How lenders and collections professionals are finding alternatives to repossession and enforcement action in consumer motor finance, a round table discussion hosted by Motor Finance in collaboration with Burlington Group.
While debt management was typified before 2008 by fast terminations and a high level of repossessions, the changed landscape of tightened credit post-financial crisis has witnessed a decline in collections and a rise in nuanced money management, from both lenders and borrowers. Against this backdrop, Burlington Group and Motor Finance assembled seven attendees, each either head of collection services or highly involved in the risk assessment of their company’s portfolio, in Cornhill, central London to discuss the options presented by private debt held on vehicles in 2013. Given the nature of the discussion, some attendees have chosen to remain anonymous.
Fred Crawley: What are people’s experiences of the arrears environment in the past 12 months?
Delegate 1: Motor finance arrears have been very good for the past 12 months, not as many are coming into delinquency. However, at the serious or recovery stage, I’m seeing a lot more fraud, and more-serious fraud, than 12 months ago. Or, when trying to repossess a vehicle, if they have paid over a third of the finance, customers are saying to judges there are mental health issues in play. Judges are being more lenient towards customers to keep the vehicle.
Delegate 2: Legislation has been herding us towards a TCF (Treating Customers Fairly) environment. Consumers are getting switched on to their rights, including mental capacity issues. As organisations, we are too, but we have procedures to help us with that. In a constricted economy, you tend to find a high level of conversion fraud. Then you get into the innocent-purchaser argument which is always a difficult matter to prove.
Delegate 5: The number of accounts going into collections or difficulty is reducing, but we tend to find the severity is a little worse when they get into arrears. Legislation has brought mental capacity to the forefront and it’s becoming a key consideration in the collection process.
Delegate 3: How much of that is because we’ve got better at identifying these things? Historically, we weren’t listening out for the trigger.
Delegate 2: We did it as a result of lobbying on various legislation, such as TCF, responsible lending, satisfactory quality, etc. Our organisation follows TCF and all of its principles. By embracing those changes we are reducing our debt and losses, which is new territory for quite a few lenders. There’s been a process: You have an asset with a value, you need to pay for the asset or return it. As organisations, we’re acknowledging we don’t really want to take the vehicle back. It’s a last option for us. We’ve been doing that quite successfully since 2006 and saved millions in gross losses.
Delegate 4: We’ve seen reduced delinquency rates and rates. But how much of that can be at least partly linked to the economic challenges, and the reaction to that, like adjusting underwriting criteria, being more careful what we bought and improving our scorecards? The reduction in delinquency is because we’ve become better at getting the more-casual delinquents to pay quicker. Before they get into serious arrears we’re using different techniques to reach out to them more quickly and help them before they get to a delay of 30 days, which gives us time to attend to TCF.
Adam Wonnacott: The reduction in delinquency appears to tie in with the 2008 restriction in credit. The reduced appetite for lending in the past four-to-five years now seems to translate as historically low levels of default. But how are lenders current processes geared to meet potential new requirements?
Delegate 2: We need to appreciate that, going back 15-20 years, your credit file was absolutely everything. Then we went into this artificial world where you tripped over credit being thrown at you on your doorstep. Now we are in an over-indebted economy, with prices falling out of the property market, meaning people haven’t got the equity to pay the debt they had 5-10 years ago. You’re also looking at another scenario where lenders are stricter in terms of what they are prepared to lend. A customer’s credit file has again become this very precious commodity, in terms of their future aspirations, financially. We’ve seen clients become extremely agitated if their credit file is impacted. We’re slowly creating a better nature of payer, because they’re aware the next time they come to get these credit agreements, they’re not going to get it unless their credit file is clean. The occasional miss-payers, our "repeat offenders" that pay every month, but pay late, are getting better because they don’t want to impact their credit file. We’re seeing it on PCP; people are staying in their contracts, wanting to keep the cars, because they’re having trouble getting finance elsewhere.
