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September 5, 2018updated 06 Sep 2018 9:58am

Collections: regulation and reform build a better future

By Christopher Marchant

In the past, unfavourable stereotypes have clouded elements of collections, especially the complex – yet sometimes necessary – area of repossession. Christopher Marchant speaks to experts in asset finance, third-party collections and legal practices to gain a clearer understanding of this essential part of the industry.

As managing director of Peak Collections, Simon Shuttleworth has been providing collections for many of the UK’s leading asset finance providers for decades. He is clear that the transfer of regulation to the Financial Conduct Authority (FCA) from non-binding guidelines by the Office of Fair Trading had a transformative effect.

Shuttleworth explains: “There is now so much regulation around this industry, and that is an advantage. It clears out some of the lowerlevel operators in the industry, and it drives professionalism.”

Mark Scotney is also able to give an idea of how the collections sector has changed in his 20 years in the industry as managing director of Anglia UK, which focuses on vehicle repossession: “There were two fairly well-established strategies that the collection market used to employ. One was to keep the customer in the car and their account ticking over, even if behind on payments, and the other was ‘first loss, best loss’.

“Finance companies used to subscribe to one or the other, but the industry has become far more sophisticated since then. All of Anglia’s collections strategies have grown from the experience we have had in that rather terminal event of recovering the car.”

Daniel Evans, collections manager at Hampshire Trust Bank (HTB) says: “We are very FCA-aware: everything we do is off the back of those regulations including the approach that we have for collections.

“We try and work with a customer as much as we possibly can. The key thing we do is find out why a customer is in arrears – we get a sense of their circumstances, and then why they might not have been able to make payment.”

Jo Davis, partner at Locke Lord, is able to give an overview of improvements in the sector: “These days most firms have adapted their procedures to allow customers a greater opportunity to repay their debts. This includes allowing collections case handlers to enter into prolonged dialogue with customers to reach a satisfactory payment plan, rather than simply referring the case to litigation after a couple of collections letters have been unsuccessful.”

Yet Davis makes it clear that FCA regulation may also have had an adverse effect on areas of collections, with some providers overly willing to continue with leasing agreements when the customer remains in arrears.

She outlines why this might be an issue for both parties: “Asset recovery is a last resort in accordance with the rules. However, there are many instances where reaching an agreement with the customer for the asset to come back and be sold is a much better outcome.

“The lender does not always know how to navigate an outcome that is a win-win for both the lender and the customer, can still reach compliance with the rules, and is a fair outcome.”

COMMUNICATION

Communication is at the core of the best resolution for both lender and customer. For Shuttleworth, this best practice can be utilised through both human interaction and the adoption of technology solutions.

He says: “We are very process-driven at Peak; we have bespoke case management software in place. We build systems integrations with most of our clients, so our systems talk to clients overnight.

“All new cases and updates are uploaded back to the client. A case can come in overnight then be allocated to an agent, who enacts a repossession order, with all the documentation performed on a mobile app.”

Neil Davies, chief executive officer for Close Brothers Asset Finance and Leasing, notes: “The in-house collections process for the company is founded upon the same ideals of efficiency and understanding. We have a long history of working with customers when they are in difficulty, and we have even won awards for our approach.

“It is about early action – not just recognising an issue, but acting on it early, leveraging the relationship with the customer and being open, honest and fair right from the start. It really helps to have a strong relationship with the customer, acting fast and working with them to shape a solution.”

At HTB, Evans is also aware of the downsides to a lack of communication: “If the customer is not responding to letters, emails, messages, then you have to think the worst.

“If a customer talks to us and explains the situation, then it gives us a lot of comfort and we will try and help where we can. When it comes to stuff like repossession and termination, you will find that it tends to happen when customers aren’t talking to us, because we then can’t assist.”

FORBEARANCE

Every case in the collections industry is unique, and understanding of a customer’s circumstances can be key to a resolving a situation in the best manner for all involved.

Scotney defines the company’s role and how fair analysis of a complex issue can be critical: “In excess of 90% of the assets we collect are road-going wheeled assets. In addition to that, we would cover a wide range of goods, from marine to aviation to agricultural to yellow plant to computer equipment.

“In those instances, you have to take a far more commercial view. Farm machinery is very seasonal, and you have to understand the customer’s position. Did the farmer have a really terrible harvest, which has resulted in the arrears?

“A lot of the agreements are structured in such a way that the payments are geared to be collected over a certain period of the year, not a straight 12-month payment cycle. Understanding cash-flow issues would be something that we have got within our strategies.”

Intrinsically related to agriculture, and the collections industry as a whole, is forbearance. Appropriate practice of this is included in the regulations introduced through the FCA Handbook, and Evans explains the impact of this: “It used to be a bit of a demand culture, where you would just tell the customer they had to pay and would not take their circumstances into account. It is a regulatory environment nowadays, which has changed it for the better. You want to understand the customer’s situation and offer them forbearance, so that in turn reduces the amount of repossessions that you are going to process.”

