By David Vant
Cutting costs in public services is a top priority and every option is being explored. Outsourcing debt collection is widely used in the private sector and is becoming more common in the public sector. The author explains the benefits of outsourcing and describes the safeguards for confidentiality and ethical collection.
At the end of February 2010 public sector net debt, expressed as a percentage of gross domestic product (GDP), was 60.3 per cent compared with 50.5 per cent at the end of February 2009. Net debt was £857.5 billion at the end of February compared with £712.4 billion a year earlier. These figures do not make attractive reading and whilst few would disagree that the UK’s general economic prospects are undoubtedly looking brighter now than they did twelve months ago, this will be of little comfort to public sector employees, especially when they see headlines such as The Guardian’s “Job Cuts Signal Start of Public Sector Recession”. Whoever emerges victorious from the general election faces a mammoth task of driving efficiencies with a view to vastly improving public sector finances.
An area under particular scrutiny within the public sector is collections, whether it be income tax, benefit over payments, council tax, parking fines or student loans. The list goes on.
Options to boost income do exist. Central government departments and local authorities have, since first introduced in 2004, been using debt collection agencies as a means of boosting their recoveries. Taking this one step further by selling the debt could be a logical and worthwhile progression in many instances. Debt sale could potentially be applied to a number of public sector debts and given the wealth of experience gathered from different markets over the past decade and the continuing squeeze on governmental budgets, now is an ideal time for public sector organisations that deal with any form of consumer and commercial debt to look at the benefits of selling delinquent receivables.
Why sell debt?
Debt sale is an increasingly popular strategy for organisations wanting to improve cash flow and reduce balance sheet liabilities. It has become an integrated part of most UK collections operations. A debt sale can take the shape of a one off sale, or a more regular arrangement; it is a flexible process mutually agreed between seller and purchaser. The benefits to the seller include:
• Gain value for underperforming debt
• Reduce management and administration time
• Significantly reduce overheads and fixed costs
• Focus in house resources on performing debts
• Gain a strategic tool in the collection armoury
• Improve cash flow
Although it can be flexible, debt sale is essentially very simple and straightforward, taking on average six weeks from start to completion of sale. After signing a confidential agreement, typically the steps are:
• Step 1 – Initial data file is provided to purchaser.
• Step 2 – Indicative price is submitted to the vendor.
• Step 3 – On-site due diligence.
• Step 4 – Firm price is submitted to the vendor.
• Step 5 – Contracts are signed and funds are transferred.
Local and central government bodies cannot generally select their customers in the same way that a financial institution can. Taking Council Tax as an example, the local authority will often need to retain an ongoing post sale interest in that customer should he/she remain a local resident. Importantly, buyers have the flexibility to manage their collection strategies and post sale relationships with the vendor such that mechanisms or processes can be introduced that may, for example, seek to identify certain categories of customer, who may perhaps be considered “vulnerable”. If, under a predetermined arrangement, the information is then shared with the originating authority, it will allow them to retain a moral obligation to that resident, so that their predicament, if appropriate, can be managed sensitively.
One might argue that the methods central government departments and local authorities apply to collect debts are already rigorous; starting with issuing reminders and final notices and escalating to obtaining summonses, appointing bailiffs and even taking court action and sending offenders to prison.
However, these methods can only be applied if the whereabouts of the debtor is known and the main reason for Council Tax debts being written off is because the debtor has moved without advising the local authority. In such cases, selling the debt will garner income that would otherwise have been lost. With dedicated resources and access to vast databases of information, debt purchasers can add value in tracing absent debtors and collecting debts previously thought to be irrecoverable. If sale of debt is going to become a major part of an authority’s recovery strategy, then choosing a buyer with whom a long term partnership can be developed will be crucial. Key factors, which a seller may take into consideration, are the buyer’s financial stability, experience and ethical approach.
Data protection is rightly considered a primary concern for the public sector. Protecting customer data is and always has been a core and vital competency of any reputable debt purchase business.
The traditional lags in the economic cycle mean that it will remain some time before this still fragile recovery transfers into a return to job creation and general financial stability. Until such time, the collections arena will continue to remain a challenging place in which to operate. All things considered, the underlying issue is that liquidation rates remain under pressure. Many of those that over-borrowed, when times were good, are now struggling to repay their debts
This plays into the hands of debt purchase companies as they can take a longer term view than debt collection agencies.
Improving liquidation rates during a time of adverse economic pressure is the challenge for all those involved in the collections arena. Debt purchasers are therefore not alone in having to face this challenge, however, to maximise their advantage of being able to take the longer term view, debt purchasers must continue to refine collection strategies and maximise efforts to improve liquidation rates.
The balancing act to play is to treat customers ethically and fairly at all times, while still recognising the moral responsibility that debtors have to pay their debts. An advantage of being able to take a longer term view is that debt purchasers have integrated the ‘personal touch’ into debt recovery by offering a range of options on repayment terms, waiving interest or even writing off a part of the balance. Established debt purchasers will also utilise their databases to access historic payment information to better segment their portfolios to ensure that the most appropriate strategies are adopted for each specific customer.
Debtors should understand that the whole credit system relies on them taking on board a moral obligation to repay their debts. Unscrupulous debtors may attempt to avoid repayment on the basis that documents cannot be provided, despite it being quite clear that they have borrowed the money. Hiding behind paper trails in this manner has a detrimental knock-on effect on those borrowers that do repay. The same is similarly true in areas of the public sector, for example council tax. The greater the level of bad debts, the greater the burden placed on fellow residents in that borough or area to absorb those losses.
2009 saw a fair amount of press containing opinions which criticised the collections industry and offered inaccurate information about collection practices. However, the increased media spotlight on the sector as a whole, has brought benefits and led to established debt purchasers and collections agencies further improving their ethical stance when dealing with customers.
Former Consumer Minister, Gareth Thomas, referred to ‘rogues’ in the debt collection sector and the need for a more consistent pattern of good practice. However practices of all reputable collections operations have changed or are moving along that path, recognising that it is necessary to build a strong foundation of trust with customers at the beginning of any relationship. This increases the likelihood of initial payment and also encourages a longer lasting commitment to pay. Best practice is to embrace a customer rehabilitation approach, which helps foster customer loyalty and enhance payment patterns.
With the Institute for Fiscal Studies reporting in December that the public sector is facing a £36bn squeeze from 2011, expenditure has come under intensifying scrutiny. In these circumstances, the benefits of debt sale are clear and with its proven success in financial services and a growing number of other sectors, there is every reason to investigate what it could do for your organisation. Debt collection in an ethical manner is a key competency for any debt purchaser to remain successful in the collections arena.
David Vant, Debt Purchase Manager at Cabot Financial.
For further information on debt purchase in the public sector call +44 (0)1732 524 901 or email email@example.com