Delegate 1: I have experienced that myself. People are getting savvier about their credit file. They were aware before, but they didn’t understand the importance; they could get credit somewhere else. I don’t agree lending is getting tighter because we’re lending more than we’ve ever lent before, since the recession. Maybe that’s a prime thing, but prime is, not only as a percentage of arrears, just having the most phenomenal month, every month. Besides the percentage of the outstanding debt – obviously if you lend more, you’re arrears book is lower because all this stuff is recorded as a percentage – the actual number of cases of arrears is lowering, even though we’re lending more.
Delegate 2: Provisioning rates, in effect, are changing, because your arrears cases are going down and your actual arrears book is likely to include more true default. That’s where you’re seeing debt counselling and debt-managing programmes. If we notice a customer who is constantly down, struggling to catch his breath, but paying regularly, we will go to that customer and offer a means for them to catch their breath, whether a deferment of payment for a month, or a change of a due date. We’re seeing quite a take-up on that, we get the customers back onto direct debit and they tick along nicely.
Fred Crawley: Has everybody here found a peak in volume and quality of their book?
Oliver Mackaness: We’re a subprime lender and we’re definitely finding that our arrears are our lowest ever. We are lending to almost-prime people but our processes are much better. We contact people a lot more regularly, we’re texting people, as soon as people go into arrears we’re contacting them, whereas before there was a delay. We’re getting a lot more VTs (voluntary terminations). When people get to the halfway point and struggling, they’re saying: "I can’t afford this anymore," then they’ll hand the car back. Then their account gets closed, so they’re not falling into arrears. The fraud thing is true as well. This year we’ve had the most ever direct debit indemnity claims.
John Ingram: Does the table think the low default rates enjoyed by prime lenders are linked to historically low base rates? Might we see prime borrowers, currently enjoying low mortgage rates, start to default on finance obligations when these low mortgage rates end?
Delegate 2: Base rates are one thing, but you can look at the average increase in salaries, around 1% so far in 2013. We’re expecting inflation to be 3%. We’ve been running on this disparity now since the recession hit. The impact on your average debtor is that their income has stagnated, or gone down, whilst the cost of living has gone up.
Delegate 5: Interest rates help, but I don’t think it’s a key driver. Our investigations suggest that it’s the changes in consumer circumstances that drive the delinquency and variations in the economic circumstances that impact our arrears levels.
Delegate 2: We factor them in as life-changing events, and this is what we’re seeing in our default book. It could be ill health, change of employment, marital break-up or bereavement. Anything along those lines which has a major financial impact on the customer. That is certainly what we’re seeing in the small default we are experiencing.
Delegate 5: Across a customer’s portfolio of credit, there is a hierarchy of payment. The mortgage is the one that gets paid, and motor finance is close in importance these days because of the dependence people have on the car. Being part of a larger group does help us to see the different customer behaviours for different types of credit. When you have that portfolio of credit and you have that order of importance, there are different drivers depending on the product. On the motor finance and the mortgage side of the book, it’s very much about changing circumstances and things a customer can’t help, whereas a credit card, for example, can have missed payments for lots of additional reasons.
Delegate 3: We find that as well. People, even if they haven’t got a job, they might let their mortgage slip slightly because they believe that banks in this environment aren’t going to repossess, whereas they recognise that they need a car to get a new job. So if the motor finance is starting to go, it is a concern. That is usually the last thing to go. As organisations, perhaps we’re better at looking at the long-term cure rather than repossession. We’re looking at supporting the customers. If we can help them in their times of difficulty, when they then find that job, when they get over the life change that just happened, they’re going to be loyal customers. And they will pay you, because you helped them.
Delegate 2: A good indicator, and I’m not sure if you guys have seen the same thing, is that when we get our IVAs (individual voluntary agreements) and our bankruptcies through, the car finance is excluded. Insolvency practitioners appreciate the asset has a value, and we’re not going to want anything detrimental impacting the value of that asset. They appreciate most people need a car to travel to their employment to be able to pay their other creditors who are under the IVA or part of the bankruptcy.
