With the regulatory burden caused by the FCA biting hard, and with lenders increasingly looking to keep customers in their cars for longer, the recoveries industry is not without its challenges. But, as Jonathan Minter has found out, these challenges have also presented opportunities.
Of all the motor finance-related industries, few have been tarred with quite such a negative brush as the asset recoveries and debt collections industry. Often confused with bailiffs by the general public, and occasionally let down by rogue agents, the reputation of those in the field is hardly reflective of the increasingly technologically driven, heavily regulated industry in which they actually operate.
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Mark Caisley, director at Ceatta, notes that part of the reason for this reputation is historical, saying it’s been there for hundreds of years, adding: "The old guys might have used to give them a smack as they left the pub back in Victorian times, and taken money out of their pocket, but it’s nothing like that anymore. But unfortunately the stigma is still there."
The people Motor Finance speaks to are all consistent in saying they don’t think this reputation will ever go away completely, even though the industry has moved a long way from the profession Caisley mentions from back in Victorian times.
Bev Armstrong, director of Armstrong Nationwide, for example, says: "It won’t go away entirely, even though it’s a biased attitude. One agent we used to use was a lady in Scotland, and she was the best agent we had with regards to recovering vehicles. She was a 35-year-old woman who was perfectly lovely and didn’t live up to the overall view that people have, which is of a big burly guy who’s going to bully people into taking their cars."
The reputation hasn’t been helped by television portrayals of the profession. Caisley, highlights stories emerging from High Court enforcement officers who featured on the BBC show The Sheriffs Are Coming, involving the collection of a debt in the tens of thousands of pounds, which received negative national press coverage. Caisley says: "Things like that are always associated with us, but we’re not bailiffs at all. It’s unfortunate the stigma is there."
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By GlobalDataArmstrong says that her company was actually invited to take part in a television show about the industry a few years ago but declined on the back of advice from clients. She says: "One of our agents, who we don’t use now, took part and lost a lot of business even though they were represented in a good light. I think a lot of clients didn’t want to be involved at all. They just didn’t want to be associated with it."
She adds that in a lot of cases it’s the customers who are aggressive, and make the job of the agents more difficult.
Adam Wonnacott, sales director at Burlington Group, says that the stereotype only exists today out of convenience. He adds: "This stereotype has no real relevance to the modern-day customer experience. It cannot happen in the regulated market with the safeguards that are in place relating to audit and oversight.
"There are strict requirements regarding complaints reporting and root cause analysis, so it’s easier for firms to identify abusive or inappropriate behaviour."
One development which could improve the reputation is the harsher regulatory environment introduced by the Financial Conduct Authority (FCA).
A common opinion is that one of the most obvious impacts of the new regulator has been a culling of smaller agents. Armstrong says she has been sent reports by the Credit Services Association (CSA), which include reports on companies which have failed in the authorisation process, or who dropped out, adding: "It was nobody who we could have taken the work from, or who work with any of our clients, but we’ve had a huge list of companies. I’ve also seen it through message boards from the CSA."
Simon Shuttleworth, managing director of Peak Collections, says he has already seen a number of smaller agents who’ve left the industry, and know of a number of others who are planning to leave in the future.
On the one hand, he says, this will present opportunities for growth for the bigger players out there, and may also improve the reputation of the industry. However he says: "We may be losing good experience." This may prove an additional bonus to those who remain, as Shuttleworth says the odds are that some of the bigger agents in the industry will be looking to recruit the best of those leaving in the face of regulation.
There are a few reasons highlighted for why smaller agents are dropping out. Armstrong points to the sheer amount of work involved in the authorisation process: "I know how much work we’ve had to do to show compliance, so I can understand why they’ve had to drop out of the market – just the amount of work involved proving you can do the job they want. These one-man bands; people who’ve got through the past 15 years working for themselves or with a small office; we can foresee them leaving because of this."
Caisley and Shuttleworth both speak about a struggle for agents looking to work with bigger players. Caisley at Ceatta, for example, says: "There are a lot of guys I speak to who have been in the industry a long time – we all speak to each other – and basically the biggest problem is they don’t want to be tied to one company.
"With some of the agents for certain areas, say Norfolk, we don’t get a lot of work there. Other companies might not get a lot of work either. So these agents might be relying on getting work off four or five different companies, but the companies don’t want to be tied in with principals and things like that. It’s a bit of a minefield at the moment."
Shuttleworth of Peak says he’s had a number of smaller agents approach him to subcontract, but that Peak is declining these options, saying this is something his company has never done, and will not do.
