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The Credit Services Association (CSA)
Blog: Cabinet Office Fairness Meeting: The Standard Financial Statement and debt collection
Peter Wallwork is chief executive of the Credit Services Association, the UK trade body for the debt collection and debt purchase sector.
I attended a Fairness Meeting at the Cabinet Office last month where I was asked to be part of a panel along with Citizens Advice and Computershare on how the new Standard Financial Statement (SFS) fits in to debt collection.
The new SFS format (which replaces the Common Financial Statement) is now being used by debt advice providers as a consistent tool for summarising a person’s income and outgoings, along with any debts they owe. This will allow the debt advice sector and creditors to more easily work together to achieve the right outcomes for those in financial difficulty.
Here’s a summary of my contribution to the session, which was met with a positive response from all those involved…
How debt collection has developed in recent years
There was a time, quite a while ago now, when debt collection was all about cash collected and not much else. I don’t mean it was about baseball bats and leather jackets, but the focus was very much on the numbers.
There is a big difference between the world of local and central government debt and consumer debt, whether it be FCA regulated or not. Local and central government doesn’t budget for any of the debt to be written off nor does it decide who it will ‘lend’ to. It doesn’t and can’t decide who its customers are – it’s a ‘fait acomplis’ and it needs to get the money in otherwise, especially in the case of local government, it can’t deliver the services promised locally. And that’s not to mention any political pressure!
If I cast my mind back to those old days when ‘cash was king’ and league tables were drawn up between competitors to decide who got the most work, it was all about performance – the amount of cash collected tempered by the number of complaints received. The more cash and the least complaints was the ideal.
I haven’t always worked in unsecured credit; I moved to it from mortgage lending and collections. In secured lending and collections we ‘counselled’ the customer by asking them their income and expenditure and finding a workable solution to repay the mortgage arrears. We had security of the property and could easily have gone for possession, but we still found the best way was to find a workable solution – most importantly, one that would stick.
When I moved from mortgage lending and collections to unsecured collections I found that there was less contact; very little of it was face to face, it was nearly all done over the telephone and arrangements to repay the debt were made. A lot more of these ‘promises to pay’ failed in unsecured than we saw in mortgage arrears counselling.
We had one particular client – I’ll not name the lender – that was putting us under a lot of pressure and we worked the debt hard. But the result was that we put the customers under such pressure that they couldn’t keep to the promises we’d talked them into. There were two reasons for this. First was that they simply couldn’t afford it and secondly they probably had other debts and other DCAs were calling them and doing the exact the same thing. We used to have to telephone that file of debt almost every month to re-establish the arrangement and they broke every month! It was madness and we were ‘busy fools’. It wasn’t good for the customer, it wasn’t good for the client and it certainly wasn’t profitable business for us either!
However, attitudes have changed a lot over the years. The FSA initiative ‘treating customers fairly’ (TCF) marked a turning point and the ‘credit crunch’ led to calls from regulators for forbearance with some commentators crediting this in no small way to helping the UK’s financial recovery.
While focus on the right customer outcome was once met with resistance - cries of “how can I make any money if I’m not getting a payment on every call?!” – it is now the norm with both the ethical and business case being recognised. We’re in a different world.
Signposting to free debt advice
A key part of this ‘new world’ of debt collection is also a recognition that signposting to free debt advice is not at odds with the commercial collections model.
To put it simply, if someone simply can’t afford to make the payment, what is likely to happen? They won’t pay! They might pay once or twice, but if they genuinely can’t afford it – even if they really want to pay, they won’t keep paying it for long. So it fails, then you have to expend resources in chasing them up – a letter; a couple more telephone calls and another promise made again – the cycle continues.
It’s not rocket science. Make an arrangement having taken into account their financial circumstances and guess what – it sticks. And unless something else bad happens to the customer, they keep paying. And if that’s the way ‘the industry’ works – then the second reason the arrangement fails doesn’t apply either, because they’re not being chased by the other agency into making an arrangement they can’t afford. No breaks, no extra resources expended and you can forecast accurately how much money is going to come in – it’s good for the customer, it’s good for the client and its good business for the debt collection agency. And the regulator is happy.
Where does the Common Financial Statement (CFS) come in?
So where does the CFS come in? Why does some agreed form of income and expenditure calculation and recognised trigger figures make a difference?
Well, turn the clock back again to the late 90s and we saw the emergence of the fee-charging debt management company. Just to clarify, debt management is different to debt collection. Debt management firms, be they free to use or fee-chargers, work for the customer in debt and contact the creditors on their behalf – some distribute payments to the creditors, some don’t. Debt collectors work for the creditors and contact the customer in debt.
When some of these fee-charging debt management companies set themselves up, they presented creditors and debt collection agencies with income and expenditure forms, sometimes making out the customer had very little money to pay creditors. But on closer inspection, the I&E was inaccurate to say the least and took on many different forms, shapes and sizes – it was unreliable at best.
Understand that and instantly you can see where a CFS is a great solution. The Standard Financial Statement (SFS) replaces it and another like it, but draws it together into one recognisable form for debt advisers, debt management firms and debt collectors to all use. If we all speak the same language, it cuts down on the chances of getting it wrong.
We need a consistent approach to financial difficulty
As I mentioned earlier, not all consumer debt is FCA regulated including utilities, gas, electricity and some telephone debt. Most of our members, but not all, work all types of consumer debt, regulated or not and they are keen to uphold the highest standards whether regulation dictates that they should or not. Let’s face it we’re often all speaking (in the majority of cases) to the same people.
Ofgem have a consultation out at the moment and it looks very much like they are moving to a principles based regulation for the power utility market, although we’re yet to see how that may filter down to debt collection for that industry. And Ofwat (the water industry regulator) recognises the sense in the FCA style of regulation too.
Government debt isn’t regulated by the FCA – or any single regulator for that matter – and I realise there is some unique debt in the government portfolio that makes what I am going to say next a little difficult. But there is one common denominator between all debt, be it FCA regulated or not. And that’s the customer, the consumer – people like you and me – we don’t react differently, just because the debt is a different type of debt. The problems don’t change because we owe the money in tax rather than a loan. We all need a consistent approach to financial difficulty when things go wrong.