Uncertainty, or opportunity?

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1 Quarter 2, 2010 Quarterly debt industry newsletter brought to you by TDX Group ELECTION 2010 SPECIAL Uncertainty, or opportunity? Recent official Government statistics confirm that the UK economy has continued to recover throughout the first quarter of However, whilst this economic recovery is positive, latest Insolvency Statistics show an increase in the number of personal insolvencies. In the run-up to the May 6th election, both the Labour and Conservative Parties emphasised the need for cuts in public spending and higher taxes to help cut national debt policies that any new Government will surely follow through on in the coming months. I expect these policies to impact directly on the debt industry in the second half of 2010 in terms of the number of new IVA cases, the buying and selling of debt, and overall liquidation rates. Inside this issue of The Debt Review we take a look at what may change and what will remain the same following the General Election. The issue of whether to keep or sell bad debts will remain an important one throughout 2010 and we look at the pros and cons of both in more detail on pages 4 to 5. We also take an in-depth look at what any government could do during its time in power to improve regulation, and help to provide the best scenario for consumers and creditors alike see pages 2 to 3. I remain cautiously optimistic about the next quarter and my hope is that continued national economic recovery will positively impact the debt industry. Mark Sanders, Chief Executive Officer Contents Election 2010 Special 1 Looking Ahead 2 Question Time 2 The TDX Group Manifesto 3 The Sell or Recover Debate 4 IVA data bank 5 Debt industry news 6 Company news 7

2 ELECTION 2010 SPECIAL Looking ahead... Question Time: How might the Government more effectively manage the collection of public sector debt? Like the majority of the country, two key events have caught my attention in recent months the recovery of both the UK and global economies, and the much anticipated and hotly contested General Election. With the election results continuing to dominate the news there are a couple of political proposals that were discussed in the run up to the election that I believe could have a particularly significant impact on the debt industry in the coming months, should they be adopted. These are: 1. The proposal to remove collectors right to consult the edited electoral register The Ministry of Justice s proposal has been met with severe criticism throughout the debt industry, and quite rightly, as the edited electoral register is one of the most important and widely used tools available to the collections industry. As the most comprehensive, publicly accessible, source of names and addresses of UK citizens, I believe that removing access to this tool will negatively impact on both the debt industry and consumers. Accurately tracing debtors will be made even more difficult with a potential increase in mis-tracing. Consumers may well find themselves paying more for credit to cover the costs of those debtors who cannot be traced. 2. Planned cuts to the public sector All of the Party manifestos referred to cuts in public sector spending with an inevitable outcome being a reduction in overall public spending. Increased unemployment in a previously stable and creditworthy consumer segment will almost certainly have ramifications within the private sector particularly with companies that rely on public sector contracts. The probable impact on unemployment is likely to drive a further increase in non-performing debt across all sectors. With the General Election now behind us and with a sense of normality beginning to return to the country, the debt industry has much to anticipate in the coming months. Money owed to the UK Government in the form of unpaid tax, benefit overpayment, fines and so on currently stands at over 30 billion. The way in which government accounting operates means that the majority of this 30 billion is already committed through spending plans and, in order to provide cover for it, the Government must either bridge the deficit with further borrowing or make cuts elsewhere. Therefore the question must be: with all the resource and information available to the government both nationally and locally, why is there such an issue in collecting debt? A key issue is that debt is spread across government departments and local councils, and debtor data is not effectively shared. This is partly due to restrictions resulting from Data Protection legislation and also a fear that data will become lost in transit or leaked to a newspaper, as has happened in the past. Having spoken to many government departments over the past year, the risks however small are a significant reason why data is not shared. The impact is that there is no single government view of a debtor. ID cards aside, one solution to this problem is a system that works as a cross-departmental clearing house for government debtors, providing a collaborated view of all known data about a debtor into a single profile. The effect would be the facilitation of debt collection from the point of view of the collection agency and a reduction in confusion for the customer as they are only contacted once for all their debts. In addition, a single government recoveries centre would massively reduce the risk associated with transferring and sharing data. Notwithstanding inevitable privacy issues, the system does have flaws: Who has the highest priority on debtors money? How would this body be funded? Under whose remit would it sit? However when done responsibly, creating a single view of customers is the logical and sensible step. HMRC DWP DVLA CMEC SLC LSC Local Govt. Adrian Crean, Managing Director, Liquidation Businesses Government Recoveries Centre Debtors For the full article, please contact Jay Ramsay, Senior Consultant in Public Sector, e: info@tdxgroup.com 2 THE DEBT REVIEW by TDX GROUP Q2 2010

