Weekly Blog by Philip King, CEO of the ICM - 'Neither borrower nor a lender be?'

I was in Basel earlier this week for the ICTF Conference. It's always a good opportunity to catch up with credit professionals from around Europe and beyond, and great to hear some of the issues being faced and how they're being addressed.

 

Flights and travel gave me the opportunity to read the FCA's recently published consultation: 'Detailed proposals for the FCA regime for consumer credit'. We'll be providing the opportunity for members to submit comments through our November ‘In Brief’, and I won't go into any detail on the 193 pages, nor the 387 pages of the Appendices here. I do though want to make just one comment about the FCA's stated intention to focus on the Payday Loans sector.

 

I've written several blogs over recent months arguing that the OFT should, in its final year, take action over the absence of evidence that affordability tests are being adequately carried out by payday lenders. I've consistently asserted that this is the key failure of the market and should be addressed with vigour. It should, after all, be the determinant in all credit decisions regardless of sector, size or nature.

I've given up hoping that the OFT is going to take any serious action on this in its final days but I was encouraged to read these words in the consultation: "Our proposals.........are based on the principle that money should only be lent to a consumer if the consumer has the ability to repay and in a sustainable way." And in his foreword, FCA Chief Executive Martin Wheatley says: "The OFT affordability guidance is good, but the OFT’s own research shows too few firms implement it. We will put it into our rules and guidance, and enforce this."

 

Martin's last two words are the most important - let's hold the FCA to account and ensure it delivers.

 

 

Weekly blog by Philip King, CEO of the ICM - 'The price of success'

I've written several blogs about the payday loan industry in recent months saying, in summary, that I don't believe the concept of short term loans is fundamentally wrong and that emotion sometimes over-rides objectivity. But that does not mean that poor practice is ever acceptable. In particular I've ranted about the absence of evidence that affordability tests were being carried out and said the OFT should, in its final year, focus on this particular element.

Wonga's announcement that its pre-tax profits were up by 35% and bad debts were up by 89% has brought the sector back into sharp focus and - reading reports and commentaries - two things have struck me.

The first is Ian King, the Times Business Editor, observing that Wonga is one of the good guys in an industry that has appalling practices; by way of example he cites that it will not allow its customers to "roll" their loans more than three times and observes that the interest rates they charge are, for example, far lower than those incurred by running up an unauthorised bank overdraft. In my view, being cheaper than someone else isn't necessarily justification but it's certainly true and mitigates against some of the more emotional headlines we see. Indeed, elsewhere in the paper it's reported that loans cannot be rolled over more than twice and that Wonga stops racking up interest after 60 days to prevent debts spiralling too far out of control.

More worrying though is the quote from Wonga's Chief Executive, Errol Damelin, who is reported as saying Wonga loans were too small to be a significant problem and "it's very unlikely that a £200 or a £400 loan is what gets people into a financial mess". Perhaps by itself such a loan value won't, but as part of a vulnerable financial situation it can play a key role especially if it's taken out in desperation and as a last resort. I'd like to think Wonga is an exemplar in carrying out adequate and effective affordability checks but come on, Mr Damelin, get real - £400 MIGHT NOT be a problem for you but it could well be for some of your customers and potential customers!

 

 

Weekly Blog by Philip King, CEO of the ICM - 'End of term report: could do better'

Last week Professor Russel Griggs, Independent Reviewer of the Banking Taskforce Appeals Process wrote a guest blog and I'm grateful to him for sharing his thoughts ahead of the publication of his second annual report. It was an interesting blog and has prompted me to return to a theme I've written about more than once before: the need for greater awareness of the appeals process.

 

Despite the assurances I hear from senior bankers at government forums and elsewhere that the independent appeals process is being drawn to the attention of businesses who are declined loans, I hear too many examples where that clearly isn't the case. Not so long ago, I listened to a presentation by a regional bank executive who seemed unaware of the process at all and, more recently, one of our own ICM members shared his experience with me. After a 37 year relationship with his High Street bank, he was told that his overdraft facility was being withdrawn because it had decided to discontinue its relationship with all customers in that particular sector. He approached alternative banks and raised the issue with the Financial Ombudsman Service, several MPs, the OFT, and government ministers. Neither his nor the other banks, nor one of these parties pointed him towards, or made him aware of, the independent appeals process.

