Are the debt collectors ready?
As consumer and motor finance arrears increase, so lenders are
concentrating more resources on collecting their debt – to increase
cash flow – at the expense of seeking new business.
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However, as the legacy of years of under-resourcing in the back
office on behalf of lenders begins to show, then UK debt collectors
will come into their own.
Or will they? How prepared is the debt collection industry to
take the strain of an exponential increase in default work?
Much debt collection is nowadays acquired in bulk by debt
purchasers. The outlook for debt purchasers seems to vary widely.
With UK debt sales expected to exceed £9bn face value this year,
Ken Maynard, group chief executive of Cabot Financial (which was
named Debt Purchaser of the Year in the 2008 Credit Today awards)
fears the sector may not be in good shape.
He says: “The rising tide of unemployment is the greatest factor
likely to accelerate the growth in arrears. While the increased
costs of commodities and utilities strained the average borrower’s
pocket they were still able to meet their car repayments. That is
all due change with unemployment on the rise.”
A split market
Maynard stresses that the banks’ current reluctance to lend
affects debt purchasers in two ways. In the short term, debt
purchasers are finding it harder to finance the acquisitions of
portfolios because, as with other business customers, lenders are
looking closely at a purchaser’s track record as a determining
factor in deciding whether to renew existing facilities and on what
terms. Increased lines of credit or new facilities are even harder
to obtain.
He tells Motor Finance: “Against this backdrop, we would expect
the rate of new entrants to the market to slow down, with the
number of buyers potentially falling. The inability of some debt
purchasers to compete as effectively as before is certainly likely
to create opportunities for those companies that are well funded
and will, hopefully, drive down prices.”
Charles Holland, marketing director of 1st Credit, which
currently has £3.5bn of debt under management, confirms: “The
market is definitely split, with some purchasers’ forward flow
under a degree of pressure. The spot market, however, is still
showing much activity and we are buying as much as we want at the
price we are prepared to pay.”
Furthermore, Maynard opines that many debt purchasing companies
paid too much for portfolios when times were good – “lenders were
greedy” – which has impacted on their profits. “Some purchasers,”
he says, “have gone out of business. On top of that debts are
getting far harder to collect especially with re-mortgage and
consolidation loans no longer a reality.”
Holland also agrees that “any debt purchaser who needs new finance
at the present time will find is extremely difficult to
obtain.”
In short, debt collectors are working harder to collect less
debt. As a result, Maynard believes that commission rates, which
have been depressed in recent years, are set to increase.
There has also been a growth in the use of ill-advised consumer
websites where dissatisfied debtors can exchange often inaccurate,
but plausible, information on avoiding payment of debts. “Most
lenders and purchasers,” Maynard says, “see this as merely a tactic
to delay payment, but it adds to the increasingly difficult
collection environment.”
Whose side is the government on?
Godfrey Lancashire, managing director of London House Services
and former president of the Credit Services Association, takes
issue with components of the Consumer Credit Act 2006 (CCA) which
have yet to be clarified.
He says: “There is currently a requirement to send information
to the last known address even if collectors know that the subject
has ‘gone away’. There is an ‘option paper’ currently with the
Minister which proposes ‘reasonable grounds’. In other words, if
you have reasonable grounds to believe your debtor is a ‘gone away’
there will be no breach of CCA if notices are not sent to the last
known address.”
But what are ‘reasonable grounds’? No-one is sure, it would
appear. Lancashire confirms that this was not clarified by the
Minister before the requirement date of October 1 2008, so
collection companies are still required to send information to the
last known address – even if incorrect – and at huge cost.
This affects both debt purchasers and sellers. “And I may stress
‘beware’ to the sellers,” Lancashire adds. “I am sure they are
aware that the Office of Fair Trading (OFT) is looking increasingly
to collection companies to meet with the rules of compliance. The
pressure to register a successful trace means that some agencies
may be tempted into ‘short cuts’ – the OFT is now watching this
aspect very carefully as well.”
