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 - 'Reading, writing and credit management'

Back in February the government announced a new draft National Curriculum for England that would see financial education embedded in both mathematics and in citizenship education, making financial capability a statutory part of the curriculum for the first time. The draft programme of study for citizenship would include the functions and uses of money, the importance of personal budgeting, money management and a range of financial products and services in Key Stage 3, and wages, taxes, credit, debt, financial risk and a range of more sophisticated financial products and services in Key Stage 4.

 

This week, following a period of consultation, Michael Gove published the revised Curriculum and the financial education has been further strengthened by the inclusion of 'risk management' into Key Stage 3 and 'income and expenditure, credit and debt, insurance, savings, pensions' at Key Stage 4. Recognition is due to pfeg for its work in pushing for this enhanced content.

 

Providing education that allows children to leave school with financial literacy can only bode well for the credit profession in the years ahead if it means consumers are more financially aware. None of us wants to see people in financial difficulty through ignorance because they weren't sufficiently aware or informed.

 

In my blog last week I called for the OFT to ensure that affordability tests were genuinely being carried out by payday lenders to avoid the vulnerable being caught in a vortex of indebtedness. An interesting discussion has unfolded in response on the ICM Credit Community LinkedIn group (you can find it here) I don't agree with all the comments - simply outlawing payday lending could carry serious unintended consequences involving a growth in back street loan sharks, for example - but action in the short term is needed and, for the longer term, education will also play its part. Now we need to make sure teachers are provided with adequate tools to deliver the proposed curriculum content.

Weekly Blog by Philip King, CEO of the ICM - 'The power to make a difference'

I was privileged to chair the 5th National Consumer Debt Conference, organised by Utility Week, in Birmingham on Tuesday. It was a full and interesting day with the order of subject matter judged exactly right.

 

The first section focused on the economic landscape looking at issues around ability to pay, the implications of the current welfare reforms including Universal Credit, and the mechanics of the government's Green Deal scheme. The second section looked at customer management including the use of analytics to identify the most vulnerable in our society, and a cross section of good practice examples of customer-driven strategies. The final part of the conference addressed billing and collections, exploring areas as diverse as fraud and meter-tampering, landlord web-portals, risk management strategies, and smart metering.

 

You'll probably guess from some of the subject matter above that the delegates were largely from the utility and energy sectors where there are some particular credit management issues. The water industry's problems arising from the obligation to supply, and difficulty in identifying customer details, particularly in tenancies, for example, are well known and equally well documented.

What always strikes me at events like this, however, is just how many themes are common across industries and sectors. While each has its own peculiarities, trends, and concerns, the principles and elements of good credit management practice are largely shared.

 

At the end of the conference day, I hosted an interactive workshop where we discussed, amongst other things, what best practice looks like. One of the common themes that emerged was the need to drive professionalism within organisations through the engagement and development of credit professionals within them.

 

Driving that professionalism is one of the key objectives of the Institute of Credit Management and I'm always proud to hear examples of where we're succeeding, and to be playing a part in raising standards and performance as a result.

 

 

 

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 - 'Confidence or availability'

The Government Funding for Lending programme has been launched this week. Under the scheme, the Bank of England will lend money at below-market rates to banks who, in return, will have to increase their lending to businesses and households; progress will be monitored and, if they fail to deliver, the interest rate will increase. There have been some interesting comments and opinions expressed including those who say it's just another in a long line of schemes such as the National Loan Guarantee Scheme that this one will, over time, replace to encourage the banks to lend more.

The initiative is creative and good but I have to say I'm with Jonathan Portes, Director of the National Institute of Economic and Social Research, who said on yesterday's Radio 4 Today Programme that making more money available at competitive interest rates is not going to fundamentally address the underlying lack of confidence in the economy. He observed that the scheme will allow businesses who want to borrow to do so more cheaply but it won't encourage the banks to lend more since they will still carry the credit risk. In other words, it will reduce the price of lending rather than increase the volume. What is needed is a boost in confidence to encourage businesses to invest and households to spend more.

Mark Hoban, Financial Secretary to the Treasury, countered that the availability of loans at a lower cost will encourage the bringing forward of projects and spending, and encourage investment that would otherwise not have happened, or at least not happened yet.

We'll see over the coming months but I don't sense any increase in confidence in the many businesses and business owners I speak to. I don't know the answer I'm afraid but it's the level of confidence we need to stimulate; when that happens, the demand problem will take care of itself.