 

I've always said that banks must be free to make their own lending decisions and I've resisted all the voices suggesting that banks must be 'forced' to lend. I stand by that view. The appeals process was intended to create an environment in which businesses could be assured that a loan declined had been declined fairly or provide an opportunity for such decisions to be reviewed and reversed when appropriate.

 

I expect Russel Griggs' report to show the process is working well when it is used and this should be applauded, but it can't work if people don't know about it. The banks, and government, aren't doing enough to bring it to the attention of customers and the wider business, financial and political community. They must do better.

 

Weekly Blog by Philip King, CEO of the ICM - 'Painting a grim picture of Payday lenders'

I've been inundated with government papers over the past few weeks such as the Insolvency Practitioners Fees Review, the Review of Pre-Pack Administrations, the Simpler Reporting proposals for Micro Businesses, the Money Advice Service proposals to improve the quality of Debt Advice, HMRC and DWP debt management strategies, the Treasury and FSA consultations on the transfer of consumer credit regulation from the OFT to the FCA, the proposed EU Data Protection changes, and a host more.  As a result, I've been a bit tardy in getting to read in detail the OFT's Payday Lending Compliance Review.  Its contents are shocking.

 

Let me make it clear from the outset that I am not in the 'outlaw all payday lenders' camp; I believe that such products have their place and when offered, and used, sensibly can be useful to a good many people.  But that doesn't excuse the findings in this review.  Among the highlights, or perhaps I should call them lowlights, the review reports that 28% of loans issued in 2011/12 were rolled over at least once, with at least a third of lenders actively promoting rollover at the point of sale and a number agreeing to rollover loans even after a borrower has missed a repayment.  By way of example, staff in two large high-street firms were told that rollovers were regarded as 'key profit drivers' and that staff were encouraged to promote them. In one case, this was even written into the training manual!

 

Equally worrying to me though is the absence of affordability checks.  Most lenders asserted that they undertook affordability assessments at the initial loan stage yet the vast majority were unable to provide satisfactory proof that they had applied such assessments in practice.  Only six of the 50 lenders visited were able to provide documentary evidence that they assessed consumers' likely disposable income as part of their affordability assessments.

 

The basic premise of credit management, whether the customer is a multi-national business, a small trader, or an individual, is to determine whether the customer is 'good' for the amount of credit being extended and whether it can afford to repay in accordance with the agreed terms. Furthermore, in the case of consumers, assessing creditworthiness is a requirement of the Consumer Credit Act and OFT guidelines.

I know the majority of the inspections were carried out before revised industry codes of practice and the sector-wide Good Practice Customer Charter came into force but the revelations of the report paint a wholly unacceptable picture.  The enforcement action already started and the 12 week deadline to address all areas of non-compliance is welcome, the proposed investigation by the Competition Commission makes sense, and the expectation that the FCA will take a more rigorous approach when it takes over consumer credit regulation next April is encouraging.

 

In the meantime I hope the OFT will live up to its promise that it will not gradually fade away but will continue to act vigorously in the period until it is replaced by the FCA.  A year is a long time in the consumer credit market.

 

I'll be welcoming a couple of guest blog writers over the next two weeks. Charles Wilson, Managing Director of Lovetts Solicitors, an ICM Fellow, and a member of our Technical Committee will be writing next week, and our own Debbie Tuckwood, ICM Director of Learning & Development, the week after.  I'll be decorating over Easter so will be looking forward to returning to normality thereafter!

 

 

Weekly Blog by Philip King, CEO of the ICM - 'Measure for measure'

The Government has this week published its response to the BIS Select Committee's report on Debt Management published in March and it makes interesting reading.  The original report contained 23 recommendations and the government responds to each one in turn. The document can be found here and what pleases me is the measured and proportionate nature of the responses.

