ARTICLE...
Cost of Compliance
Over the last two decades, the debt collection industry has been transformed in a bid to forever remove itself from images of bullies and baseball bats.
Trade associations have formed. Consultations have been issued. Legislation discussed – and fought over.
However, the increasing resources required to ensure compliance with an increasingly complex series of guidelines is bringing some companies – particularly smaller ones – to their knees.
With the country as a whole creeping out from the shadow of recession, experts are already predicting a large-scale shake-up to counter the increasing costs of compliance and the difficulty agencies face when it comes to making any money.
Denise Crossley, managing director of IMFS explained: "The raft of compliance guidelines are a struggle to deal with and it's making the industry as a whole less profitable than it used to be."
One of the biggest complaints is the spiralling number of organisations they need to ally with – and the varying guidelines to which they must adhere.
Denise added: "There are different departments telling us you must have this and do this – and some of them conflict. The different guidance about what we can't do leaves me confused."
For example, the CSA is imposing its own code of conduct, while the OFT polices the industry as a whole through its debt collection guidance.
In 2009, 1st Credit felt the wrath of the OFT. The body imposed requirements on the business for failing to meet satisfactory standards. It warned that if the company did not stop issuing demands warning of bankruptcy where it is unlikely proceedings will be initiated it could face a £50,000 fine.
Soon 1st Credit had hired a head of compliance, a team of eight and a legal solicitor focused on compliance. It has also introduced a 'sensitive cases' team. This allows debtors in a 'sensitive' situation – those suffering from bereavement or mental illness – to be transferred to dedicated staff to make sure calls are handled in an appropriate manner.
Bob Kingdon, head of compliance since November 2009, added: "There are a huge amount of costs involved in complying with the standards. The extra costs include not just the formation of a system, but the costs of recruiting staff and employing specially dedicated teams and training.
"It is a huge cost – but it is absolutely necessary to improve and, if the staff are compliant, it builds on the success of the business."
Of course, the OFT can revoke a collector's licence if they do not follow requirements – leaving firms with the option of either paying up to make sure they comply or losing their business altogether.
Ofcom, the communications regulator has also waded into the minefield, by regulating diallers on silent calls. It is also in the process of clamping down on the industry and plans to raise the maximum fines for the companies that are plaguing customers with silent calls – from £50,000 to £2m after its initial investigation into Barclaycard in 2008.
Claire Aynsley, head of compliance at the CSA, shared her views: "I think that Ofcom's decision to take the size of a firm into consideration is a positive thing. When it went after larger firms it believed that £50,000 didn't act as enough of a deterrent for them – but that would be a huge amount for a small firm."
In January BIS finished consulting on Ofcom's silent calls proposals and is expected to publish its findings soon. A BIS spokeswoman explained: "Silent calls cause a great deal of distress to consumers and it's been taken into consideration by the review how much distress is caused and what the penalty should be. Ofcom will set the regulations or guidelines, but statutory powers are needed to increase the fine."
In addition to the measures introduced by OFT and Ofcom, the Information Commissioner's Office (ICO) will get new powers in April, which will allow it to slap a £500k penalty on collectors who breach Data Protection Act regulations.
But this increasing number of fines and penalties has also led to increased confusion throughout the industry.
Willem Wellinghoff, legal counsel at Cabot Financial, explained: "I have no idea how the fines are worked out – it's like the ICO and OFT just put their finger in the air and said 'sounds like a good number'."
Crossley added: "So much time is now spent form filling and checking. I do think the industry needs policing, but it's getting too much. It's one compliance measure after another. It's a constant battle and constant expense."
To comply with Ofcom's rules about silent calls, companies need to invest in diallers that cost upward of £4,000. Willem explained that Cabot Financial had to hire an internal compliance management team of 12 to monitor live and recorded calls and then score them according to compliance. The wages alone cost the company £192,000 each year.
Independent checks by lawyers to make sure letters to debtors are compliant are also necessary. Again this is expensive, with letters updated each time new guidelines are released. Willem added: "We want the best deal possible, and we hire reputable firms – they can charge around £300 to £400 for an hour's work."
If a complaint from a consumer reaches the courts the collector is faced with barrister costs of at least £2,000 a day. This pressure on companies to comply at all costs is starting to damage bottom-line profits.
Bob Kingdon said: "The ever-changing guidelines and the increase in legislation has certainly put more pressure on companies to comply – but at a huge cost. We are quite a large company and so we have the resources to do this – but I would question whether a small company with a small turnover could manage this extra burden."
Indeed, industry experts now believe further fallout, with smaller companies unable to adapt quickly enough in the face of mounting compliance costs.
Crossley added: "Small businesses are failing because they either can't make enough money to cover the costs of implementing all these measures or they haven't implemented the measures and are not getting the business because clients are refusing to deal with people that aren't up to scratch."
Many businesses are turning to external advice, with the difficulty being turning compliance from a tick the box exercise into a practice and management policy.
Chris Firat, who offers bespoke debt collection training, explained: "We are all aware of the CSA and OFT regulation, but there is a difference between adequately and practically understanding what it means. Many people are aware of the guidelines, but don't fully realise how to comply with them in working life."
And, citing an example, she went on: "In the 1980s harassment might have been understood as a collector shouldn't ring a debtor after midnight. But now it is taken to mean not ringing a night shift worker in the morning if he has asked not to be called at that time."
The CSA has underlined that, if companies do not comply, their status as 'members' will be ended. But, rather than wielding the stick it is trying to aid the industry's reputation with a carrot of education and best practice.
Claire Aynsley added: "Rather than just chucking them out and leaving them to continue bad practice which will continue to impact the perception of the industry, we educate them and assist them to reach good practice. It's all about eradicating bad practice."
And the level of complaints does seem to be coming down; surely a positive sign that times – and the industry – are changing for the better.
CSA reports show, out of the 20 million individual cases dealt with by debt collectors in 2009, it had only 428 complaints. Likewise, the FOS figures showed 30,000 complaints about payment protection insurance, compared with just 407 concerning debt collection over the same period.
Compliance certainly is steering the industry away from the conduct that was 'acceptable' in the 1980s. Claire Aynsley summed it up: "Companies can't continue with the same procedures they have had for the last 20 years – times are changing and people need to change too."
But it may of course take much longer to change the public perception of the industry.
"Debt collectors are always going to bear the brunt of consumer complaints because of the nature of their work."
Original article courtesy of Credit Today.
