Weekly Blog by Philip King, CEO of the ICM - 'Banking on insurance'

There was an interesting piece in The Times on Monday talking about business lending by banks and a proposal for a Guaranteed Repayment Insurance Policy. Apparently the scheme would involve the issue of an insurance policy that could be purchased by a small business and offered to banks as security for a loan. The Government's new Business Bank is considering offering a subsidy to insurers under which it would underwrite 15 percent of the cost of any default.

The theory is that such an offering would remove one of the obstacles to business lending when the collateral demanded by the banks is so high that the taking out of a loan becomes prohibitive or too personally risky for the borrower. Small business owners would, it is thought, be more comfortable paying the premium than putting their home on the line as security.

BIS says it is only currently looking at the proposal and has made no commitment, and I agree it is right to be looking at new and innovative ways to increase the flow of money into a much needed part of the economy. I can see the attraction to a small business whose owner is fearful of losing his house if the enterprise fails but, given the paucity of cash available to businesses in their earliest days, finding additional money to pay for an insurance policy on top of all the other overheads will be a challenge.

As always the devil will be in the detail and I have no idea what the pricing model might be but I'm afraid I'm a bit sceptical. It already worries me that someone can start a limited company with no business knowledge, no awareness of their obligations and responsibilities as a director, and no capital. This scheme would, I fear, encourage the taking on of an additional expense in return for lower personal risk at a time when the business is least able to afford it. The consequence of that will be reduced profits - or increased losses - and a greater propensity for failure.

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 - 'Going for growth'

Lord Young published his Growing Your Business - A report on Growing Micro Businesses on Monday and it's a good read with some insightful views. I've spent some time with Lord Young as part of my involvement on the board of the Start-Up Loans Company, and I never cease to be amazed at his enthusiasm and energy. I'd love to think I will be so sprightly when I am 81! 

 

The report can be found at the link above and three things strike me in particular. Firstly, the proposals regarding public sector procurement starting on page 19. Whatever government might say, or intend, the reality is that many small businesses find procuring for public sector contracts bureaucratic and daunting. Their perception is that large organisations will be favoured in the process and - whether they're right or wrong - we all know that perception is, for them, reality. The removal of the PQQ system for contracts below €200,000 makes very good sense, as does the 'single passport' proposal allowing pre-qualification data to be entered once and then - after approval by one authority - apply to all bids across multiple authorities.

 

Secondly, the recognition that "Few small firms understand the importance of cash flow particularly when applying for a first bank loan." I guess the fact that the ICM/BIS Managing Cashflow Guides have been downloaded more than 450,000 times since they were launched in 2008 and are seeing regular and substantial monthly increases reinforces this point.

 

Thirdly, the recommendation that the upper age restriction be removed from the Start-Up Loans scheme. Originally set at 18-24, then in January changed to 18-30, this latest suggestion would allow anyone to benefit from what has been a hugely successful initiative. Almost 4,000 businesses have been started, receiving loans totalling nearly £20m, and the creation of a private company to manage the scheme is a radical and

 

innovative alternative to previous government propositions. The businesses receiving funding, support and mentoring have the chance of a real kick-start towards their entrepreneurial vision and aspirations. At the start of 2012, micro businesses (0-9 employees) accounted for 32% of private sector employment and 20% of private sector turnover. Growing the contribution of such businesses can only be good news for the economy and add to the increased confidence that is starting to emerge.

 

The report's 54 pages contain much more, including the proposal for Growth Vouchers encouraging businesses to obtain support and advice, and just as I am proud to have been engaged on the Start-Up Loans Company Board since its inception, I am also proud that the ICM is listed as one of the organisations with which Lord Young engaged in the writing of the report.

 

Finally, it would be remiss of me not to mention the fact that the Institute of Credit Management won another PR award last week. The press release announcing the win can be found here and I'm delighted at the recognition of what we, together with our PR agency Gravity London, have achieved in raising the profile of professional credit managers and the vital role they play in supporting the economic recovery.

 

Next week, I'll be standing down from my blog-writing responsibility for a week and we'll be publishing a guest blog by Professor Russel Griggs OBE who is Lead reviewer of the banks appeals processes and Chair of the Scottish Government’s Regulatory Review Group ahead of the publication of his second annual report in June.

 

 

Weekly Blog by Philip King, CEO of the ICM - 'Whistling in the wind'

If you've read the latest (May) edition of the ICM's Credit Management magazine, you'll have seen mention of a survey finding that 42% of SME respondents had never heard of any of the current Government or bank-led initiatives to support small businesses. The recent news about funding through the Business Bank and the increase in length and breadth of the Funding for Lending Scheme is great news but only if businesses are aware of the help that might be available.

 

I was pleased that, of all the schemes, awareness was highest for Start-Up Loans. Regular readers of my blog will know that I'm privileged to sit on the board of Start-Up Loans and I know how much work has gone into raising public awareness, not least by James Caan (the Chair) who has used his personal profile and networks to such great advantage.

 

There have been numerous other initiatives supporting small business in recent times such as the National Loan Guarantee and Enterprise Finance Guarantee Schemes as well as the 17 introduced by the British Bankers' Association (BBA) Task Force in 2010. But none of these serve any purpose unless businesses, banks and others are aware of their existence.