Explaining the risk for companies looking to go down this route, he says: "If a client rings me up and says ‘there is a massive issue on the job, your guys are there now, what’s happening?’ If I’ve subcontracted, I’ve got no idea who’s on the doorstep. That to me is a massive risk. With our model I can speak to our guy right away and so can our client – you’ve got a really short communication line, and that’s the way it’s got to be – particularly going forward with the FCA."
With smaller players now dropping out of the industry, this will in theory open up the field for bigger players to expand rapidly. Yet, for a number of reasons, this growth won’t come immediately .
A large part of the reason for this is that the majority of the industry, both on the collections side and the lending side, are still trying to get a fuller grasp of the other.
Wonnacott at Burlington, for example, says the industry will only start taking full stock of the situation once the authorisation processes has been completed. A notable problem is that, as the FCA is principles-based, much of its rules and guidance are open to interpretation. Wonnacott specifically highlights that there are some very narrow and impractical interpretations of what is meant to be ‘outcomes focused’ regulation as a problem.
Armstrong mentions one example of this: "Initially, when we were going to get authorised, there was this whole issue going on where we didn’t know whether or not we were allowed just to go and repossess somebody’s car, and that we may even have to make an appointment to repossess somebody’s vehicle."
She adds that every solicitor she spoke to gave different advice regarding interpreting the FCA. "There was a lot of scaremongering going on," she concludes.
As time has gone on, and more companies have gone through the process, things have cleared up. However there’s still a sense that, as with the rest of the consumer credit industry, the FCA is still feeling its way, as it attempts to get to grips with the diverse consumer finance sector it only recently took over.
Caisley, for one, says he foresees further shifts in the FCA’s rules and regulations as they gain a better understanding, and that 2015 is comparatively "early days" for the regulator.
Another reason why larger collections firms may not be able to expand immediately, which both Caisley and Shuttleworth mention, is the length of time it takes to train new staff. At Peak, for example, the initial training period lasts a year.
While recent regulatory changes may have encouraged longer-term training, this was often already the case, as it was with Peak, and there’s a general agreement that those working in the industry, as customer-facing agents, represent both their company as well as the client.
While there’s a definite sense that the FCA’s record so far could be described as a ‘work in progress’, overall, the people Motor Finance speaks to are broadly of the opinion that the FCA is improving the standard of the industry.
For example, when asked if the FCA would improve standards, Armstrong says: "It will force the industry to improve even though I don’t know if the FCA has the manpower. It’s spurring companies into doing something about regulation and treating customers more fairly, which is the way it’s geared towards. You should be doing this anyway, but I think the standard will be much higher."
Technology
Regulation has also increasingly pushed companies to look to technological solutions to ease some of the regulatory burden. In many cases this has just sped up a process which had already begun, but nonetheless the past year has seen a decided shift in that direction.
According to Wonnacott, technology has evolved considerably. For example, he says: "Most debt collection agencies now provide portal technology to allow clients visibility of activity on accounts and management information to understand performance trends."
Caisley claims Ceatta was the first repossession website to offer a bespoke portal system to its clients, dating as far back as 2007.
Exchanging data with clients is an area where technology has been able to speed up the process tremendously. Talking about the system Peak employs, Shuttleworth says: "We’ve now got clients that we operate with where we just don’t speak to them from one month to the next. Our systems speak to their systems overnight. When we come in the next morning, all the new cases are already in our system, and our system has uploaded the results of all the ones from the previous day."
Caisley adds: "Technology is in our lives all the time; we’re all out with iPhones. If the guys are out in the field and an urgent job comes in, we know exactly where the lads are, we can say ‘you’re closest to that, can you go pick this car up from the compound?’
"At the beginning of the week we had someone ring up who had realised she had to hand the car back because she was moving abroad the following day. So it was a case of getting straight out and picking up the car."
Moving forward, there are two key drivers for the pace of technological development. On the one hand technology can be used to help cope with the FCA. Wonnacott, for example, says one of the challenges the industry must adapt to is the use of technology to meet emerging compliance needs.
Shuttleworth says that the evidential requirement of the FCA lends itself to the use of technology.
The other side is that, as the industry develops down this road, it becomes harder for competitors who aren’t as up to date with technology. Shuttleworth says: "There is a lot of trust between us and clients. That trust has to be justified, and the more we can give that evidence across, and automate it for them, the easier it makes their lives."
He adds that the rise in technology could be another reason for industry consolidation. He says: "The smaller agents won’t be able to invest. It’s not just the finances; it’s the time investment as well. If you’ve got a small agent with maybe half a dozen staff they are going to be out on the road a lot; they won’t have time to sit and think about this type of stuff. Have they got the expertise to develop it? Not many of them will have – it’s a long-winded and expensive process."