Delegate 1: Absolutely. Customers know that if they go into arrears we can take back the vehicle and get in touch with the IVA or the bankruptcy.
Delegate 2: Our default rate is only about 3% on bankruptcies and IVAs. These are people who have reached a critical situation in terms of their economics, entering IVAs and bankruptcies, but they will maintain those payments. Keep a roof over your head and a wheel underneath, and then hopefully prosperity will return.
Delegate 4: The key to treating customers fairly when people have changes of circumstance is how the company reacts. It’s about treating them as individuals rather than run them through a policy. We’ve got better at looking at individual circumstances and finding the best solution for each customer, which isn’t always the same thing.
Melanie Chell: Acting for various different motor lenders, I can see trends. First, a huge decrease in the volume of files passed onto us. Some clients pass them to us early, for collection, some later, when they need a return of goods order. Our clients definitely prefer to keep customers in their vehicles. If you haven’t got those wheels anymore, you’re less likely to engage because that debt has gone to the bottom of the list of priorities. Secondly, TCF has embedded across the industry, and everybody now understands what it means: forbearance and understanding. So our whole approach to collections has changed. You no longer have a hard-nosed phone call, saying: "We’re litigators and we’re going to come and get your car". They won’t engage with you if that’s the approach you take. Now we are listening to customers and understanding their individual financial circumstances. Customers are going to take another call from us because they’ve been understood and they’ve been listened to. If you imbed TCF within your businesses you can sort out the "can’t pays" from the "won’t pays" and adopt a different strategy for each case.
Delegate 2: You are equally bound from the other side not to worsen the situation the customer is in. As an organisation, we appreciate that the asset is depreciating, so you would want to help the customer as much as possible, but sometimes that is by taking the vehicle.
Fred Crawley: Has this changed your recruitment and training of collections teams?
Delegate 2: There is an element of cultural change. All the procedures have to be changed in line with legislation. The process and staff are moving along as times have changed.
Delegate 3: It’s more about behaviour and being open-minded.
Adam Wonnacott: We are now dealing with people that can’t pay, not necessarily that won’t pay, and we must adapt our collections strategies accordingly. Increasingly, we are dealing with people who are experiencing genuine payment difficulties as a result of life-changing experiences.
Melanie Chell: And it’s about considering new strategies. There is a whole generation of people who only want to text and email. We have to respond to that. There are people who won’t pay if you call them, but if you give them a web portal and say: "At 11 o’clock tonight, before you go to bed, you can pay us £10", they will do that because it is faceless and they are embarrassed. We’re seeing an increase in the number of people paying that way, rather than directly engage.
Delegate 2: We’ve already seen the move to the mobile scenario and the use of SMS in terms of debt collection. We’ve been using this for four or five years now. It’s extremely effective. Now it’s about capturing e-mails and establishing what we can and can’t send in e-mails.
Melanie Chell: One of our best collectors is incredibly respectful to our client’s customers. She refers to them as ‘Sir’ and ‘Madam’. That really catches people by surprise and means they want to engage with her when she calls again.
Delegate 2: We do a lot of training. It’s the ‘reasonable’ test. If you were a customer, and this was happening to you, how would you want to be treated? It’s paid extreme dividends to say: "Put yourself in that scenario."
Delegate 1: There are cases where people have received too much credit and can’t pay, but life-changing things happen to people who are more savvy, from the financial world. When they offer something – "I’ll declare off my arrears I will pay you 70%, 80%" – it’s because they’ve done all their maths, they know how to work out their finances.
Fred Crawley: Is this the flip side to increased customer awareness?
