Tackling problem debt

a press release from the National Audit Office 6 September 2018

Full report: Tackling problem debt

Personal debt problems have a significant impact on individuals, but the government has a limited understanding of how this affects the public purse and there are weaknesses in its strategy for dealing with the issue, says today’s report by the National Audit Office (NAO).

Problem debt, which is defined as the inability to pay debts or household bills, affects around 8.3 million people in the UK. It can have significant damaging effects, such as causing anxiety and depression. It can also increase people’s likelihood of being in state-subsidised housing. Problem debt is caused by a large number of factors, including life events, access to affordable credit, debt collection practices and a person’s understanding of financial matters. An estimated 4 in 10 people in the UK cannot manage their money well day-to-day, and internationally the UK ranks below average in financial capability.

The NAO estimates that the increased use of public health and housing services by people with problem debt costs taxpayers an additional £248 million a year, and around £900 million a year to the economy as a whole. Due to gaps in the government’s data, it is not possible to model other impacts including on employment and benefits.

HM Treasury has overall policy responsibility for problem debt and works closely with many organisations across government and the private and third sectors in trying to address this issue. However, the NAO has found weaknesses in HM Treasury’s approach. It does not have any formal mechanism or forum to bring issues together in a coherent way, ensure a common understanding of priorities, or collectively hold delivery partners to account.

People increasingly report problems with debts to government or utility providers. The NAO estimates that the UK public owe at least £18 billion to utility providers, landlords, housing associations and government, such as through council tax arrears or benefit overpayments. HM Treasury has limited information on debt in these areas and, as such, does not fully understand the problem, which hinders its ability to respond effectively. The information available is much less clear and transparent than retail lending information.

Government also lags behind the retail lending sector in following good debt management practice. As an example, established best practice in how to assess affordability of repayments is used by only 19% of local authorities and is not used as standard by central government creditors. Debtors’ perceptions of whether they are treated fairly also lag behind retail lenders. A lack of data-sharing means government cannot identify individuals who owe money to more than one department, resulting in debt collection teams competing for repayments from the same person. Short-term incentives and funding pressures may also be leading to debts being pursued too quickly and aggressively, particularly in local government. NAO’s modelling estimates that intimidating actions and additional charges on over-indebted people are 15-29% more likely to make debts harder to manage or increase anxiety and depression. The Cabinet Office leads the government’s work to improve debt management practices across government, but departments, agencies and local councils are responsible for their own approaches.

To reduce the extent to which problem debt occurs in the first place, the Money Advice Service has improved coordination of efforts to improve the public’s understanding of financial matters, but its strategy does not involve all relevant parts of government. Meanwhile, the Financial Conduct Authority has taken action to improve responsible lending, for example by reducing fees and charges on a typical payday loan which it estimates saves borrowers £150 million per year. It recognises it has more to do though on high-cost credit to tackle persistent and unsustainable debt.

HM Treasury is developing proposals to strengthen statutory protections for people struggling with debt problems. The NAO recommends that HM Treasury should ensure its policies on personal debt are delivered effectively and are drawn on best practice. It must also improve the quality and availability of data from across government on the scale, nature and impact of problem debt on individuals and taxpayers.

"Problem debt has significant consequences both for individuals and the taxpayer. While government has made progress in seeking to address this issue, its attempts so far have been insufficient. The Treasury needs a better understanding of the scale of people’s debt problems and how it is impacting their lives and the taxpayer so it can effectively resolve the problem."

Amyas Morse, the head of the NAO

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