirling Park LLP
Source:
Getting Paid (Volume 26, No
1,
2005)
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