Delegate 2: There are a lot of free agencies out there and the money advice service. It infuriates me to see customers being ripped off by fee-charging agencies. The huge push I have with my guys right now is to get to our customers before the DMAs (debt management agencies) and we won’t be charging them to that extent; in some cases we won’t be charging them interest on fees. We just want to recover our debt at a rate which is fair and reasonable.
Adam Wonnacott: Would you signpost the customer to a free advice service?
Oliver Mackaness: We’ve advised people to take up these services. However, when somebody has called up for a payment arrangement, we’ve actually said no to people sometimes. Someone will say they can’t pay this month and we say its fine, they can pay over two months. But, if they’ve lost their job, we ask them to send proof of this. This has improved our arrears.
Adam Wonnacott: That is a different approach. It’s just that what we were talking about a few moments ago having become the norm, and has become so over the past four or five years, with the increased emphasis on TCF and forbearance. The collections industry has changed significantly.
John Ingram: It’s actually worked. Initially it was forced upon us as a new burden, but time has shown the benefits.
Delegate 3: I embrace the regulation. You are fairer and more reasonable with the customer and they respond well because they know you are taking their individual circumstances into account. Even if you get to the point of default termination they know you’ve tried to help them. Then you are more likely to get the car back quicker. You’re less likely to have to send cases back to litigator and over to court, which is the last resort. Once you’ve got the car back and you’ve got the shortfall, they’re more likely to be engaged without you having to escalate it, because you’ve been fair and reasonable. Overall, it’s helped us recover more money. It might be spread over a longer time period, but you are recovering more and it sticks more.
John Ingram: Supporting the other side of your business ,which is working very hard on reputation and customer retention.
Delegate 3: Coming from captive finance, it’s not just the financial services brand we have to protect; you also have to protect the manufacturer-brand. The customer goes into the dealer showroom, after seeing an advert or by having an emotional attachment to that brand. The dealer shows the brand; they come through to the finance side and generally have customer service correspondence with us; again, we are the brand. When they go into arrears, why should it be any different? We need to make sure, even when a customer is in arrears, that we try to treat them as the brand would want, as well as overlaying all the TCF and OFT debt collection guidance.
Delegate 5: There is clearly a theme of customer-centricity and the way we talk to customers coming through. A few people are saying better recovery levels are evidence that this is working. What I am interested to know is: What is happening with your complaints? Are they falling?
Delegate 2: Absolutely, we have a committee to look at the statistics and specific cases. We analyse those; we feed back into the operation where we feel there is a potential weakness within the organisation or the product, or whatever has created that complaint. There is complete transparency and analysis of the complaints fed back into the business.
Delegate 1: True arrears cases are falling. However, there has been a lot more due to PPI, but that is completely different. As a bundle, our complaints have gone up due to PPI. However, 95% of our PPI complaints don’t even have finance with us, and 40% have never had any car finance anywhere. Of the true arrears, we actually get a lot of thank-you letters.
Adam Wonnacott: Again, this is because we are occupying the role of a debt councillor, and in that role it’s quite conceivable that the customer is going to be quite grateful for our assistance.
Oliver Mackaness: We only have eight controllers. Each credit controller will be assigned to an account. People phone and they ask for Geraldine, their account manager, and they have a great relationship with her. And Geraldine, who’s been with us for eight years, will see the customer through their four-year agreement. There is a personal touch there and often they won’t speak to anyone else. That, in a way, is bad, but it’s good there is that rapport, they’ve been through the children, split-ups and heartache. It’s good customer service and they will appreciate that and come back to us.
Delegate 2: It’s about the customer journey. Loyalty to a product was the initial driving factor but the support you offer during the life of that contract equally counts.
Oliver Mackaness: We’ve changed in the last five or six years. We’ve become a lot more consistent in how we’re dealing with debt. People are aware of what our system is. If they miss a payment, we’ll come to an arrangement, but if they miss that arrangement, they know there will be a consequence. They’re not shocked because we made it clear at the beginning, we’re not hiding anything.
