Arrears management for Local Authorities in a post-Covid world

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Written by Richard South, Business Development Director, Target Group

With such a widespread impact, the Covid-19 pandemic is certainly going to continue to disrupt lives for the coming months, years and perhaps decades.

It’s created a “perfect storm” for Local Authorities:

With fewer people using town centre parking, leisure centres and other Council-provided facilities, much needed supplementary income has been significantly reduced throughout 2020. This trend may continue through some or most of 2021, especially if new and tougher restrictions return. Pressure is on Councils to reduce or remove parking charges, for example, to help give the High Street a boost. Without this additional income, Local Authorities will have smaller budgets to play with for the foreseeable future.

Council tax is often cited as the bill that consumers most worry about. It’s a significant cost to households and the repercussions of missing payments are huge. As we journey through a rocky recession plagued by soaring unemployment, the number of people defaulting on bills including council tax will sadly rise. This is the second of three revenue streams to be curtailed for Local Authorities.

As well as losing income from the above two revenue streams, recent austerity has already put pressure on Council services. With demand for support increasing across the board, Councils will need to keep service standards high, on tighter budgets. This is challenging enough, without having to deal with operational issues such as social distancing and remote working.

These three key factors, coupled with recent budget cuts and austerity, mean that Local Authorities are struggling. Research by Grant Thornton has shown that over half of English Councils face financial failure, and there are similar figures for Northern Ireland, Scotland and Wales.

Although we’re starting to see the end of some restrictions, and a small rebound in the economy, there’s a tough winter to come, and mass vaccination is still some months away.

So, what will be the mid and long-term impact from the crisis for Local Authorities? And how should such challenges be tackled by Local Authorities under such immense pressure?

With mass unemployment on the cards for 2021, there will of course be an increase in the amount of people who will find it hard to pay for things like council tax and rent, because of the sudden loss of income.

It’s critical that local authorities and central government are well-prepared for an influx of citizen support requirements and are able to provide such support with empathy and fair treatment, despite tightened purse strings.

There is already a significant level of debt owed by citizens to government, with over 9 million people in “problem debt”, even at the start of the pandemic. This amount will undoubtedly rise, and quickly. Debt such as parking fines, council tax arrears, and tax credit/universal credit overpayment debts amount to over £13.5bn.

After initial support measures such as grants, payment freezes and mortgage payment holiday periods have expired, we expect to see four types of citizens:

  1. They have seen no change to their income are able to continue with their payments as normal
  2. They may have received a pay cut or reduced working hours, which has left them with a reduction in income. They will require forbearance to ensure they are able to make reduced payments, safely.
  3. They have completely lost their income because of the Covid-19 crisis. This may be due to ill health, a business going bust or redundancy. This approach will require a longer-term level of support and therefore resource from local authorities and central government.
  4. There is also a fourth type, the fortuitous citizen who has been unaffected financially during the crisis and may actually have some surplus income available to make over-payments, since their spending may have reduced.

Council tax debt was the single most common debt for the 635,000 new clients who contacted the national debt charity Step Change in 2019.

When there’s a sudden loss of income, just one missed monthly payment can easily escalate. Currently, a two-week delay in paying a single monthly council tax payment leads to debtors becoming liable for the entire annual bill of £1,750 for the average Band D home.

Citizens Advice received 474,500 approaches relating to government debt in the last financial year, compared to 221,300 relating to credit cards and loans.

Council tax debt can easily spiral and become unmanageable without intervention. This is not only damaging for the citizen, but also for Local Authority finances. The more the debt increases, the less likelihood there is of the funds being recouped. Intervening with empathy, and intervening early is not only ethical, it makes good financial sense to carefully manage a person’s debt.

The financial services sector learnt a lot from the global financial crisis of a decade ago, particularly around treating customers fairly and protecting the vulnerable. A series of governance measures were put in place to make sure customers weren’t unfairly treated and that they received good outcomes.

Translating those lessons learnt from financial services into the public sector would not only protect citizens, but also protect the sustainability of Councils and their services.

One option is to spread the cost of missed payments across the lifetime of the relationship.

As already happens in other public sector payments scenarios, when people miss one or more monthly or weekly payments, an arrangement is made to spread the cost of the default over the course of the subscription or loan, rather than having to pay double, triple or more in a single month.

To make sure the repayment is affordable, a full assessment of what the citizen can truly afford is carried out. Often this uses Open Banking technology to get an accurate and up to date picture of the citizen’s income and outgoings, spending habits and behaviours (with their consent). Using such technology gives a truer picture than just asking the citizen questions.

This simple and flexible arrangement can be set up as a Direct Debit and is based on a careful assessment of affordability. Target provides the software to enable such payment plans through a portal, which is ably supported by a team of technicians to ensure smooth and continuous running of the system.

Originally published at https://digileaders.com on December 2, 2020.

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