Before COVID-19 struck, many sections of society were already facing financial hardship - whether down to zero hours contracts, the fact that 12.8 million people had either no or minimal savings, or that eight million people were at risk of financial difficulty. Equally, local councils were already facing a £6.5bn funding gap by 2025, so the impact of a pandemic on public sector debts was always going to be substantial.
COVID-19 saw a direct and immediate change to debt collection. Creditors implemented forbearance and emergency payment freezes, as well as amending, and in some cases pausing, collections activity. This resulted in a significant reduction in debt collection activity and monies recovered. With estimates suggesting councils could need an extra £6bn in addition to Government funding to cover the costs and income losses of the pandemic, it’s clear a solution is needed.
So, what happens when we move to the ‘new normal’? We’ll inevitably see a large upswing in debt collection activity driven by the backlogs and forbearance built up, and more people will struggle to manage their debts. No one knows the extent of this problem for certain and we must make the best decisions we can based on experience, and the data available. Moving from crisis to stabilisation and recovery has no clear calendar for the transition to the new normal at present. All industries need to be flexible by refining, changing or even completely re-working debt management strategies.
Taking the lead from the private sector
Steps taken since the 2008 ‘credit crunch’ fundamentally changed the way debt is collected, when the FCA introduced new ‘Treating Customers Fairly’ guidance for the private sector. This significantly improved the way vulnerable people are treated by allowing for affordable repayment arrangements - raising standards across the industry, driving innovation and better governance, and improving commercial debt recoveries.
But the problem of debt and vulnerability is not restricted to the private sector. A recent Centre for Social Justice (CSJ) report ‘Collecting Dust: A path forward for government debt collection’ showed 42% of debt problems in 2018/19 related to money owed to government.
Over 50 cross-party parliamentarians have written to the chancellor calling for him to support a Debt Management Bill proposed by the CSJ, which could include:
- Enshrining a set of binding Fairness Principles in law
- Transforming local government debt collection
- Transforming debt collection in the welfare system
- Transforming debt collection in the justice system
The importance of standards and data
A fair and responsible approach to debt management will be more important than ever post-COVID-19. Government must collect the money owed in order to fund services and facilitate economic recovery, but people must be treated fairly and compassionately throughout that process. Effective use of data can make a real difference.
The use of data to identify vulnerability, ability to pay, propensity to pay and change in circumstances will become the cornerstone of any collection strategy.
This will enable public sector bodies to treat people as individuals. Whether it’s the impact of bereavement, ill health, redundancy, reduced incomes or mental health, proactively identifying financial and other vulnerability, and offering different repayment paths to those affected, is proven to improve outcomes both for those in debt and for those who are owed money.
However, standards and data are just part of that story – quality engagement is key. Listening, being compassionate and finding a workable solution are vital components of an equitable collection strategy. Since the start of COVID-19, we’ve seen an interesting change in the conversations people are having with us. Lockdown, with many agents working from home, has created a common experience which in many cases creates more open dialogue where people are willing to honestly share details of their circumstances. This builds better relationships, which in turn makes finding a solution – such as a reduced payment plan, a longer-term arrangement to pay, a payment holiday or no payment but agreement to remain engaged – much easier in many cases.
As an industry, we need to offer longer and more flexible payment arrangements to support people’s changing financial situation. We also need to drive the adoption of FCA ‘Treating Customers Fairly’ and CONC standards across all debt collection, and embrace a more rapid move to digital solutions to support increased volumes and changing needs.
Richard Haymes is director of consumer affairs, strategy and market development at Indesser