Delegate 2: It’s about keeping the communication avenue open. If a customer comes to us prior to the event and explains everything, we will look at that to see what else we can do to help. But you’re not doing them any favours by allowing them to get into more debt and have an asset that is depreciating. Hitting that optimum arrangement, so you’re helping the customer but you are not going to be putting them in a worse position. That is where the skill of the collector comes in.
Delegate 3: Then, when you do escalate and have to go to repossession agents or solicitors, your partners are aware of everything you’ve done and how you’ve had to adapt to the customer’s needs. Then they don’t do something that is completely different and doesn’t sit alongside the experience of the customer, or they don’t do exactly the same thing you’ve already done.
Fred Crawley: How do you plan to accommodate the regulatory shift from the Financial Services Authority (FSA) to the Financial Conduct Authority (FCA)?
Delegate 2: They will probably want to make an impact within the first 12 months. There will be a no-nonsense approach and they are going to want to set a benchmark. We’re seeing that a little with licensing.
John Ingram: The quick wins are going to be with pay day lenders. Recent indications suggest that there are two million regular users of payday lenders now. So I’m sure they’re going to be a target.
Delegate 5: We are expecting a lot of regulatory change in the second half of this year and it’s likely to require a large degree of investment in resource and system changes. Even just changing the letters FSA to FCA is a big thing. Everything is automated within a system and just making that small change requires a relative large amount of change and investment.
Delegate 4: At the seminar organised by the FLA, they discussed an interim permission, so it looks like you’ve got to change your letters to say you’ve got an interim permission and then change them again when you get the final permission.
Fred Crawley: What potential upsides are you seeing from a new regulatory regime?
John Ingram: As a debt collections agency, we’re going to see operators leave the marketplace. We’re going to see lenders being able to take greater comfort in knowing who they are dealing with because the best practice regime that we currently adopt will be mandatory. We are already subject to regular, detailed, client audits in a broad range of areas of our business, so we are confident that we will be one of the few companies operating in this niche sector that can meet the FCA’s requirements. As a result, lenders will be able to take greater comfort in dealing with FCA licensed parties, which is a positive for the industry.
Delegate 3: It is, but then it’s going to be harder for people to break into the market as the regulatory burden becomes greater.
I agree it’s going to move in the way we’ve been moving anyway. When we talked about debt collection guidance and irresponsible lending guidance coming out, initially, there was a bit of antipathy, but actually it’s helped us become more responsible and transparent, as an industry.
John Ingram: Cost of compliance is significant. Burlington now has a dedicated, full-time, compliance officer; something that would have been unheard of until relatively recently and is now a necessity that comes at a significant cost. Smaller operators will, under the FCA regime, need to meet compliance costs or withdraw from the market. As a positive, it should see best practice become a minimum standard.
Fred Crawley: Will TCF or the FLA code of conduct take a back seat as the kind of behaviour they’re encouraging becomes mandatory?
John Ingram: I would say that’s inevitable.
Melanie Chell: But the new white paper already says the FCA will look at all of the codes and learn from them. So they become more important.
John Ingram: So specific industry associations will become more important, initially.
Adam Wonnacott: I understand that the FCA doesn’t intend to alter the OFT debt collection guidance too much, though.
Delegate 5: So one would hope, as they moved from the FSA to the FCA, that they should apply common sense, and let us continue things we’re doing already. Hopefully, there isn’t anything that radically changes the industry.
Melanie Chell: It’s more prevention than cure if you’ve got a compliance team in place, your policies and procedures clearly written, with evidence that not only do you have them, but you’re complying with them and auditing your compliance with them, then you will have far less to worry about. It’s no good saying you have policies if your staff don’t know what they say.
John Ingram: It should be very obvious to the FCA auditors where compliance is being adhered to and where it isn’t.