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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 into the unknown'

I seem to have been reading and reviewing an endless stream of lengthy reports and consultation documents recently, including the 150 page Ministry of Justice 'Transforming Bailiff Action' consultation over the past weekend, but more of that later (and please respond when the Institute issues its consultation survey questionnaire in the not too distant future). Some of the documents have been more interesting than others but let me mention two reports relating to consumer debt and advice.

The first is 'Debt Advice in the UK', the final report produced by London Economics for the Money Advice Service. The Money Advice Service, which was initially set up by the Government, is funded by a charge levied on the financial services industry and collected by the Financial Services Authority. It replaced the Consumer Financial Education Body in April last year. In 2012/13 the Service will use a budget of £46.3 million to deliver against its money advice targets, and a separate budget of £40.5m to coordinate the delivery of debt advice across the UK. Credit professionals working in the sector will be keen to see that the financial services industry's levies are put to good use!

The report concludes that 'Overall, the desk review of the existing literature and information on the debt advice sector and the consultations with stakeholders show that, while there exists a fair body of material on individual debt advice providers or programmes, very few analyses take a more holistic approach, covering the debt advice sector as a whole or, at least, large segments of it. Notable information gaps relate to: estimates of the actual and total demand for debt advice; the volume of debt advice provision by form and channel for the sector as a whole; the needs of actual and potential debt advice seekers; and the comparative effectiveness in the short and longer run of the different forms and channels of debt advice provision.'

I may be being cynical here, but to my simple mind it seems that the report tells us more about what it can't tell us than about what it can!

The second is the 'Consumer Debt and Money Report' launched by the Consumer Credit Counselling Service as the first in a series of quarterly reports based on research carried out by Cebr. This reveals: that households are spending 24 percent of their discretionary income - £199 per month - on interest payments; that the demand for debt advice is forecast to remain high and peak in 2014 as unemployment rises across the UK; and that middle-aged and older people will be increasingly affected by debt problems severe enough for them to need to seek help, highlighting the challenging financial situation that older households face. The report predicts that CCCS's share of clients over the age of 45 will rise from a historic 28 percent in January 2005 to a projected 47.6 percent by December 2014.

I was privileged to chair the ICM's Credit Industry Think Tank last week - it's always great hearing the views of leading experts from across our industry - and, during the forum, we were reminded that personal insolvencies are falling, with 2011's figure of c120,000 representing a fall of about 15,000 over 2010. Good news perhaps, but let's bear one thing in mind: no numbers are collected for debt management plants arranged through the advice sector and these do not appear in the official published insolvency figures (another piece of missing but vital data!).

I hope at least some of the Money Advice Service's £86.8m will be used to identify the real size of the problem and the effectiveness of solutions. Without knowing where we are, it's hard to plan the route to a better place!

Weekly Blog by Philip King, CEO of the ICM - 'Never underestimate the value of good credit management'

The Bank of England published its Credit Conditions Survey for quarter 4 of 2011 last week. In summary, it said that although lenders expected a small increase in overall credit availability in the coming three months, it will be impacted negatively by factors such as the economic outlook and tighter wholesale funding conditions. Furthermore, a key determinant of credit availability will be developments in the euro area and their impact on banks' funding conditions. It noted that demand was down across all areas but most significantly from small businesses where it fell sharply. I guess a succinct way of distilling the 17-page report down to a few words would be: a stagnant economy where lack of confidence is stifling demand to spend or invest, and where external factors could have a major effect!

I'm often reminded by our members - and I in turn remind government in meetings - that trade creditors lend more to businesses than the banks and - just as bank lending decisions impact on the ability of the economy to grow - so do the credit decisions of credit professionals. When they decline or accept an order or contract, they impact on the whole trade cycle for themselves, their customer, their customer's customer and so on either negatively or positively. That in turn impacts on the economy and its capacity to grow. In isolation of course, an individual transaction is probably not material, but cumulatively the impact is immense.

In my blog last week, I talked about showing and being proud of our professionalism - that professionalism is manifested in the decisions we reach throughout all credit management activity. Getting them right, whether we're dealing with multi-national corporations or individual consumers, is vitally important and we shouldn't underestimate the impact we have, not only on our own organisations but on the wider economic well-being.

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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.