Credit, Collections & Insolvency News
This blog is written in advance of the Credit-Connect Online Collections Technology ‘Think Tank’ on 16 September 2021 around transformation in debt management strategies. This blog uses my recent experience as delivery lead on the ‘Contact Engagement Programme’, part of the Government Major Projects Portfolio (GMPP). This was a displacement programme involving public procurements on a SaaS/PaaS basis involving complex cloud2cloud integrations and data migration. It also takes account of experience as a subject matter expert in the debt management sector (e.g. Supporting Debt Transformation discovery activity) and as a director of the Debt Managers Standards Association (DEMSA).
I have highlighted my Top 10 (with an eleventh as an emerging challenger) factors that may shape ‘business transformation’ thinking in the ‘debt management’ (in the widest sense) space in 2021:
Tailored forbearance going forward
The ‘Think Tank’ event takes place as many Chancellor forbearance schemes come to an end and government agencies ‘return to collections’, with HMRC now having crown preference from November 2020. How will lessons learned from the pandemic be used and evidenced in mainstream activities, will some practices revert to pre-pandemic models or have we moved on in both the consumer and micro-business arrears management and collections spaces? Digital engagement has progressed, partly through necessity when the workforce moved to home working and partly through customer preference.
Enforcement activities have been generally deferred and collection activity from May 2021 was fairly benign with use of lettering and digital messaging being the main activities with telephony activity still very subdued, especially to those where there is evidence on record that the individual or firm has been impacted by COVID-19 (e.g. CJRS or SEISS claims). This seems a critical assessment going forward.
Many regulated creditors and insurers have been challenged by the FCA to ensure their record keeping is of the highest standard and that they can pro-actively identify changes in circumstances as part of the tailored forbearance schemes that should have been in place from April 2021. This has put more focus on RegTech used by firms of all sizes. Governance, risk and compliance should now be an integrated part of the systems & controls driving everyday operational processes. The evidence is that this is still immature and that WFM tooling and other QM and compliance oversight services are only integrated with firms that are ‘pioneers’ or have been in sectors subject to high-levels of regulatory scrutiny (e.g. sector or firm based ‘deep dives’). How much ‘knowledge’ is transferred to key data processors looks an important topic.
‘Hot topics’
Various business groups and trade unions have called for the furlough scheme to be extended to protect workers in industries that continue to be impacted by the COVID-19 pandemic. There is concern about a potential spike in redundancies as the furlough scheme comes to an end. The British Chambers of Commerce is forecasting a rise in unemployment above 5%.
The end of the £20-a-week Universal Credit uplift comes to an end on 6 October and this has stimulated a strong reaction in terms of the potential consequences on those families and micro businesses that have relied on this payment. In terms of balancing the books, the extension has been estimated to cost the taxpayer around £6 billion a year.
Meanwhile, increasing inflation will add up to £12 billion to the cost of servicing government debt. Around a quarter of the UK’s national debt is tied to RPI, which reached 3.9% this month and is forecast by economists to reach 5.6% by the end of 2021. This is likely to focus the UK government position.
It will be interesting to see what central and local government ‘business readiness’ activities arise from the HMG Debt Management Functional Standard (Jul-21) and Vulnerability Toolkit (Aug-21). Most central government agencies will be now compiling their ‘Strategic Review’ (SR) bids for the coming financial year(s) and this type of change should feature, including measures to improve fraud prevention, which also prominently featured in the Cabinet Office ‘call for evidence’ around central and local government debt recovery practices. Alignment of public sector and commercial sector practices seems very important to encourage consistent customer journeys and outcomes.
There needs to be clear differentiation in future collection strategies between those impacted by COVID-19 and those that weren’t, especially given the polarity between the winners and losers during the pandemic from a financial resilience perspective. This is where good data analytics is important.
Cabinet Office minister, Lord Agnew, said at the launch of the HMG Debt Management Vulnerability Toolkit:
“This new guide will ensure an individual’s hardship and circumstances are factored into their cases by government bodies.
“At a time when the country continues on its path to build back better from the pandemic, it’s vitally important we don’t lose sight of the need to not leave anyone behind in the process.”
However, the minister has been fairly vocal around collection of taxes and government debt for those not impacted by COVID-19. One of the intents of the Toolkit is to allow the government to focus on those who are deliberately trying to avoid repaying debts to government, which can include debt to public sector creditors that include overpayment of benefits, council tax arrears or outstanding fines. In some instances, this can be down to inefficiencies in the systems administering these types of payments.
SFS
The Standard Financial Statement (SFS) has now matured and this is a de facto standard, but is still open to some variations between different creditor groups. This should be integrated into all affordability assessment tools and new trigger figures used as a guide when updated in April 2022.
