An Update on Rising Arrears in Utilities, what this means for Vulnerable Customers and the Increasing Importance of Assessing Ability to Pay

An Update on Rising Arrears Levels in Utilities, what this means for Vulnerable Customers and the Increasing Importance of Assessing Ability to Pay

In my September update, I described that, although the proportion remained low, there had been a significant step change in the proportion of utilities customers falling behind on their utilities bill payments since the pandemic. This increase saw early arrears reaching record levels, which was surprising given the protective measures implemented across industries to prevent arrears.

We’re nearly 3 months on, what’s changed? Have utilities customers fallen further behind and are more customers now showing signs of payment stress?

Unfortunately, the answer is, yes. The majority of the early arrears described in September have progressed through to later arrears and the consumers that were 1 and 2 months behind are now 4 and 5 months behind. The step change in early arrears seen through to July has remained, though the rate hasn’t increased further, so it seems that (on a sustained basis since the pandemic) more utilities customers are now falling 1 or 2 months behind on their bills. Sadly, the majority of customers that get into this difficult situation continue to be unable to rectify it and are progressing through to later stage arrears.

Concerns around people struggling to pay because of the pandemic are mounting. Experian’s research indicates that 41% have suffered income shocks. Emergency Payment Holidays (EPH) and support plans have been widely adopted with a take up of 4.4m mortgage, credit card or loan EPHs. Ofgem’s survey reveals that 4% of energy consumers have taken EPHs, rising to 14% for those under 24[i] . Ofwat haven’t released an equivalent view yet.

Experian have been monitoring roll off from EPHs on credit cards, loans and mortgages and our findings show that arrears are more than 3 times higher than normal on completion of the holiday period.

How are you changing your support for Vulnerable Customers given the increasing financial challenges they are likely to face?

Many would agree with Citizens Advice who believe that ‘financial difficulties - faced by customers and suppliers alike - will be the longest-lasting issue to tackle [from the pandemic]’[ii]. I couldn’t agree more and believe this will be the key challenge that those involved in supporting vulnerable customers need to address over the coming months. Sadly, many customers who were already vulnerable are likely to have their existing challenges exacerbated by financial difficulties. Many more people will also become vulnerable as a result of a deterioration in their finances. The latest rise in unemployment to 4.8%, accompanied by the highest rise in redundancies seen since the 2009 financial crisis, are both expected to deteriorate further, with the Bank of England suggesting there is a small chance that unemployment could rise as high as 10%[iii]. Clearly, the regulators have this firmly in their sights and it’s reassuring to see that Ofgem has already strengthened Suppliers’ governance for assessing affordability this winter with the requirement to assess Ability to Pay now forming part of suppliers’ licensing conditions.

Effective and smart use of CRA data underpins 3 of Ofgem’s six Ability to Pay Principles:

‘Making proactive contact with customers’, ‘understanding customers’ ability to pay’ and ‘setting up repayments based on ability to pay’, all require information on how customers are managing with their existing credit commitments and, crucially, how this has changed over time. Without effective data exchange with a CRA;

·      how can a utilities supplier know to proactively contact a customer who is continuing to pay their utilities bill but has recently accumulated debt across multiple credit cards.

·      How could a utilities supplier know which of their customers have recently suffered income shocks in order to proactively provide support?

·      Will a utilities supplier factor into their ability to pay assessment for a debt plan, situations where a customer may be increasing utilisation of high cost credit to fund utilities bill payments?

·      If a customer misses multiple payments on their utilities bills and funds debt through increased high cost borrowing, how would the customer’s credit card provider be able to pick up on early warning signs to enable appropriate support to be provided, as opposed to automatically increasing borrowing facilities?

Although I have focused on Ofgem’s Ability to Pay principles, the same smart use of CRA data applies to assessing debt plans and proactive support in the water industry.

Ultimately, my concern is that, facing into challenging financial times arising from the pandemic, Utilities who don’t share data with CRAs are creating a growing blind spot for all those involved in lending decisions and in the management and support of vulnerable customers in financial difficulty.

If you don’t share information with a CRA at the moment and would like more information, please get in touch. Equally, if you do share information but don’t feel that you’re making best use of it to help vulnerable customers or in your Ability to Pay decisions, then please don’t hesitate.

I’m also speaking on all the topics raised in this post, at the forthcoming U&T conference on 24th November as part of the Collections and Vulnerability Summit hosted by Credit Strategy.

My next post will provide an update on Experian’s initiative for the utilities industry (launched in response to the pandemic) to trial open banking technology. This technology, which typically takes a week to implement, puts the customer in full control of their data and enables suppliers to undertake a fast (within seconds), comprehensive assessment of customers’ ability to pay and identification of customers’ eligibility for financial support schemes. You can probably tell that I’m excited by this as I feel it can really help address the challenges that utilities face in the current environment.

[i] https://www.ofgem.gov.uk/system/files/docs/2020/09/consumer_experiences_during_the_covid-19_lockdown_april_and_may_waves.pdf

[ii]https://www.citizensadvice.org.uk/Global/CitizensAdvice/Energy/The%20end%20of%20the%20beginning_%20covid%20retail%20energy%20next%20steps.pdf

[iii] https://www.bbc.co.uk/news/business-52660591#:~:text=In%20its%20most%20recent%20set,rise%20as%20high%20as%2010%25.