3 ELECTION 2010 SPECIAL The TDX Group Manifesto Positive policies for driving change It is fair to say that the campaigns of the three main parties in the run-up to the General Election have, on the whole, been negatively received across the debt industry. This is what we think the Government should be looking into to help the industry recover from the recession, develop better collection practices and improve the situation for consumers, DCAs and creditors alike. 1. Formalise Debt Management Plans (DMPs) Current status: Because of the more informal nature of DMPs there is little structure or regulation Proposal: Push the Ministry of Justice to introduce rigour to the structure of proposed DMPs to be more in line with formal arrangements such as IVAs 2. Share data on debtors Current status: Debtor data is often not shared effectively between creditors making it difficult to trace a debtor the removal of DCAs right to consult the edited electoral register will further worsen this Proposal: Increase the ways in which data can be shared between creditors, DCAs and debt purchasers and continue to allow the edited electoral register to be used to help trace debtors 3. Facilitate the amalgamation of individual debts from different creditors Current status: The current process for doing this is arduous and the legislation for use of data for this purpose is ambiguous Proposal: Review whether, and how, a customer-level approach to debt repayments could be effectively implemented on a large scale, across the industry as this will ultimately allow creditors and DCAs to treat debtors in a fairer manner 4. Improve liquidation of water and electricity debts Current status: The repercussions of non-payment for water and utilities debt are not as great as for Financial Services (FS) debts and are often de-prioritised as a result Proposal: Investigate how lessons learnt in the FS sector can be applied more broadly for utilities debt 5. Understand the impact of changing interest rates on debtors Current status: Little is currently understood about the considerable impact that significant changes in future interest rates could have on a debtor s ability to repay Proposal: Research the likely impact of future interest rate changes on debtors and introduce policies to provide relief for debtors in the event of such changes in interest rates 6. Impartially educate consumers Current status: More impartial advice is needed to help consumers avoid or manage their debt Proposal: We suggest that greater support is required (from Government and creditors) of non-profit making organisations to assist in educating consumers and assisting in financial difficulty THE DEBT REVIEW by TDX GROUP Q

4 The Sell or Recover We examine how creditors can regain control after the recent The disappearance of the Debt Sale market 2009 was a landmark year for the recoveries market as it saw the dramatic close of five years of unprecedented growth in the debt sale market. By the end of 2008, growing concern over the economic climate translated into an increasingly pessimistic view on future recovery rates at the same time as market liquidity was reduced by debt purchasers funding lines being restricted by the credit crunch. The impact was immediate and dramatic, and by the end of 2008 prices for some debt segments had fallen by over 50% (see figure 1). Sell or keep? The big question for 2010 Throughout 2009 creditors looked away from the debt sale market and towards investing in recovery infrastructure and the key question for creditors in 2010 will be what to do now with their debt. TDX Group has already observed a marked improvement in the debt sale market in Q and we forecast that by the middle of 2010 most creditors should once again find sale an attractive option from a Net Present Value (NPV) basis. Some creditors, however, may be reluctant to switch back to sale after having experienced the painful process of the past 18 months investing in developing in-house capability and forging relationships with debt collection agencies. The value of outsourcing For most creditors, the switch away from selling debt was not a strategic decision but one necessitated by market forces the need to act quickly and decisively meant there was little time to evaluate or plan the investment needed to ensure long-term effectiveness and efficiency. For these reasons often, and despite best endeavours, the level of investment was far below that required to maintain that capability beyond the short-term. Those creditors already using third party service providers, such as TDX Group and others, were largely sheltered from the impact because the increase in volume created by the reduction in debt sale volumes could more easily be absorbed by the flexibility of the panel management platform. This flexibility is one of the key benefits provided by an outsourced readyto-go platform and network of Debt Collection Agencies (DCAs). In addition, by accessing this service, creditors also avoided the need to invest in their own infrastructure, safe in the knowledge that they were benefitting from proven capability and performance. Choices for creditors in 2010 The aftermath of the recent market turmoil has left many creditors failing to extract the full value from their bad debt portfolios. The options open to creditors are clear, as can be seen in figure 2, to the right. Stuart Bungay, Head of Capital Markets at TDX Group said, Given that many creditors will have been conservative in their forecasting for , most having excluded any proceeds from sales; any transactions could present an opportunity to deliver positive upside to existing budgets. Whichever option creditors choose, the decision regarding whether to sell or Figure 1: Debt sale, market volumes and price % Face value sold ( bn) % 80% 60% 40% 20% 0% TDX Gtroup price index H1 H2 TDX Group price index THE DEBT REVIEW by GROUP Q2 2010