When it does come to repossessions, the size and nature of the asset, of course, has a definitive effect on the process. For Shuttleworth: “It is more about the logistics of moving the asset once we’ve taken possession of it. For example, hatchbacks aren’t a problem, we’ll drive them if they’re road-legal and it’s the quickest and most cost-effective way of getting them into an auction. If you’ve got something like a combine harvester, then you’ve got to plan and you’ve got to make sure that you’ve got the logistics in place ready, so once it’s located, Peak can get that asset away.”

RELATIONSHIP WITH LEGAL

Collections teams work closely with legal teams, though both Shuttleworth and Scotney clarify that third-party providers dealing with direct legal action from customers is rare.

Davis gives an overview of legal procedure from her side of the collections industry: “The team should have procedures in place whereby the more junior staff escalate issues that are outside their knowledge to more senior staff, who can then either deal with such matters, or seek internal legal or external legal support if required. They should not have set mandates any longer, as arguably this results in case handlers following the mandate rather than reaching an outcome suitable to that particular customer.

“If companies are having trouble trying to resolve issues with the customer, and the problem persists, then the agreement will need to be terminated and the asset collected. In regulated cases, the Consumer Credit sourcebook rules need to be followed correctly, and regardless of whether or not the agreement is regulated, the right outcome needs to be reached with the customer.”

Evans describes the legal process at HTB: “We will use the legal team for advice. If there are any problems off the back of anything we do, we can use them for advice on cases. “We also have a panel of external solicitors that we contact to discuss any issues that we have. We will seek advice from the solicitors if there is anything we are not clear of from a legal perspective.”

COLLECTIONS IN 2018

An interesting development is how record-low levels of default have expanded the collections industry. Shuttleworth explains the boon for Peak Management: “Record lows make the whole arena quite profitable, so most of our clients are pumping more money into the market. Even with those low default-rate percentages, that generally tends to equate to a higher actual number of cases coming to us. It continues to increase month-on-month, and has been on the rise – especially in the last two years.”

There must also be a reassessment of the original asset provision in the case of an enforced collection, of which Evans is aware: “What we do is we always try to learn from everything that goes on, so we are in close contact with our underwriting team. We feed back deals that go wrong, especially those deals that go wrong in a limited amount of time. They will review the underwriting of that deal to see if there is anything that could have been spotted.

“It is a continuous cycle of learning and evaluating what you’re doing. We’re in risk: there is always going to be a certain amount of bad debt and losses, but we always try to learn from what we do and what we see.”

Evans is also aware that the rise in interest rates will directly relate to levels of repossession: “Without doubt, there will be an impact. We will see more insolvencies from both a commercial and consumer perspective. “A lot of the reasons our customers use for non-payment is cash flow. Their customer’s are not paying them, interest rates are going up; that will only affect that.

“If insolvencies are going to rise as a result of interest-rate rises, then naturally we’ll see more insolvency cases, which is what we’ve been seeing since the turn of the year.”

THIRD PARTY VS IN HOUSE

Asset finance providers also understand the relative benefits of using a third party such as Peak or Anglia for collections, while also keeping an eye on having certain operations in-house.

For Davies: “It depends on the value and volume of transactions. For smallervalue transactions there are merits in using third parties; however, we believe there are significant benefits from in-house teams. It’s about balancing efficiency and effectiveness.”

Evans adds: “Hampshire Trust Bank only has a small collections function in-house at the moment, so we have not had the resource in place to do it all ourselves. Long term, the in-house collections function is preferable to outsourcing collections – especially with asset finance, I think.

“We’ve started growing the team, with a third member joining at the end of this month. Through this we can sit and discuss cases and situations, share experience and knowledge, and listen to conversations on the phone. Assets can go missing very quickly; sometimes you have to act fast, and outsourcing can delay how quickly you act upon certain triggers or certain events.”

From the third-party perspective, Scotney is well aware of the responsibility and outlook necessary in working for a leading asset finance provider: “We represent an enormous number of very well-known, global brands who make a great deal of effort to ensure that they represent their customers in the way that they are expected to. As a consequence, we need to make sure that we do the same. If you actually look at the amount of times that you get a third-party being entrusted with the level of responsibility that we’re given, I think it is fairly rare in the collections environment.”

Modern collections figures are clear in its need for professionalism, from both an asset finance perspective and for third-party collections agencies.

Both sides, and from a legal input, are also aware that there must be a continuation of improvements to fully adapt to recent changes in the industry.

If an interest-rate rise does have a tumultuous effect on collections, it will be vital that the sector is able to understand and effectively deploy the resources within its remit.

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