Nigel Stanford, group sales director of Anglia, adds that the rise in technology has removed an element of human error from the collections equation, resulting in fewer complaints and an improved reputation for the industry overall.
Stanford also says that he has seen clients look at the collections process timeline increasingly in its entirety. He adds: "By taking an integrated, partnership approach to both collections and remarketing activity they are able to speed up the overall process and deliver better returns for their business."
While new technologies and regulations coming in have made life harder for smaller companies, there are also some substantial opportunities beginning to emerge for the industry.
The kind of voluntary terminations Caisley mentions with the customer who was leaving the country hints at an area
of growth, and Caisley says this sort of thing happens more often than would be expected.
At Armstrong, voluntary terminations used to account for around 30% of the business, but now account for the majority of the business in terms of volume. Armstrong says: "It’s affected profit because voluntary terminations don’t pay as well, but we’re receiving about the same amount of work. It’s nicer work for the agent to have because there’s no confrontation, but they get paid less, and so do we."
The reason for this growth, she says, is because customers have become more aware of the ins and outs of their finance agreements, and are becoming increasingly aware of the small print. She says: "It sounds stupid that you wouldn’t read it [the finance agreement], but a lot of people didn’t. Now they know they can hand it back after a certain date with no penalties, as long as their payments are up to date."
While most finance companies are still reporting relatively low levels of default rate, the amount of finance being written has grown at a fast rate for the past two years. While in September 2012 171,984 new and used vehicles were financed by Finance & Leasing Association (FLA) members, two years later, in September 2014, 235,382 new and used cars were financed, and recent FLA figures suggest this number will once again be higher in September this year.
Therefore even if default rates have remained the same, or even fallen slightly since the recession, this has in many cases translated into a larger actual number.
This is a theme which Shuttleworth has seen. He says: "We can look back over 25 years and compare figures. We’ve seen growth now for the last 13-14 months where we started to see slight increases in volumes, and its started to accelerate. I think a large part of that is from growth in portfolios and not an increase in default rates."
Caisley says if current trends continue, he expects Ceatta to grow the amount of collections it does significantly by the end of 2015. One of the key trends he’s identified causing this is lenders returning to the market, looking at slightly riskier deals.
He says: "There’s a lot more lending going on right now, and I think some of the finance companies who used to be just for prime customers are being a little more lenient to people with a little bit of bad history and things like that. There’s a lot more lending going on right now, especially on the second-hand car market."
This is all the result of an increase in the general economic confidence people are feeling he says: "There are a lot of people out there who are now working, and starting to feel a little bit more secure, and who are going out and taking a risk and getting another car or a newer car. Unfortunately things can go wrong for them, so we see an increase in work due to the increase in car sales."
Another potential area of growth may come from a potential increase in interest rates. While Wonnacott says this might result in a modest increase in default rates, the effect may be lessened by the fact that most people tend to consider their car payment a priority.
One subject Wonnacott says might have a greater effect on the industry could be more proactive internal collections manager roles.
This is something Armstrong also predicts, saying the larger finance companies will be encouraged to do this in order to ease some of the regulatory burden that can come with relying too much on external agents.
She says: "It might not be every area of recovery, but they might want to do a bit more debt management themselves within the collections department. And like we’ve said before, there might only be a few companies left who cover the whole country between them, who a lot of the bigger clients will use. I think that’s the way it’ll go because of governance over external agents."
An increase in the amount of auditing done by clients is something Armstrong expects to see over the coming months or years, something Wonnacott agrees with, saying this is providing a different challenge.
"All clients are looking to evidence the same things, but in slightly different ways – which makes audit processes more of a challenge than they need to be," says Wonnacott. "I would hope that in due course we could reach agreement on the specifics so that an audit report for one client would suit the purposes of another."
Increasing levels of audit will increase the costs of entry into the industry, adding yet another reason to expect more consolidation in the future.
Looking ahead, the industry specialists Motor Finance spoke to are fairly unanimous in their expectation that industry consolidation will be the key trend in the near future. For example, when asked what he expects to happen in the future, Shuttleworth says: "Over the next six months we’ll see everybody go through the FCA process. So it’ll shake itself out over the next 12 months. I’m not expecting any surprises with the bigger, more quality agents, just a continuation of some of the smaller guys leaving the industry."
As Wonnacott says, this will have both positive and negative consequences for the industry: "We have already seen record consolidation in the industry and this is set to continue. The end-result will be a modest number of operators who can meet the exacting standard, which is good for consumers, but arguably reduces choice (and increases costs) for creditors."
