22 May 2015

Debt Collection and Credit Referencing

The 88 page Australian Competition and Consumer Commission report Research into the Australian debt collection industry [PDF] considers practice in the "debt collection industry", a continuing area of concern regarding consumer protection and privacy law.

The ACCC states
With over 500 businesses offering some form of debt collection service in Australia and collectors making up to 65 million contact attempts each year, the report reveals the scale and breadth of the industry which affects many Australian consumers … Debt collection can be a stressful experience for consumers, and can exacerbate existing financial pressures. Debt collectors that do not comply with the debt collection guideline may cause harm to disadvantaged or vulnerable consumers and become a target of ACCC action.
The report notes that
 The ACCC and the Australian Securities and Investments Commission (ASIC) both enforce Commonwealth consumer protection laws relating to debt collection and have recently updated their joint Debt collection guideline for collectors and creditors. This guideline assists creditors, collectors and debtors to understand their rights and obligations, and ensures that debt collection activity is undertaken in a way that is consistent with consumer protection laws. 
Issues of particular concern identified in the report include -
  • Some in the sector not abiding by the Guidelines and the law who cause considerable detriment to vulnerable and disadvantaged consumers. Problems that can be traced back to the retailer or service provider. 
  • Consumer advocates are particularly concerned about debt collection practices within the energy sector. 
  • Billing issues, management of hardship, disconnections and the referral of debt to multiple debt collectors were cited as concerns. 
  •  Widespread concerns about the practices of Credit Repair businesses. While not considered part of the debt collection industry these businesses can charge consumers large fees –consumer advocates state that these are sometimes larger than the debts involved – for support that is freely available to them from other agencies such as industry ombudsman schemes and financial counsellors. 
  • Debt collection processes that impose addition costs that can add to the detriment for consumers already in financial distress.
The report states
The debt collection industry in Australia is relatively competitive, with over 500 businesses offering some form of debt collection service. While the industry is dominated by a few larger players, the sector is mainly comprised of small businesses, with 6 3% generating less than $200,000 in revenue and 95 % employing less than twenty people. 
Such a divergence has created an interesting competitive dynamic. The major users of debt collection services tend to favour the larger debt collection businesses that have the necessary scale and sophistication to meet their requirements. This means smaller firms are more likely to specialise in niche markets where demonstrated industry knowledge can provide a competitive advantage. Developments in technology, new customer segments and attitudes to compliance have driven significant change in the industry over the last five years. Technology has created economies of scale, which has seen the majority of collection activity shift to call cen tre based operations allowing for consolidation within the sector . 
Technology has also increased internal oversight and compliance as digitisation allows for call recording and improved record keeping. The compliance environment is complex . Debt collectors are required to comply with a number of state and federal legislative and regulatory instruments. Banks, telecommunications providers and energy companies have been long - term users of debt collection services. However, over recent years the industry has seen clients emerge in new sectors, including government, health care and education. 
Key Findings 
Technology and scale have improved compliance, but there are still challenges for both large and small businesses
  • Large collections businesses now have automated systems and procedures to ensure compliance with provisions relating to the timing, frequency and appropriateness of contacts . However, this results in a substantial number of contacts to consumers, which is the underlying driver of complaints. 
  • Small businesses may not be able to implement automated systems, and are theref ore heavily reliant on training, support and a compliance culture to ensure that they are meeting their obligations. 
Issues with debt collection can vary by sector; different debt drives different behaviours and outcomes 
  • There is a clear distinction between issues arising in relation to credit regulated debt and non - credit regulated debt, such as the energy and telecommunications sectors. This distinction occurs because of the nature and value of the respective debts. 
  • The identification and adoption of best practice approaches in the debt collection industry requires a comprehensive understanding of those industries that are refer ring or selling debt. 
  • Debt collectors state a preference for collecting debt from those businesses that have rigorous processes in place to ensure debt quality and hardship issues are appropriately managed prior to a debt being referred or sold. 
Rising costs and the nature of supply have created a particular set of challenges for the energy sector 
  • Consumer advocates have raised concerns about debt collection practices within the energy sector. Billing issues, management of hardship, disconnections and the referral of debt to multiple debt collectors were cited as areas of concern.
  • The debt collection industry believes that a sig nificant portion of complaints are driven by billing issues, disputes, or a failure to identify hardship, rather than debt collection conduct. 
  • Energy retailers acknowledge the issues. There was general agreement that the sector is highly transactional in nature, which creates some unique challenges within the sector.
Debt collection approaches that impose additional costs can result in detriment for consumers in financial distress
  • Consumer advocates report that it is common for some debt collec tors or solicitors to impose additional fees and charges on outstanding debts. From a consumer perspective, such fees can exacerbate any existing incapacity to pay. 
  • Debt collection businesses note there are standard terms and conditions that allow for rec overy of costs associated with debt collection. However, consumer advocates suggest that these terms are not commonly provided and if they are, they either do not provide for recovery of costs or the relevant term is arguably unfair.
Increased regulatory oversight has led to an improvement in debt collection behaviour
  • Regulatory measures such as the Australian Consumer Law (ACL), the Australian Credit Licence, external dispute resolution (EDR) schemes and the ACCC/ASIC Debt Collection Guideline for Collect ors and Creditors have resulted in improved behaviours within the sector. 
  • Increased regulation and oversight, and the associated compliance costs, ha ve contributed to industry consolidation. There is a noticeable difference between the compliance environments of larger and smaller collection businesses. This may indicate that larger businesses have been more effective in implementing compliance frameworks and promoting a compliance culture.
Despite variations in state and territory licensing regimes, the key obligations of debt collectors when dealing with consumers are made clear by the ACCC/ASIC Debt Collection Guideline
  • Debt collectors are currently required to respond to a range of national and state based laws, regulations and licensing requirements. This has created confusion, or additional administrative burden, for some businesses in the sector.
  • The ACCC/ASIC Debt Collection Guideline is the regulators’ interpretation of the key consumer protection legislation. It represents best practice for the industry, and makes compliance obligations clear.
Non - compliant debt collection practices result in significant detriment to vulnerable and disadvantaged consumers. Regulators are willing to take appropriate action in such cases
  • Regulators and consumer advocates generally acknowledge that complaint s are relatively low as a proportion of total debts referred for collection. 
  • However, complaints regarding debt collection are highly emotive and can lead to both financial and psychological stress for consumers. Consumer advocates also point to research that suggests debt collection complaints are grossly under - reported. 
  • Debt collection often affects consumers who are experiencing hardship in various forms. Non - compliant debt collection activity can be particularly harm ful to vulnerable or disadvantaged consumers. The protection of vulnerable and disadvantaged consumers is an ongoing priority for the ACCC .
Credit repair businesses often increase costs for consumers with debt problems
  • While credit repair services are not part of the debt collection industry, there is a consensus between industry, regulators and consumer advocates that these businesses can add unnecessary costs for consumers who have an outstanding debt. 
  • Stakeholders noted that credit repa ir agencies charge consumers large fees for support that is freely available to them from credit reporting agencies, industry ombudsmen, the Office of the Privacy Commissioner and financial counsellors.