Exus Blog Article
Lessons learned: The real cost of getting collection regulations wrong
It’s possible to create a collections process that is super-efficient in its infrastructure, process, and service while maintaining strict adherence to banking regulations.
Where the collections process falls down, however, is when banks ignore these regulations, whether purposefully or because their systems for managing debt collections are out of date and not fit for purpose.
In recent years, a number of global banks have been caught out by regulators. The result? Negative press coverage, debt is written off, and often substantial fines. These are their stories, and what they could have done better.
1. Levying ‘unreasonable’ debt collection charges
The collection practices of a large multinational bank came into question in early 2017, when it was deemed that charges levied against credit customers of two of their subsidiaries were unfair. Customers falling into arrears were passed over to the companies’ nominated solicitors, with around 6,700 of them paying a “debt collection charge” that the solicitors had added to their account balance, the value of which stood at 16.4% of the total debt.
In addition, approximately 350 customers were found to have been given a loan on which the interest had been miscalculated, leading them to be overcharged.
These customers were affected between 2003 and 2009, with the Office of Fair Trading deeming these costs unreasonable in 2010.
The cost of these two errors to the company was vast: the bank was mandated to pay out £4m in redress, in addition to being required to pay 8% interest per annum for each group of customers.
Here, tighter management of the legal process after customer details were passed on could have flagged the issue early, saving the bank time, bad press, and money.
2. Failure to understand customer circumstances
Customers of a UK bank who broke payment arrangements or fell into arrears between January 2009 and January 2016 were offered compensation in 2017, as it was deemed that the bank failed to do enough to understand individual customers’ circumstances.
When a customer falls into arrears, the onus is on the lender to ensure that they are treated fairly and that any payment plan that is put into place is both sustainable and affordable. The FCA ruled that the bank’s treatment of their customers in arrears was unfair - proving costly to the company.
The bank was ordered to refund all fees paid by those who broke payment agreements or fell into arrears between the specified dates - including any litigation fees accrued, and interest charged on unpaid fees. Where customers were deprived of funds, the bank was also required to pay a further 8% interest. With the issue affecting around 590,000 customers, the company set aside a sum of around £283m to make these payments.
Debt collection should not be seen as an opportunity to exile a customer - rather, a chance to demonstrate great customer service. Empowering the customer to work through an affordable repayment solution puts them in control - and makes it more likely that the debt will be repaid.
3. Falsification of court records
In 2016, a US-based bank was ordered to compensate credit card customers whose debt had been transferred to debt buyers. The catalogue of errors was threefold: the sale of credit card debt to third parties with inflated interest rates, failing to pass on customer payments quickly to debt buyers, and - along with two debt collection legal firms - altering affidavit dates and falsifying details of debt values in official court documents.
The bank was required to pay a penalty of $3m for its wrongdoings, along with payments of almost $11min refunds and consumer relief.
This case highlights the importance of a reliable, accurate means of documenting the collections process, allowing all authorized parties to keep track of all documents and decisions relating to each individual case.
4. Inaccuracy of information
In 2015, a US multinational bank was ordered to pay millions of dollars in penalty charges and consumer funds as a result of the bank’s provision of inaccurate information in debt collection cases. The company was found to have robo-signed large numbers of documents without first checking the information they contained, meaning that third-party debt collectors received inaccurate information on the purchase of these accounts.
In addition, the inaccuracy of the customer information held meant that the bank filed lawsuits against customers whose accounts had been discharged due to bankruptcy, had been paid off in full, or were uncollectable for some other reason.
The result was $136m in fines, $50m in customer refunds, and a $30m penalty payment to the Office of the Comptroller of the Currency (OCC) - as well as the bank being forced to agree to new debt collection processes that included case-by-case verification of any debts sold to third parties.
This case highlights the importance of a centralized, regularly updated collections system: with many banks still using legacy systems, such issues may be more common than we think.
5. Dishonesty from bank employees
In the case of a large US bank in 2015, it was employees falsely claiming knowledge of individual cases that led to multi-million dollar fines. Bank staff was found to have signed documents relating to the collection of debts from military personnel, claiming to have personal knowledge of the allegations contained in the documents when, in fact, they didn’t.
As a result, the bank was fined $30m, and also agreed to refund fees and excess interest payments to some of the affected customers.
In cases like these, a collections system that allocates tasks to individual users can make employee responsibilities in each case clearer, and also ensure accountability for actions taken.
The majority of these issues may not have happened if customers were given control of their own debt and if legacy systems had been replaced by a centralized, collaborative approach that ensured that every stage of the collections process was carefully documented.
While doing things the way they have always been done may appear to save money, these cases highlight the need for strict control of the debt collections ecosystem from start to finish. A tech and customer-focused strategy and solution have the potential to reduce delinquent debt and adhere more tightly to regulations, saving time, bad PR, and, of course, money.
If you’re looking to build a successful, digital, customer-focused debt collections channel, download our free ebook to find out how.