FCA Consumer Duty consultation paper (CP21-13)
The FCA has signaled a “paradigm shift in its expectations” and the impact of the Consumer Duty cannot be under-estimated in terms of its regulatory intentions and the need for a robust Conduct Risk Framework supporting a business model. This is particularly relevant where risk appetite may result in ‘consumer harm’.
Registry Trust Limited (RTL) took the opportunity in their CP response to highlight how a small change to the way firms process payments of CCJs could make a big difference to the financial wellbeing of vulnerable consumers. They focused on the process for ensuring CCJs are marked as ‘satisfied’. When consumers settle a CCJ debt in full, they currently have to inform the courts (in E & W) or RTL (in other jurisdictions) and provide ‘proof of payment’ in order for it to be shown as ‘satisfied’ on the register and subsequently on their credit file. There is a low level of consumer and micro-business awareness of this process.
‘Partial settlements’ are also not currently recognised on the register, leaving those who have come to a mutual agreement (e.g. after a debt is purchased) with the claimant with no way of evidencing it. RTL believes that users of this data may be operating with incomplete, inaccurate information on consumers’ financial circumstances and behaviours. They are proposing that this gap is addressed by creditors being required to notify the courts or RTL when a CCJ has been fully or partially settled. RTL are making the same point to the other sector regulators that are part of UKRN, such as OFCOM, OFGEM and OFWAT.
FCA desired outcomes of consumer credit
I think the FCA vulnerability guidance (Feb-21) will have helped debt management firms prepare in terms of how they have reviewed and tested their products relative to the vulnerability agenda. Clearly, COVID-19 will have assisted as a major test both in terms of communication strategies, but also in adapting products & services both during the pandemic and afterwards.
Customer service will have been adapted to take account of virtual working, with some working practices being retained after lockdown has ended. The changes to the SM&CR Conduct Rules for all staff in March 2021 set the tone of what is to come with the Consumer Duty and regular adaptions to products & service delivery would have featured with the introduction of the Debt Respite Scheme on 4 May 2021 and the changes to the DRO eligibility criteria in June 2021. Change is a constant factor and some of the regulatory changes can deflect from other firm or sector specific strategic initiatives unless properly planned and funded as part of the strategic planning processes over a 3-5 year timeframe.
Many are looking at the impact of Statutory Debt Repayment Plans (SDRPs) from May 2024.
The FCA expect to see fewer upheld complaints in consumer credit, though complaints relating to debt advice and debt adjustment are proportionately very low, as are claims to FSCS relative to levies.
The FCA will continue to monitor how firms provide tailored forbearance support.
HMG Vulnerability Toolkit (24/8/2021)
This was commissioned in January 2020 by the Fairness Group Vulnerability Sub-group to understand how vulnerability is currently identified and supported, in the context of how government interacts with people in debt.
DEMSA welcomed the publication of the Toolkit, especially the recognition of good engagement with the debt advice sector, data driven approaches to customer engagement and wider data sharing. Government agencies are encouraged to effectively use CRA data and Open Banking/Finance data within tools and analytics services to identify customers in or at risk of financial vulnerability. They should look at creating data partnerships within and outside of their sector to proactively identify customers in need of additional support (e.g. Vulnerability Registration Service).
They should look at use of technology to enhance vulnerability identification, with examples of speech-to-text analytics and sentiment analysis. This extends to third-party vulnerability referral forms/databases.
There are many familiar themes with the FCA vulnerability guidance. However, the major difference is that the FCA reminded regulated debt collection and debt solution firms that their guidance applied immediately after 2 previous consultation papers.
The headline press releases don’t provide any detail on the timetable for adoption of the HMG toolkit for adoption by central and local government agencies. As discussed above, implementing the Debt Respite Scheme in May 2021 was a major challenge and this was regarded as a regulatory requirement that tends to prioritise government agency funding, but often with a transitional solution that reflects a ‘just in time’ approach with a ‘minimum viable product’ (MVP).
Consumers struggling with debt
In line with the MaPS forecasts, the FCA expects greater demand for debt advice later in 2021, including from consumers who would not previously have needed it. Identification will be key when the demand begins to rise with close collaboration between the debt collection and debt advice communities.
Credit information market study (MS19/1)
The FCA is looking at the relationship between credit information and firms’ forbearance measures. They will also look at the impact of credit information on borrowers in financial difficulties, which was a key issue during the pandemic.
The restarted study will take account of the Woolard recommendations from February 2021. The work will reflect market and regulatory developments relevant to credit information over the last 18 months, which have been considerable. This is most in evidence in terms of consumer portals and the integrated use of CRA data and open banking. New data contributors (e.g. Vulnerability Registration Service) need to be taken account of.
Scope includes:
How aspects like the Debt Respite Scheme from May 2021 is consistently reported by lenders could be really important.
*Kevin will be part of a panel discussing Business Transformation at the forthcoming Online Collections Technology Think Tanks. Join Kevin on Thursday 16th September from 9.30 am.