Collection departments have been long accustomed to dealing with the ever-growing list of requirements from industry regulators. Now, pressures from internal finance departments reacting to changing accounting standards are creating additional stress, and the implications for managing collection agencies and debt buyers are far-reaching.
Creditors cannot ignore how third-party servicers treat customers, and those third parties have also come under closer scrutiny from both creditors and regulators. All parties need both technology and explainable analytics to both ensure that borrowers receive the right treatment and to be able to provide evidence that they did.
Industry RegulationsOver the past several years in the US, a large volume of guidance has come from the United States’ Bureau of Consumer Financial Protection (BCFP, formerly the Consumer Financial Protection Bureau) regarding the management of third-party collectors through quarterly supervisory reports, consent orders and the ongoing work connected with the development of new rules governing debt collection activities.
This is no different outside of the US. The UK has seen new requirements within the Financial Conduct Authority’s Know Your Customer guidelines and a more general regulatory focus ensuring a Treating Customers Fairly approach across collections.
Regulators have placed responsibility for the consumer relationship directly on the creditor, even if the account is being serviced by a third party. Creditors are expected to “identify, manage and mitigate” any errors made across the entire collections process, even with a third party. These requirements are increasing the need for greater oversight, if not control, over how consumers are treated.
Meeting these standards, as well as a long list of additional requirements, has not been easy for organizations using antiquated systems and poor data transfer processes. As a result, some creditors have elected to send less debt to third parties, or have even halted activity for periods of time.
Accounting StandardsThe accounting changes being implemented in advance of the Financial Accounting Standards Boards (FASB) Current Expected Credit Loss (CECL) accounting standard in the US will put new pressures on the banking industry. Institutions outside of the US must already comply with a similar accounting change called the International Financial Reporting Standard 9 (IFRS 9), which took effect as of May 2018.
For many organizations, the increase in impairment costs driven by these new standards will result in finance departments rushing to their collections leaders for support.
For example, IFRS 9 includes changes to provisioning methodology that add greater significance on accounts rolling to 31 days past due, with impairment implications for the entire lifecycle of these accounts. As a result, pressures will be felt by credit issuers to increase reliance on third-party suppliers. Examples of likely requests could include:
- Can we scale up the use of digital automated resolution channels?
- For those who don’t auto-resolve, can we accelerate the use of more dynamic strategies, such as using external collection agencies or BPO services, to prevent accounts from rolling through the collections process, in order to minimize provisions?
- What other strategies can we use to minimize impairment charges across the portfolio — for example improved restructuring and or debt sale?
In those markets where collectors need to show they are reaching a “right customer outcome”, the critical factor is not to sidestep the use of data and analytics — for fear that it constrains the correct treatment of a customer — but to use it in a transparent and explainable way to show how it enhances the chances of driving the right customer outcomes.
This is a case where analytic technology can keep both the finance folks and compliance officers happy — or at least satisfied!