David Cameron's recent headline grabbing plan to allow the Department of Works and Pensions to carry out credit checks on benefit claimants will result in greater financial exclusion.
What has not been mentioned in the coverage of this new practice is that each time a credit check is carried out on a consumer, it can result in their credit rating being affected, meaning access to credit for those on low income, may become less easy to access and more expensive.
Some have called the new policy "bounty hunting" with the those firms involved in carrying out credit checks receiving payments for every fraudulent applicant they help catch.
However, how much this in reality is about catching benefit cheats is questionable. Arguably it is more about outsourcing lucrative work to the private sector and will prove ineffective as a method of reducing fraud.
Credit reference firms can tell whether consumers are making payments on their accounts, or missing payments. Benefit claimants are, therefore, likely to be questioned where they are still managing to make payments. This is likely to deter many from making claims for benefits rather than have their every financial transaction scrutinised and will instead result in many sinking deeper into debt and hardship. Debtors make payments to their debts legitimately in a number of ways, but still may prefer not to face the scrutiny of having their every payment to every debt investigated. Often debtors will pay debts on a temporary basis by using credit cards and other borrowings and are often harassed by creditors to do so; also when debtors become unemployed, they may have their obligations met by other family members, so they won't default or incur charges – if these family members believe they may become subject to investigations, as they may, they themselves may be unwilling to help; they may even have their obligations met by payment protection insurance, so even when someone is meeting their debt payments, it may mean nothing.
The value of the information that credit reference firms can, therefore, provide is debatable and traditional investigative work will still have to be carried out. However, no doubt the three major credit reference firms will make fortunes out of these credit checks and investigations at much expense to the public purse.
Also the statement by CallCredit's Owen Roberts, that they "… can say with a degree of certainty, whether there is somebody else living at a particular address," is farcical. This information may be of importance when someone is claiming benefits as a single person or claiming a single person discount for council tax. However, anyone who has ever seen their credit file will tell you it is not unusual to find everyone up your close on your file, including previous occupants of your home. It also often won't show whether the people in the home have financial links with each other. Parents will also show up on their children's credit reference files. Will this mean youngsters living with their parents will be discouraged from claiming benefits or asked to move out when the parents don't want their financial affairs scrutinised?
This new practice will not reduce fraud or the cost of fraud to the public purse. £1 billion is lost through fraud and considering the value of the information many of these private sector agencies will be able to provide, would it not make more sense to tackle the £2 billion that is lost through customer error and official error? The likelihood is that with the cuts to public services in the DWP and local benefit advice agencies, the amount that will be lost through customer and official error will increase, as front and back room services are cut.
It is also likely that the recent decision by the ConDem Govt to cut the buffer in the tax credit system from £25,000 to £5,000, will only result in more customer errors. The buffer was introduced by the last Labour government to reduce the likelihood of customer error. Tax credit claimants must predict their income for the year ahead: if their prediction is short by more than the buffer they have to repay the overpayment or face incurring a debt. The buffer was introduced after tens of thousands of claimants incurred overpayments shortly after the introduction of the tax credit system and thousands were discouraged from applying.
Cameron's new headline grabbing policy will prove ineffective as a means of cutting fraud and is likely to increase the financial exclusion of society's poorest. It will, however, no doubt provide a lucrative gravy train for the private sector that win the contracts and it won't surprise me if it increase the cost to the public purse.