 

The timetable for the planned review of the regulatory framework, including the transfer of regulatory powers from the OFT to the FCA, is set out with the final transfer expected to take place by April 2014.  Having a clear timetable and plan including expected consultation dates is helpful.  The more interesting aspects, however, relate to payday loans and debt management companies.

On payday loans, the Government refers to the work it has been carrying out with the four main trade associations representing over 90% of the payday loan market to improve consumer protection in their codes of practice.  These improvements together with the OFT’s review investigating levels of compliance with the Consumer Credit Act are, in my view, the right approach before any more stringent measures are considered.  Furthermore, the codes include measures to address the issues of rollover loans, affordability assessment, and continuous payment authority, and the Government has undertaken to review how best to include high-cost credit transactions in credit files.

In summary, close engagement with the trade associations to introduce enhanced consumer protections into their codes of practice and their commitment to publish a common industry-wide Good Practice Customer Charter setting out in a clear, concise and user-friendly format what customers of payday and other short-term loans should expect from their lender is positive and encouraging.  One can never condone poor practice but I believe payday loans have their place in certain circumstances and meet a particular need.

With regard to Debt Management companies, the Government is working with stakeholders to develop a Protocol of best practice for debt management plans which will cover transparency of fees and costs (particularly where they are upfront), misleading advertising, and safeguarding client accounts.  Again, in my view, working with the industry and trade bodies makes absolute sense before considering legislation and heavier regulation.

 
It's worth also noting that – in both cases – the approach being proposed will deliver faster results than would be achieved by the introduction of legislation.  Finally, as an aside, I have to mention again my particular soapbox that Debt Management Plans should be reported in the insolvency statistics so that the published numbers are a true representation of personal insolvency levels.

Weekly Blog by Philip King, CEO of the ICM - A positive step for debt management'

The OFT published its Debt Management (and Credit Repair Services) Guidance last week, following consultation last year, and this represents a positive step in improving compliance across the debt management sector. The guidance can be found here and will also be signposted in the ICM Briefing due to be issued to members shortly after Easter. Three things have struck me as worthy of note from an ICM perspective.

Firstly, credit professionals should be aware of the creditors' responsibilities highlighted in the guidance. For example, in paragraph 3.48, it says "the OFT expects creditors to have appropriate regard to this guidance when dealing with third parties acting on the client's behalf. Creditors should not refuse to deal with a debt management business or other third party unless the debt management business or third party failed to comply with relevant consumer protection legislation and/or have appropriate regard to this guidance. Under such circumstances, the creditor should be able to satisfy the OFT that it has an objectively justifiable basis for refusing to deal with the other party if asked to do so. Creditors who provide advice to customers who are behind with their payments should have regard to the spirit of this guidance". This, together with the following paragraph 3.49, is particularly relevant to many credit professionals and we should be mindful of it.

Secondly, I am pleased that our contribution to the training within the sector has been recognised. The guidance says that "licensees should have adequate training in place for staff, agents (such as self-employed debt advisers) and franchisees acting on their behalf, to ensure they are sufficiently skilled and knowledgeable to carry out their role", and the ICM is included in the list of examples of accredited training.

Finally, the example of unfair or improper business practice have been modified with the reference to dividing available income between debts in proportion to their size being removed. The Institute argued that the requirement to introduce what, in some cases, would be subjective judgment could be unhelpful to creditors and work to their detriment. I'm pleased our voice was heard and is reflected in the final version.

P.S: I'm on holiday next week and have been reliably informed I will be having a week free of Twitter, blogs and email so I'm delighted my good friend Josef Busuttil (my counterpart at the Maltese Association of Credit Management) has agreed to write a guest blog.

