Extract of the speech made at the Credit Summit 2018 by Huntswood's Matthew Drage and Alex Prentice
The focus on regulatory compliance is often the key driving force when it comes to collections and recoveries, however, delivering a fair customer outcomse is even more critical for consumers in this situation.
Firms clearly have a variety of forbearance tools on offer, and we do see good practice in this space. Indeed, there are a variety of firms who offer to support customers in relation to collections and recoveries. Whether this is performed in-house or by an external party, the same principles will apply.
Where should firms start when assessing their frameworks?
The Credit Services Association’s ‘code of practice’ is an excellent starting point, against which firms can consider and assess their practice. However, putting this to one side, the market is shifting rapidly and there is an increasing focus on early intervention for consumers who exhibit signs of financial difficulty and vulnerability. Firms are increasingly turning to risk indicators to proactively identify distress, for example:
- Debt-to-income ratio – “a household is frequently considered vulnerable if its debt service-to-income ratio exceeds 30 per cent and its income is below the median of the population.”
- % utilisation of credit facilities
- Household income (versus accepted quantiles)
- Recent CCJs and defaults on account
- Payday lending / use of high-cost, short-term credit
- Unauthorised overdraft breaches
Irrespective of your industry and sector, the new Payment Services Directive 2 (PSD2) provides opportunities to change your business ecosystem by allowing access to granular account information held by traditional financial services firms.
From collections and recoveries through to debt sale and purchase, the new PSD2 allows for enhanced customer management and consumer journeys through more accurate income and expenditure calculations driven by this change.
How is your firm embracing this regulatory and technological revolution to ensure the best outcomes are reached for consumers?
Outcomes testing can be summarised as a defined, considered approach to testing true customer understanding. It operates in the business with independent oversight and challenge; an effective customer outcome testing capability will operate in the first line, with oversight and challenge from the second line. To be effective, it should be performed through a combination of desk-based reviews and actual telephone conversations with customers, helping you to reveal the true experience of customers who interact with your firm’s products and services – to this end, it should also be risk-based and cover a representative sample of business.
Testing outcomes is key to evidencing a tailored and effective approach
Irrespective of early identification, when consumers find themselves in a collections or recoveries situation, testing outcomes becomes all the more important.
Huntswood usually segments its outcomes testing methodology into the following key areas for collections and recoveries (matching the typical stages in a customer’s journey towards a collections situation). Example questions posed at each stage are outlined below:
|Stage in customer journey||Example of outcomes testing measures at this stage|
|Identification||Was financial difficulty identified at the earliest opportunity?|
|Understand||Is up-to-date income and expenditure information held?|
|Personalise||Was the solution proposed / deployed personalised to the customer?|
|Communicate||Was the customer given the opportunity to enter into constructive dialogue?|
|Judgement||Did the handler exercise sufficient judgement in seeking to agree the best way forward?|
What are the benefits of testing outcomes?
Outcomes testing will allow you as a firm to:
- Identify gaps in policy and procedure and drive customer centricity and continuous development
- Detect consumer spikes or trends that may become costly and can damage your reputation as early as possible (e.g. a particular consumer segment which is receiving persistent poor outcomes)
- Evidence to satisfy regulatory scrutiny and move towards positive assurance – with outcomes testing increasingly being used to satisfy regulators of the delivery of fair outcomes
- Improve processes, for example, in relation to vulnerability or other types of customer in need of a tailored approach, which have not otherwise been detected
Operating models should be underpinned by considering the ‘three c’s’
Customer, conduct and culture are inextricably linked, and should be considered at all stages in the collections and recoveries lifecycle. The three C’s are as follows:
- Conduct: Conduct touches on almost everything. It’s important that a firm’s conduct is geared around delivering good customer outcomes to help it meet its commercial objectives and its regulators requirements.
- Customer: A poor customer experience and poor outcomes are potential drivers for loss of business and may result in regulatory scrutiny. A poor customer experience and outcome can also result from a firm’s culture.
- Culture: A firm’s culture should be balanced between commercial demands, risk appetite and customer outcomes. As an organisation, how do you currently interpret and understand culture, including employee sentiment and behaviour? It really is the secret driver to your businesses success.
Firms have frequently viewed each of the above areas in isolation, but the benefits of viewing these areas holistically (using a robust outcomes testing approach) are now becoming more widely recognised across all areas of the customer journey.