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Collections Resilience post COVID-19 - part 2

December 14, 2020 at 10:15 AM

Principa Decisions (Pty) L

In part one of Collections Resilience Post COVID-19 we looked at the importance of digitalisation and the need to pro-actively identify debtor types through analytics (analytical evolution).

Within this second part of the blog we are going to focus on legislation and scrutiny post Covid-19.

A subject which has received a lot of attention recently, has been the requirement for financial institutions to treat their customers fairly. Even though this has always been an implied principle, The Conduct of Financial Institutions Bill will empower the Financial Sector Conduct Authority (FSCA), established under the Financial Sector Regulation Act, to set conduct standards and to regulate the operations, culture, product design, selling, marketing, advertising and internal procedures of financial institutions.

As we mentioned in part one, we can segment debtors into three main types, namely financially disorganised; those in financial difficulty and those that are financially distressed. In practice, however, we segment these main types into much smaller groups of similar accounts, or similar debtors.

 

“The Conduct of Financial Institutions Bill will empower the Financial Sector Conduct Authority (FSCA), established under the Financial Sector Regulation Act, to set conduct standards and to regulate the operations, culture, product design, selling, marketing, advertising and internal procedures of financial institutions.”

 

How will The Conduct of Financial Institutions Bill affect the Collections and Recoveries space?

 

Here are a few questions we are being asked regularly:

  • Does this new bill now imply that all debtors must be treated the same?

No certainly not, but it does imply that even though we assign different tones and types of actions to different account and debtor segments, we need to align the content and intent to “treating the customer fairly”.

  • Does this new bill now imply that financial institutions need to do more from their side in order to treat the customers fairly?

Yes, and we are already seeing it more and more from the larger financial institutions.

As an example:

Regarding affordability of customers or debtors; historically, companies would do an affordability assessment when a new (or in some cases existing) customer applies for a loan, overdraft or credit increase. An assessment was required when a customer required credit, but no assessment was done when that account entered collections.

When entering collections we typically negotiate payment terms, and the only reference we have is the initial affordability assessment and analytical models to determine “probability of payment” or “probability of default” etc.

It is therefore becoming clear that we are not treating the customer or debtor fairly in our approach within collections. Within collections our aim is to “rehabilitate” the account (and therefore the customer). We are there to assist and guide the customer or debtor in order for him or her  To get the account up to date, and improve their credit bureau standing. If we do not assess the customer or debtor’s financial situation within Collections, how can we accept payment terms which could be unaffordable and only lead to further delinquency? Will we be “treating the customer fairly”?

With new legislation, it will be vital to do affordability within collections and recoveries, and therefore our systems need to be aligned (but more on that in Part 3).

Is the current Debt Review process in South Africa aligned to TCF?

This is going to be a controversial topic, but let’s look at it with an open mind.

The current debt review process has been marred with controversy and unsatisfied customers. According to the National Credit Regulator’s latest annual report, there are currently 1 495 registered debt counsellors, of which 705 were found to be noncompliant.

Based on that data - within an industry created to assist overindebted customers, almost 50% of that industry are noncompliant to governing regulations!

When we look at the people the industry has been created to assist, we will regularly see articles of customer complaints and dissatisfaction - you only need to type in “debt review” into HelloPeter to find examples here.

It is therefore obvious that the current Debt Review process has its flaws, and if we need to measure it against treating customers fairly, it will in all likelihood fail.

Finding a solution

In my opinion the biggest issues within the current process are:

  • Specialisation: Debt Counsellors only need to do a short course to receive a Debt Counselling Certificate (I have also done the course and received the certificate), which empowers them to give specialised financial advice and restructuring power over credit agreements. By making it easy to earn a qualification to give financial advice, often opens the door for irregularity.
  • This industry remains a business, and as such, the aim remains to make a profit. This is in my view the root cause of most of the issues of the Debt Review process.

But what is the alternative?

The process of rearranging credit obligations in order for over indebted customers to manage responsibilities (personal and financial) remains extremely important, now more than ever before.

UK Debt Review structure

The UK debt review structure could be the answer wherein non-profit organisations or organisations which provide a service without financial gain objectives assist with the issue at hand.

  1. The second we introduce companies, which have not been created with profit in mind, we can truly provide a service for the overindebted to assist them. The focus will now not be on profit, but customer outcome based.

Companies such as StepChange, Citizens Advice and Debt Advice Foundation are all non-profit UK based organisations, which rely on industry funding rather than customer based funding.

I therefore believe that if we create non-profit organisations, which are funded by the credit industry, both consumers and credit providers will ultimately reap the benefits.

Let me know your thoughts on this topic by commenting below... 

In part three of this series we will cover flexibility of systems and processes.

 

 

Perry de Jager
Perry de Jager
Perry has been involved in Collections and Recoveries for the past 15 years, spending time in different market segments ranging from law firms to investment companies. At Principa, Perry has worked on extended projects within both South Africa and the Middle East with some of the largest financial organisation, providing on-site consulting within the collections and recoveries space covering strategy, process, people and technology.

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