 

One of the BBA initiatives was the creation of an independent appeals process for when loan applications were declined. Russel Griggs, who chairs this, has done good work and his reports show the effectiveness of the idea but I've seen recent examples demonstrating clearly that awareness is woefully inadequate.

 

I heard in the last few days from a business that had thrown in the towel after its current bank had withdrawn facilities despite a 37 year positive relationship, loan applications to other banks had been declined, and engagement with the Financial Ombudsman Service, MPs and numerous others had failed to have any impact. What astounds me is that at no point in this whole process was the business pointed towards the very appeals process that might have helped, or at least allowed it to understand the various banks' position.

 

Surely some of the parties involved would have heard of the appeals process and could have signposted to it? Not long ago I was at a presentation by a senior regional manager from one of the major banks and he was totally ignorant of it, so perhaps not!

 

In this age when we can communicate in so many different ways, and when instant communication is the norm, I find it sad and strange that getting important messages communicated and understood is so difficult. I guess it's incumbent on all of us to ensure we are well informed and up to date with what's going on in the business world and that we play our part in passing important messages on to those who might benefit from them.

 

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 - 'A journey of discovery'

In my blog last week I mentioned that I'd seen a really good example of the Government working with the wider business community to deliver growth through tangible and practical support.  I said that sometimes Government has to create an environment in which something can be created and delivered without its direct and ongoing involvement.

I was referring specifically to the launch of the Start-up Loans Company, which many of you will by now have seen in the press.  You may also have learned from our own ICM announcement that I've been invited to join the Start-up Loans Company board.

The Start-up Loans Company is different from any previous Government scheme I have ever seen.  It is not a case of ministers throwing money at a problem just to say that they are doing something – money that is often squandered. This scheme is much more focused, and has a specific purpose.

The Start-up Loans Company is a limited company with an independent board chaired by respected entrepreneur James Caan.  While the funds come from the Government purse, our role as a board is to be responsible for identifying appropriate delivery partners, and for setting the ground rules that they will have to follow. Government is stepping back, letting the board lead the initiative, and giving us the autonomy to be able to drive the scheme forward.

Loans will be at a competitive interest rate, and are likely to average £2,500 (though not a maximum as has mistakenly been reported elsewhere).  They will be repaid over a period of up to five years.  Crucially, the initiative – as Lord Young stressed as the launch event – is not just about the cash; it is also about the support the young entrepreneurs (aged between 18 – 24) will receive from a network of mentors across the country, to help turn their dreams into reality.

The board is also comprised of experts chosen to help the scheme succeed.  Each board member has a particular area of responsibility and will be expected to deliver real tangible results.  It is especially gratifying to see the importance of cashflow and credit management being recognised and getting their rightful place. My brief is to ensure we have the right mechanism, process, procedure and drawdown facilities in place to enable the smooth running, and monitoring, of the issuing and recovery of loans.  The sort of things that credit professionals do every day, but not what you'd necessarily and ordinarily expect to see included in a government initiative.

I can't wait to get started, and I'm going to enjoy working alongside Lord Young, James Caan, Bev James, Julie Meyer, Duncan Cheatle and the other directors.  I believe they are going to teach me more than a thing or two along the way and I know I'm going to get as much out of this journey as I put in.  Seeing youngsters set up their own businesses and take steps towards their dreams is a massive opportunity and I feel privileged to be part of it.

Weekly Blog by Philip King, CEO of the ICM - 'Fatal distraction'

So Wonga has entered the business loan market and added to what is already a fast and dramatically changing landscape.  The introduction of services such as Funding Circle and MarketInvoice have already had a big impact on how businesses can source finance and the recent Breedon Report recognised that alternative funding sources are here to stay.  Couple that with last week's Bank of England Trends in Lending report which said….. "The annual rate of growth in the stock of lending to UK businesses was negative in the three months to February. The stock of lending to small and medium-sized enterprises continued to contract….." and you can see why Wonga might sniff an opportunity.  I'm not sure Wonga is a good solution for small businesses strapped for cash but it's little different to a small business owner funding his business using a personal credit card or two, and that's been happening for years.

 

What worries me more is the suggestion touted in the media and elsewhere that solutions like MarketInvoice are a cure for late payment.  They're not.  MarketInvoice allows a business to sell invoices to a network of institutional investors and it can release the capital tied up in those invoices in real time.  In the short term it can therefore address the cash-flow problem caused by late payment but it's not a cure.  Payment still has to be obtained and, if the invoice is not eventually paid, the amount will have to be refunded to the investor.

The problem as I see it is that – having obtained funding against the invoice(s) - the business owner has removed the immediate cash-flow hole caused by non-payment and can focus attention elsewhere.  The problem hasn't gone away though, and if there is a fundamental problem preventing payment it still needs to be resolved.  Let's not forget, and let's make sure that small businesses don't forget, that the best way to avoid late payment is to get the basics right: knowing your customer, agreeing payment terms in advance, invoicing correctly and promptly, and chasing payment immediately it becomes overdue.  Anything that slows that process, or distracts from it, could lead to far more serious problems; timing is all-important in the management of cash-flow and collection of amounts due and, while attention is elsewhere, the slow-paying customer could fail and become a bad debt rather than just a late payer.

Cashflow keeps business in business and good credit management is vital to maintaining that cash-flow. Mixing messages is not helpful.

http://www.creditmanagement.org.uk/bisguides.htm

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.