Weekly Blog by Philip King, CEO of the ICM - A journey of discovery'

My contribution this week is going to be short and sweet, or perhaps not quite so sweet, and it's about a payday loans company. But I'm not adding to the many column inches and hours of airtime devoted to the subject in recent weeks. Indeed, the OFT's announcement a couple of weeks ago that it has launched a review of the sector makes me think it's best to wait until the outcome of that review is known - and the dust has settled from the publication of the BIS Select Committee's report this week - before adding my two pennyworth to the debate.

My comments relate instead to a story in The Times on 17 February after Cash Converters UK had issued its results for the six months ended 31 December 2011. It said that 'it's nascent lending business had shown a big rise in bad debts' rising from 9% to 11% between 30 June and 31 December. The company said: 'The UK business reviewed its lending criteria in November 2011 and as a result has made certain adjustments to their procedures. This action, combined with the appointment of a new collections manager, should reduce the bad debt percentage going forward. Over time, as the new business matures and our customer information database improves, we would be targeting a significant decrease in the level of UK bad debts.

'Cash Converters appears to have discovered what many of us already know: that tightening lending criteria, having better customer information, and appointing a new collections manager reduces bad debts. While it seems to be stating the obvious, I'm pleased it reinforces my view that professionalism is vital and adds real value. When good practice is applied to policy and process, and good credit professionals are employed, then businesses can only benefit. This is the message at the heart of everything the ICM stands for and drives.

Weekly Blog by Philip King, CEO of the ICM - 'A source for good'

A slightly unusual topic for me this week prompted by recent personal experience. I was involved with a police force at the weekend about a missing person. The details and circumstances aren't important but the police wanted to know everything I knew about the missing person who has gone AWOL many miles from home and may need help.

My wife and I shared all we knew (which wasn't much to be honest) and my wife referred the police to Facebook which included a number of friends in the area where they were looking, and had comments that might give clues as to their whereabouts. We were asked if we had a picture of the individual and we confirmed we had but pointed out that a more recent and clearer one was on Facebook.

Extraordinarily, a few minutes later we received a phone call asking if we could download the picture and email it, along with any other relevant information, because the police didn't have access to Facebook and so couldn't use that source of information! I don't know if this is common to all police forces and I don't know the detailed reasons why access is denied but - in today's age - I was incredulous that such a productive source of information couldn't be used!

I discussed the use of Facebook in tracing debtors following the release of the OFT's Debt Collection Guidance a few weeks ago and shared my view that the content of the guidance was being misrepresented by the media. We've also recently heard the ongoing debate about how social media was insufficiently monitored during the riots across the UK in the summer.

Social media is a powerful tool that can be used for good - as well as bad - but it strikes me that the potential 'dangers' of Facebook et al and sensitivities over privacy, while understandable, are getting in the way of progress. It certainly seems absurd that the police could not pursue what to me would have been a blindingly obvious line of enquiry.

Whether we like it or not, social media is here to stay and we can't just ignore it. The ICM has heavily embraced Twitter, LinkedIn and Facebook because we know a proportion of our members are using them and we see many benefits.

I fear, however, that in certain cases bureaucracy is winning and the loser is someone who could really need help!

Weekly Blog by Philip King, CEO of the ICM - 'The changing 'Face' of Debt Guidance'

Since mentioning the publication of the new OFT Debt Collection Guidance in my blog last week, I've now had chance to look through it in detail. No great surprises; it's very similar to the draft on which we were consulted some time ago and says what I guess we'd all largely expect it to say. It is, after all, only an update of the version of the document issued in June 2003.

The aspect that seems to have caused the greatest debate on the ICM Credit Community LinkedIn group, and elsewhere, is the OFT warning to debt collectors not to use social networking sites such as Twitter and Facebook to pursue people who owe them money. I don't want to be pedantic here but I'm not sure that's exactly what it says. Actually what it says is that unfair or improper practice would include 'acting in a way likely to be publicly embarrassing to the debtor...' which includes, as one of the examples quoted 'posting messages on social networking sites in a way that might potentially reveal that an identifiable person is being pursued for the repayment of a debt'. That's a long way from banning the use of Facebook!