5 Debate market turmoil...data bank...data bank...data bank...data BANK... Individual Voluntary Arrangements (IVA) Data bank keep bad debts will remain a key one throughout This article is an extract from a TDX Group briefing note. For a free copy, e. info@tdxgroup.com Figure 2: Creditor choices in Migrate back towards a sale-based strategy. This would result in immediate sale benefits, would assist with balance sheet optics and would require little operational expense. However, there would be a risk of future exposure to asset sale market variations, no benchmarking of price vs. performance and this option would require investment in provisioning models. 2. Invest further in in-house recovery capabilities. This would offer complete control over recoveries operations but is costly, may limit future flexibility and may leave a significant legacy backbook. Having made the investment, many creditors may find themselves subsequently reluctant to sell based on the cost they have sunk into infrastructure. 3. Outsource recovery operations. The benefits for the creditor would include access to best in class infrastructure and capability, comparatively low costs and complete future flexibility, however, this option may involve the restructuring of existing resources. 4. Do nothing. This option would have no incremental cost, but this must be weighed against the likely sub-optimal nature of the current process and the opportunity cost that would therefore be incurred in carrying on with the current infrastructure. IVA data bank Average Mar 2008 Mar 2009 Mar 2010 Total unsecured debt in an IVA 1 50,905 49,862 48,418 Debtor salary 23,510 25,380 25,158 Debtor income vs. expenditure Debtor monthly payment (proposed 2 ) Debtor monthly payment (activated 3 ) % cases with homeowner 34.2% 49.4% 54.1% % cases with higher rate tax payer 7.4% 11.0% 9.5% % cases with equity release option 21.4% 16.4% 15.9% IP fees as and % of div (proposed 2 ) 7259, 38.1% 7191, 41.9% 7103, 44.9% IP fees as and % of div (activated 3 ) 6337, 28.5% 5729, 28.1% 5614, 29.4% Dividend (proposed 2 ) Dividend (activated 3 ) Notes: 1 Figures exclude trust deeds 2 Proposed = Initial terms proposed 3 Activated = Final terms agreed Proposed monthly contribution Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Q saw a continued trend of reducing levels of disposable income available for contributions into an IVA. With income levels expected to remain static and cost of living increasing in line with inflation, we expect this trend to continue putting downward pressure on activated dividends. Matt Trueman, Head of The Insolvency Exchange (TIX)...Data bank...data bank...data bank...data BANK... Dec-08 Feb-09 MOC Month Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 THE DEBT REVIEW by TDX GROUP Q

