In the ‘good old days’ collections was all about getting the money quickly. Pushing for payment in full first, if this was not possible then it would be two instalments and slowly extending repayment periods. Key collections metrics for agents were average payments and promises kept among the normal operational metrics. More often than not a debtor has more than one debt, and it was a competition to get to their disposable income first so yours got paid first.
The push for higher payments and short repayment periods meant that many promises were broken along the way, as they were never really affordable in the first place. Even if a customer could afford the current creditors payment scheme, as soon as the next creditor got in touch and convinced them to pay them then, once again, the previous creditor’s scheme became unaffordable and the arrangement would be broken.
If you were consistently the first creditor in conversation with the debtor and always managed to get payment in full then you would not want this system to change. For all the others, broken promises teams would have to re-engage the customer and start the cycle again, and operational expense was certainly not optimised.
The principle of the current compliance regime is affordability, we can all argue what should be reasonable expenses to include in calculating this – I often do - but we cannot argue with what is trying to be achieved. Ensuring the debtor can pay off their debts as quickly as possible in a sustainable way is in everyone’s interest.
There will always continue to be debate on how we do this:
• Do we need to do an income and expenditure (I&E) to assess affordability for every customer each time we agree a payment in collections?
• Should we do a full I&E each time we make a loan? I have recently taken out a mortgage and have been asked fewer questions about my income and expenditure than I would get if I wanted to pay a debt off in a collection agency.
Ultimately, the principles of compliance are not the ones costing the industry, it is the interpretation and application of these principles which are. It is this balance which we should continue to focus on to get right. If we could do this, the question I would have been asked is ‘what is the cost of not being compliant’?
By Nick Georgiades, Director - Advisory Services, TDXGroup