Show me the money

"I'd love the freedom of having my benefits paid directly to me – but I wouldn't trust me!" Council tenant Julie Fawcett smiles as she says this but she's making a serious point. Like most tenants, she's not dishonest, but people on benefits are often forced to choose between paying one essential bill and another.

"If they paid housing benefit to me directly I'd find it very hard to budget," says Fawcett, who lives in a Lambeth council flat in London. "If you haven't got any money and it's your kid's birthday, will the rent come first?"

Fawcett is one of 4 million householders on housing benefit who would be affected if the Department for Work and Pensions' plan to pay benefit directly to tenants goes ahead. Paying tenants rather than landlords is meant to make benefits administration clearer and cheaper; it also fits the government's emphasis on more choice in public services by giving tenants the freedom to move to a cheaper home and pocket the difference. Nine councils are running two-year pilot schemes for private tenants. Social landlords have also tried out the method: London & Quadrant Housing Trust recently finished a pilot and Circle 33 and Five Piers Housing Association, part of Manchester Methodist Housing Group, have trials under way.

But many landlords share Fawcett's concern that if the pathfinder is rolled out to all social tenants, as the government hopes it will be by 2010, arrears could rocket as other debts eat up the money tenants would have spent on rent. L&Q's pilot found that the system led to significant and lasting increases in arrears and the Council of Mortgage Lenders has warned the DWP that the system could jeopardise registered social landlords' position with their lenders.

Will it pay?
The most vulnerable tenants will be exempt from the direct payment system, but the onus is on getting all the others to take responsibility for their finances. To make sure they pay, the councils and RSLs running pilot schemes use a number of tactics.

Strongly encouraging tenants to have bank accounts is one. More than a sixth of British adults don't have a bank account and, among the poorest, this rises to almost half. Having a bank account means a tenant doesn't have to collect and cash a benefits cheque – which creditors will be keen to take straight off them – and can pay rent by direct debit or standing order.

Rachel Conway, project manager for Brighton & Hove council's pilot scheme, actively promotes this. "People come in and ask us to verify their cheques over the counter so they can cash them at a bank, but this takes officers away from other people," she says. "If they do it about three times, we tell them we'll verify no more cheques until they've asked our money advice service about having a bank account."

Brighton has also appointed officers to liaise with local banks on helping tenants get introductory accounts – basic accounts that cannot go overdrawn – which all banks are obliged to offer.

There are difficulties, though, with setting up accounts. One sticking point can be a lack of recognised proof of identity. This has been tackled in recent years and approved forms of ID now include not only the familiar driving licence but also benefits books, work ID cards and residence permits. Bank staff can still be reluctant to accept unusual types of ID.

Also, banks won't prioritise introductory accounts, so they can take up to 12 weeks to come through. 

The best way of tackling such problems is for an RSL to cultivate a strong relationship with local bank managers.

But Julie Fawcett doesn't think a bank account would make much difference to her. "If you're in debt anyway, paying housing benefit into the account means it's eaten up before anything else gets paid," she says.

And direct debits can be a lot of trouble, as Alice Rogers, coordinator of Services Against Financial Exclusion, points out. "If you set up a direct debit and there's not enough money in your account when it's due to go out, most banks apply a £30 charge, even if in theory the account has no overdraft," she says. "When the income support next goes in, they'll take the charge out of that." So the landlord doesn't receive rent and the tenant falls further into debt.

A helping hand
With practical financial education not yet compulsory in schools, making sure tenants have access to financial advice is vital if the scheme is to succeed. Rogers says: "Tenants need to know how to set up a standing order, check if their benefit has gone in and cancel the standing order if it hasn't."

The DWP has paid for Citizens Advice Bureau advisers to help housing benefit recipients in pathfinder councils. They teach basic budgeting and emphasise that rent should take priority over other bills. Tenants are helped to apply for other benefits and pointed towards credit unions where loans are offered with about 12% APR – much better than the 400% or more they may pay to loan sharks.

If advice is given early, tenants will find it easier to adjust to the scheme. Steve Carey at Leeds council wrote to tenants three times before the pilot began to let them know about the need to open a bank account. The council also has a helpline and a full-time housing allowance team of six that answers queries and problems raised by tenants and landlords – solutions may include going back to paying benefit directly to landlords. So far, only six of about 2500 people receiving direct benefit have rent outstanding, says Carey.

Mick Lear, benefits delivery manager at Lewisham council in south-east London, says: "There was extensive advance publicity and we wrote to all claimants individually to confirm details of the changes." L&Q goes even further, recommending that changes should be explained face-to-face before a trial starts.

With other creditors sending debt collectors to the door or threatening to cut off services such as gas or telephones, landlords may have to return to the door-knocking days of old to get heard. Circle 33 sends tenants who get direct payments monthly rent statements, but also sends income officers to visit people in their homes about two weeks after they fall into arrears.

"Their other creditors aren't going to faff about for six weeks before making a phone call," says Jules Bickers, assistant director of customer services. But he says it confuses tenants if RSLs offer financial advice. "We are quite tough about arrears and the message we give to people is, 'it's your responsibility and if housing benefit payments mess up, you've got to sort it out'."

Tenants themselves see the advantages of door-to-door collecting. Michael Gelling, chair of the Tenants and Residents Organisations of England (TAROE), says: "Some systems in local authorities revolve around letter writing, which is no use if, for example, you're almost illiterate. There's nothing like seeing people face-to-face."

However, he is sceptical about how much financial support will prevent arrears. Voluntary advice from agencies like the CAB often comes too late: "People in difficulties run away until they have to go to court."

Last resort
Social landlords can ultimately threaten tenants with eviction if they fall into arrears. Circle 33 evicts roughly 70 people per year, mostly for arrears, and will issue a possession notice four weeks after someone defaults on their rent. But eviction is expensive and there is a limit to how tough councils can be – or want to be. The pathfinders will pay the landlord directly if a tenant falls into eight weeks' arrears, to prevent eviction.

Partly because the pathfinders are in an early stage of trials, they are being cautious but the scheme does raise the question of how far people can or should be pushed to take responsibility for their finances if they don't want to. Rachel Conway of the Brighton & Hove pathfinder says: "I'm sure some people will resist the change and not pay because eventually they know direct payments will go back to the landlord. But what else can we do? We don't want people to lose their homes."

Incentives can be used to encourage payment: Circle 33 has set up a £500 quarterly draw that all tenants who are in credit with their payments can enter. It is also considering giving a discount for paying by direct debit and marketing the option of shared ownership to tenants on benefits who pay on time as another sweetener.

The incentives are targeted at those who have the ability to pay, but don't do so promptly. But for those with multiple debts, such carrots are unlikely to make much difference.

Gelling says: "We don't want prizes. I don't see why rent payers' money should be used as an incentive and this certainly won't help people who have no control over the system and whether benefits are paid on time."

The DWP is optimistic that the greater choice and empowerment will be enough of an incentive for most tenants. "There will have to be a proper evaluation before we roll this out nationally," says a spokesman.

"But early indications are that things such as large arrears, or moving out to the private sector, haven't happened in the council pilots.

"It's in tenants' interests to pay their rent on time because it gives them more options."

The results of the pilots are yet to emerge, but when tenants themselves have such strong doubts about the wisdom of paying benefits to them directly, it does cast doubt on how effective the cash incentives could ever really be – and whether direct payment is the best way to go forward.