I might be showing my age here but I remember lecturing ICM evening classes at Watford College in the 1980's and recall teaching about s40 of the Administration of Justice Act 1970 which addressed the unlawful harassment of debtors and included the works: 'A person commits an offence if, with the object of coercing another person to pay money claimed from the other as a debt due under a contract, he harasses the other with demands for payment which, in respect of their frequency, or the manner or occasion of making any such demand, or of any threat or publicity by which any demand is accompanied, are calculated to subject him or members of his family or household to alarm, distress or humiliation'.

So nothing has changed really; in those days, the example of harassment was parking a van outside someone's house with the words 'debt collector' written on the side. Surely all we're talking about here is the 2011 equivalent? There's nothing wrong with using social networking tools to find people or to learn more about them but harassing people by any means is - and must be - unacceptable. Those who have seen me present using a baseball bat as a visual aid will know that such a bat is an equally unacceptable collection tool!

I am intrigued by the following words in the Foreword: 'This guidance document is not intended to provide a basis for debtors to avoid the repayment of debts duly owed. We consider that debtors should take responsibility for engaging appropriately in the debt recovery process...'. On the one hand, I am encouraged by its inclusion; on the other, the fact that they have to write these words at all makes me think that the document is weighted heavily in favour of debtors. We shouldn't lose sight of the fact that taking on debt carries with it an obligation to repay it, and that should always be the starting point.

The Guidance carries considerable detail and Consumer Credit licence holders would do well to read it and ensure they, and any third party organisations working for them, are complying with it.

Weekly Blog by Philip King, CEO of the ICM - 'Finding common cause...'

I said in my blog last week that I would be meeting a couple of MPs to discuss late payment. Since then, I've met with Debbie Abrahams, Labour MP for Oldham East and Saddleworth and Anne Marie Morris, Conservative MP for Newton Abbot. In addition, I attended the BIS Small Business Economic Forum chaired by Mark Prisk and have been talking to the BIS team about some future activity around late payment. I have also been starting to prepare for a presentation I'm giving to the AFDCC (the French equivalent of the ICM) in Paris next month about the new EU Late Payment Directive. It's fair to say that late payment has certainly been at the forefront of my mind in recent weeks!

Debbie Abrahams and Anne Marie Morris are both articulate and passionate about supporting small businesses and helping to protect them from the impact of late payment. Coming from different sides of the chamber, it is no surprise that their views on what can and should be done differ slightly but they certainly have common objectives. I was encouraged by the fact that both recognised the need for a change of culture across the whole business community, acknowledged that payment terms are part of the wider contractual and commercial negotiations between businesses, agreed that more emphasis should be placed on the positive aspects of prompt payment (see www.promptpaymentcode.org.uk), and endorsed the need for businesses to be educated in the basics of credit management that can help them to assist themselves.

There is work to be done and I will continue our dialogue, exploring various ideas and initiatives. This, together with the imminent BIS activity and the continuing demand for the ICM/BIS Managing Cashflow Guides (of which there have now been over a quarter of a million downloads), gives me grounds for optimism.

I'll return to the EU late payment directive on another occasion but, before then, I suspect I'll be addressing the new - and just published - OFT Debt Collection Guidance which I'll be reading in detail over the next day or three.

Weekly Blog by Philip King, CEO of the ICM - 'Change the insolvency landscape'

I've spent a good deal of time over the last few days reading and reviewing the Insolvency Service's 'Consultation on Reforming the Regulatory Framework for Insolvency Practitioners' which has been produced following the OFT Market Study into Corporate Insolvency published last June.

It's large document (c90 pages), so not an easy read but nevertheless vitally important for credit professionals. Indeed the press release that accompanied the launch highlights a principal objective of the consultation in considering ' the three main issues to address the problems associated with the weak position of unsecured creditors.'

