Tuesday, 21 October 2014

Ensuring those who can contribute, do contribute

The levels of unplanned, unwanted indebtedness in the UK are increasing. Ongoing welfare reform and continued decreases in real income for the least well-off in society means that a growing number are struggling to meet their financial commitments.

I have been reviewing data captured by TIX, our insolvency management platform which has visibility of over 90% of all personal insolvencies; it reveals that in the first quarter 2010 only 9.2% of IVA proposals were from consumers with more than 50% of their income coming from benefits and pensions. By 2014 this had more than doubled to 23.6%.*

As a result of this financial pressure, consumers are increasingly making tough decisions about which of their debts they can service and we are seeing a prioritisation of private debts over local government debts, due to the perception that private companies, such as banks, will pursue debts with much greater intensity. 

However, in the current climate, local authorities are also having to make their own ‘tough-decisions’ as they try to deal with on-going budget cuts. With the percentage of debt owed to government on the increase, the sooner Authorities address the challenge, the better.

Council tax

Although average in-year council tax collection rates in England are at an impressive 97.4%, the value of the unpaid 2.6% is, however, over £600million per year. The process for recovering this debt has traditionally been an almost exclusive reliance on third party Enforcement Agents (bailiffs). The effectiveness and fairness of the bailiff approach is the subject of much debate and it remains to be seen whether the recently introduced regulatory changes go anyway to address concerns. What is clear is that many of the innovative collection strategies widely adopted across the private sector are not utilised. When we benchmarked council tax collection performance, against that of the private sector, we found that 16 of the top 100 local authorities in England were potentially underperforming in terms of council tax collections when compared to the private sector ranking for their area. Within that 16, five of the top 10 largest local authorities by population had relatively poor actual in-year collections performance relative to their private-sector collections ranking.**

Service lines at a disadvantage

But what about those areas where the use of Enforcement Agents isn’t available? Our experience is that areas such as sundry debt, adult social care, and overpaid benefits are often reliant on internal legal service teams who do not have the resource to pursue all cases. As a result, in many areas, those owing money have learned to prioritise other debts over those owed to the council. Letters are often left unopened and council collectors have little re-course with those who are deliberately avoiding payment. In an environment where creditors are becoming increasingly sophisticated in the ways they compete for every pound, this leaves local authorities at a distinct disadvantage.

Three tips

The work our consultants have done with local authorities who are seeking to improve collection performance in order to meet growing budgetary pressures has found there are immediate and straight-forward improvements which can be made. Our top three tips are:

1. Agencies can unlock value - If your existing collections processes aren’t yielding results, don’t let the debt become old and unworked – think about engaging a debt collection agency, or a panel of agencies. You will have to spend some money, but there will be a net benefit.
2. Bureaux reporting is a proven deterrent - Consider providing credit reference agencies with data about your service users who owe you money. We have found that this alone deters those who can pay but are making an active decision to deprioritise your debt.
3. A full view of the service user and what they owe will transform your approach -   Individuals are often in debt to multiple service lines – a review we conduced of one council’s arrears revealed that 30% of its service users had debts across multiple revenue lines. By working together you can share knowledge and benefit from streamlined approaches. You can also make the experience of dealing with your council more positive in that service users can talk to one person or department about all of their debt.
Paul Fielder, Strategic Account Director, TDX Group

* TIX Q1 2014
** Analysis conducted by TDX Group in August 2013

Tuesday, 14 October 2014

The ‘right price’

Recently I was asked by a seller what the right price for their debt was; they wanted to know how many pence in the pound they would get. This got me thinking about how much this concept has changed over time – not only the value but also the definition of ‘right’ price. I am not going to go into the reasons that different debts are worth different prices i.e quality of origination, current debtor situation mix, how hard it has been worked to date etc., I want to comment on the ‘evolution’ of debt sale.
Over the years I have seen three broad definitions for ‘right’ price. Almost eight years ago when I started out in this industry, the ‘right price’ equated for what is the most I can get for my debt? This era was typified by limited data being made available to purchasers and often the debts would be window dressed for sale. High turnover of purchaser panels was common place, with buyers often being ‘stung’ on price (it still is in some of the developing markets). In this era, sellers got to a position where it was difficult to sell debt for two reasons:
  1. Purchasers no longer trusted the seller or the quality of the debt.
  2. Those purchasers that did come back offered more realistic prices, but creditor expectations were still at the old, unrealistic, prices. 
During the middle ages, ‘right price’ was the price that can be achieved for my debt on a repeatable basis. This era was typified by more data being made available to buyers so they could build confidence in their pricing. As a result, large relatively stable panels were common place with buyers coming back for more debt at similar prices. In this period purchasers evolved the most – using more and more data to enable them to price accurately, reducing their desired rate of returns as the move towards transparency reduced their risk and they invested heavily in operational capability to improve returns.
Right now, ‘right price’ is the price that will ensure that my customers will be treated fairly. No longer is it purely about price maximisation. As a seller who now retains responsibility for accounts sold, if you seek too high a price it could drive a whole host of activities that wouldn’t fit your wider customer-centric philosophy.
In summary, the industry has moved from limited data exchange, to pre-sale openness, to transparency across the whole life of the customer. Creditors now want to not only know how their customers will be treated, but want evidence to prove they are being treated fairly.
I am not sure that everyone’s expectation of the right price has caught up with the times. But this is where we are most definitely headed.
By Nick Georgiades, Director of Advisory Services TDX Group

Monday, 6 October 2014

Third party oversight

Recent results of LSB review of subscribers’ handling of customers in financial difficulties.

I read with interest the recently published summary findings of the Lending Standards Boards’ (LSB) review of how subscribers to The Lending Code handled customers in financial difficulties.

For those not familiar with the detail, the LSB re-ran a set of monitoring first initiated in 2013. The review focused on the extent to which subscribers and their DCAs are handling customers in financial difficulties with a focus on the policies, processes and controls in place - including areas such as staff training, incentive schemes and complaint root cause analysis. Additionally, the review also assessed subscribers’ due diligence processes when selecting a third party for contingent collections or debt purchase and the oversight processes in place.

The LSB examined the governance frameworks and processes used by a sample of nine code subscribers and either a DCA or debt purchase firm used by each of them.

The results made for interesting reading. In summary, the reviews resulted in one ‘green’ rating, six ‘amber ’ and two ‘red’ ratings for the nine organisations assessed.

The report highlighted general weaknesses in a number of the firms reviewed including the adequacy of training of agents to deal with customers in financial difficulty and the completion of affordability assessments and the questioning of customers in financial difficulty. The report indicated, however, that the factors driving the red-rated and weaker amber reports were largely in relation to ineffective oversight by the subscriber over its outsourced activity and, in one case, inadequate due diligence conducted prior to the subscriber selling debt.

I think the report is interesting for a number of reasons:
  1. At a time when there is a lot of ‘noise’ around the requirement for financial service organisations to focus on FCA readiness it is a timely reminder that the FCA is only one part of a wider regulatory/compliance regime.
  2. It supports the need for creditors to learn from their peers and to benchmark their organisation against good/best practice from across the industry.  Whilst the report is critical of certain organisations practices it also calls out a number of examples of good practices and rates one organisation ‘green’ (a potential exemplar for their peers?).
  3. Finally, with lending levels set to increase as market conditions improve, there is likely to be increased demand for both DCAs and debt purchasers to help creditors manage their debt books as they grow. 
It is clear from the report that it is critical that all creditors ‘get their houses in order’ now, particularly with regard to ensuring there is an appropriate level of oversight and due diligence of third parties.

By Charlie Horner, Lead Consultant - Debt Sale and Advisory, TDX Group