Anglesey council said measure had been taken to improve the service
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A report has found "numerous and severe administrative failings" at a council's housing benefit service.
The public services ombudsman upheld complaints about Anglesey Council from one person who claimed she went into debt because of the problems.
The other complainant said the council had failed to respond to his letters.
The ombudsman ordered the council to pay them £1,500 each and recommended "urgent action". The authority said the service had already improved.
The ombudsman, Peter Tyndall, said the council had not given enough resources to process benefit claims while it introduced a new software system.
But he noted that problems started before this and ended after the computer upgrade saying: "Systemic administrative and management weaknesses unrelated to problems generated by the IT software change."
Failure to log correspondence also meant staff duplicated work and asked claimants for information they had already given.
The report said one of the complainants, known as Mrs James, a single mother on low income, had complained about the service she received from November 2006.
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WHAT THE OMBUDSMAN FOUND
Absence of accurate housing benefit performance information
Failure to report accurate information to regulatory bodies in Wales
Failure to implement internal procedures with regard to complaint and post handling
Extensive and repeated failures to abide by statutory targets in the Housing Benefit Regulations in respect of the two complainants' claims
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She said it had taken a year for the council to resolve the problems which had caused her stress and put her in debt.
Mrs James told the ombudsman she was forced to take out an overdraft to pay her rent and had to apply for a crisis loan to pay for heating fuel.
The second complainant, known as Mr Davies, made a claim for housing benefit in October 2006 to cover a double rent liability.
But he said the council had not replied to his letters, including a formal complaint.
He also said dealing with the authority's benefits service was "extremely frustrating".
In both cases, the ombudsman concluded there was "maladministration" in the council's service.
A third, more recent complaint was also upheld.
The ombudsman recommended the council "improve its housing benefit performance through training, improved systems and communication between staff".
The report also said a self-assessment return produced by the council in January 2008 was inaccurate.
"Given the council's repeated failures to handle formal complaints correctly, its reported level of complaint and performance on dealing with formal complaints must also be questionable," it said.
'Good progress'
Isle of Anglesey council said the report would be considered by councillors on 16 September.
It added the time taken to process benefit claims had fallen to 33 days in July, down from 90 during the period investigated.
The council's director of finance, David Elis-Williams said: "We've had positive dialogue with regulators about our current action plans and they accept that we are making good progress.
"The action plans, which were being prepared at the time of the inspection, reflect our own risk assessments and also respond to issues identified by the ombudsman.
"We keep these under review. Despite the system change, the vast majority of claimants received correct payments throughout the period.
"This shows that the benefits section is clearly not a 'dysfunctional service', as claimed by the ombudsman. It has had problems, but we're certainly on the right path towards resolving them."
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