When I'm out and about, our Members and those in the credit community frequently complain to me about the insolvency process and how they lose out. This then is our opportunity to influence the insolvency landscape of the future. If we ignore it, we do so at our peril, and to this end the ICM will shortly be issuing a survey that will enable anyone interested to give their opinion and comment on aspects of the paper that are relevant to them. Please take the time and trouble to allow us to take your thoughts and feedback into account when we produce our final response to Government.

Elsewhere I see that David Kern, Chief Economist at the British Chambers of Commerce has reacted to the recently published minutes of the Monetary Policy Committee http://bit.ly/h77WrS. He's absolutely right when he says '...the factors pushing up prices in the short-term are outside the MPC's control...' Raising interest rates now would be too soon and would damage the prospects for recovery.

Finally, I'm writing these words ahead of the ICM's Regional Roadshow at the National Motorcycle Museum in Birmingham which has the highest number of registrations yet for our Roadshow programme. To find out more about our Roadshows and when we're going to be near you visit: http://www.icm.org.uk/default.asp?edit_id=1286-56

Weekly Blog by Philip King, CEO of the ICM - 'Debt management - we need disclosure'

The OFT made an announcement last week that followed its warning to 129 debt management firms in September last year that highlighted serious issues over compliance.

It confirmed that 35 firms have surrendered their consumer credit licences and at least 15 are facing licensing action as a result of the OFT's compliance review. In detail, since the warning was issued: 35 firms have surrendered their licences; 8 firms have been informed that the OFT intends to revoke their licences; a further 7 companies who did not respond are currently being investigated; and 79 firms have submitted evidence, which the OFT will now review.

One of the footnotes to the official news release says that: 'the OFT is not able to name the companies subject to the announcement because of disclosure restrictions under Part 9 of the Enterprise Act 2002. Where the OFT uses its formal powers under the Consumer Credit Act 1974 to refuse or revoke a credit licence, decisions are made public on the Public Register'.

I understand the principles of disclosure but it seems to me perverse that the public cannot know the names of the companies involved so that they - and their advisers - can be wary of dealing with them, particularly where the OFT plans to revoke a licence. It has now been four months since the initial announcement, which means at best there are still many debt management companies behaving unethically or worse. (By the way, I thought I'd look at Part 9 of the Enterprise Act to see what the restrictions were and I'm still ploughing through the 18 pages of guidance notes!)

To more positive news, I am delighted to see our Managing Cashflow Guides passed 200,000 downloads in January. I appreciate there are an estimated 4.7 million businesses in the UK but at least a proportion of them are downloading good advice that can help them manage cashflow more effectively.

5th Weekly Blog by Philip King, CEO of the ICM - Musings from China

I am currently attending, and presenting at, the 7th China International Credit & Risk Management Conference in Nanjing, and it is interesting to note how the topics of debate have shifted since my last visit 12 months ago. There is much more discussion, for example, around the move to open account payment terms rather than letters of credit for international trade, and the move towards alternative sources of finance such as factoring - a conversation that mirrors our own experiences back in the UK.

It is noticeable, also, that there is increased availability of credit ratings within China on Chinese companies, and a clear desire for skills to support selling into the West rather than skills and knowledge simply for use in the domestic market.

We know that there is a rapidly expanding middle class in China, and this is placing increased demand on the trade and availability of expensive consumer goods. What is interesting, however, is that there are no personal insolvency rules or procedures in China, leading me to think about the OFT's recent warning to 129 debt management firms in the UK: http://oft.gov.uk/news-and-updates/press/2010/101-10

The report makes salutary reading and the paid advice sector evidently needs to do considerably more to clean up its act. We have ourselves spoken to the Debt Resolution Forum which is working hard to drive improvement. I sit on its Complaints Committee and there have been very few complaints. It is important that bad practice is highlighted, so remedial action can be taken.

Some ICM Members are asking me why the firms shouldn't be publicly named and shamed. The reason is simple: they can't, under part 9 of Enterprise Act 2002. That does not mean that we will never know their identity, however. If they fail to improve, and the OFT decided to take formal licensing action, then their names will be published for all to see.