Delegate 3: My role has become more of a compliance manager, making sure my team are complying, have the right procedures and are evidencing it. We’re working with the suppliers and their partners: Are they doing the right thing and how are they doing it? One of the biggest parts of my job is making sure we’re up to date on regulation and we’re evidencing that we’re complying with it.
John Ingram: But again, the FCA should give you that answer in that they will, to some extent, be doing that job for you.
Delegate 3: But I still think I’m going to have to do it. If I’m going to wait for them to do it, then I’m transferring my responsibility to them. I have to show them I’m responsible and I’m not just relying on them, I’m ahead of them.
Melanie Chell: I don’t think they’re proposing to change as much of the Consumer Credit Act as they were originally, which shows the lobbying has worked. You have all spent a large amount of money on the CCD project to make sure you’re compliant, to amend all of your documents. It’s amazing to think you are going to do that level of a project again so soon.
Fred Crawley: How are you guys thinking, strategically, about mental health issues?
Delegate 5: If somebody is deemed to have mental capacity issues where they’re unable to keep to a financial arrangement, then the chances are there is some correlation about whether or not they should be driving. At a company that is predominantly unsecured, they’re equipped enough to sell the car before they get in touch with us.
Melanie Chell: Just because somebody has a mental health issue doesn’t mean, necessarily, finance companies have to write off the debt. It means you need to give them forbearance. Where you might give a standard 14 days in a letter before action, you may instead give a month for them to get back to you. You wouldn’t call them as often. You would engage with them by understanding what time of day is best for them, if there is someone else they could nominate on the account, or if there someone you can speak to, another family member, who is helping them with affairs. As long as you can evidence you are treating the customer fairly, you can still proceed to go for return of goods if you need to. If you are unable to engage them to surrender the vehicle voluntarily. The potential reputational issues at play may be serious and so we have always to bear that in mind, but you can still proceed.
Delegate 3: In the past lenders weren’t as equipped to deal with the warning signs. If someone presented the evidence, we dealt with it properly, but perhaps we weren’t as able to spot those warning signs. That is why we see the numbers increase, not necessarily because customers are just using that as a way of getting more breathing space.
Delegate 2: We train agents to identify those triggers, to ensure they’re aware if a customer is fragile and the protocol to deal with that. If a customer is particularly demonstrating signs of severe stress or mental health issues, even at that stage, refer them to the team.
Adam Wonnacott: It is something that interests me because, having come from the core part of the business in collections, it’s difficult when someone says something like that. How do you react to it? A lot of people are naturally inclined to brush over indicators like this and bring the conversation around to the issue of payment of the debt.
Delegate 3: That is why it’s especially important to have the specially-trained team. Then whoever is getting that call is not trying to deal with it without the training. They know who to turn to and then there is a conversation. That’s why we put the metal health cases with the vulnerable customer cases in this specialist team who are able and trained to ask all the right questions in the right way, and know the right time frames, because it is different to a standard collections approach.
Adam Wonnacott: Did you have outside training from the Money Advice Trust?
Delegate 3: We had outside training from some of our partners; some of the law firms we deal with who came in and attended. We sent people out, we had people come in. When we’ve produced our policy we send it out for checking. Then we audit the cases that have gone through that team to make sure what we said we were going to do in our policy is the experience the customer’s having.
John Ingram: It’s exactly what you said about it being no good to have policies just sit on the shelf. That is what the FCA is going to be looking at.
Delegate 2: Even down to having the training documentation itself and having something up to date. Although we’re looking at this from a mental health point of view, you might have a customer who contacts you with terminal cancer, someone who’s had an
accident or a trauma and can no longer drive, and all of these cases we treat in the same manner.
Adam Wonnacott: As a business have you managed to define vulnerability? The OFT looked, but, as far as I am aware, no one has managed to come up with anything definitive.
Delegate 3: It’s down to that individual customer on the call. For example, if you said an elderly person was vulnerable because of their age, you’re being ageist.
Adam Wonnacott: How do you train for someth