6 Debt industry news: Our round-up of some of the headlines from the past three months CONSUMER NEWS DEBT INDUSTRY NEWS Loss of income named as key factor in increasing UK personal debt Total UK personal debt at the end of January 2010 stood at almost 1.5 trillion an increase of around 0.8% over the previous 12 months, with the number of personal insolvencies also increasing over the same period. According to debt solutions provider Eurodebt, loss of income is one of the primary reasons for the increasing number of debtors. Eurodebt s study revealed that over 229,458 Britons have reportedly been made redundant since Q3 2008, leading to as many as 23,500 people collecting their unemployment benefit in This figure is expected to increase following the General Election, as any new Government is expected to announce significant cuts in public spending, resulting in an increase in unemployment. Source: Loss of income named as main reason consumers need debt help, , Debt Management Today Rise in water bills set to hit the average British household hard OFWAT has permitted some water companies to increase their bills in 2010/11, a move that is expected to worsen problems for the already over-burdened water debt industry which currently witnesses over five million British households owing money towards their water bills. Money owed to water companies by debtors has increased by 50% over the past five years, now standing at approximately 1.4 billion according to official OFWAT data. Sources: Rise in water bills to hit Britons next month, , Debt Management Today Water regulator calls for action on bad debt, , Water UK TDX Group commentary: In our experience, a lack of effective, impartial consumer education is a key factor in the high levels of personal debt. See our article on page 2-3 for some of our proposals on how to improve the debt industry for both consumers and companies. Debt Management Plans prove to be a debt trap Although in principle, Debt Management Plans (DMPs) are meant to be short-term repayment plans agreed between individuals and unsecured creditors, in reality approximately one quarter are expected to last for 10 years or more according to insolvency trade body R3. The length of some of these plans suggests that the amount of debt is too large to be paid off through a DMP, and in opting for such a longterm DMP, debtors run the risk of falling into increasing levels of debt, ultimately leading to insolvency. Statistics show that almost a third of individuals who have become bankrupt or entered into an Individual Voluntary Agreement (IVA) have previously entered into a DMP. By choosing a DMP before filing for bankruptcy only serves to reduce Net Present Value (NPV) ultimately reducing overall returns for creditors. Source: Ten Years of debt slavery for those in Debt Management Plans, , Business Credit Management UK LEGISLATION NEWS 2010 Budget released Alistair Darling delivered the last Budget before the General Election in March 2010, in which he stated that the UK economy had shrunk by about 6% over the course of the recession. Amongst the headlines that will impact upon the debt industry in the coming months are: Confirmation of the sale of the Student Loan book to raise cash A total of 20 billion of Government savings forecast The number of civil servants in London is to be reduced by a third, with the relocation of 15,000 posts within the next five years Source: Budget Headlines 2010, , Credit Today TDX Group commentary: The sale of the student loan debt book is a significant step in the Government acknowledging and addressing the need to find new ways to deal with public sector debt. Unique challenges exist for the collection of public sector debt. However, much can be taken and, where necessary, adapted from private sector practices; public-private partnerships for example may be an effective way in which the new Government can follow through on their commitment to reduce national debt by increasing recovery rates. OFT issues new guidelines warning lenders against irresponsible behaviour The Office of Fair Trading (OFT) has set out guidelines to lenders regarding what constitutes irresponsible lending practices. These include the use of oppressive behaviour towards debtors who have fallen behind with repayments, and the use of misleading advertising. Lenders are also expected to explain the key features of a credit agreement to consumers in order for them to be able to make an informed decision. It is hoped the guidance will help lenders avoid the risk of engaging in behaviour or practices that could lead to action by the OFT. Sources: OFT issues warning to lenders, , Daily Finance UK OFT warns lenders against irresponsible lending, , Financial Times 6 THE DEBT REVIEW by TDX GROUP Q2 2010

7 Insolvency rate rising in the UK The Insolvency Service has released figures revealing that over 134,000 people entered into Individual Voluntary Agreements (IVAs) in 2009, an increase of almost 25 percent from This rise in the number of insolvencies is largely attributed to financial mismanagement and an over-reliance on credit. Further research carried out by KPMG found that approximately 223 people per day choose to petition for their own bankruptcy, highlighting the serious financial difficulties still faced by many in spite of record low interest rates. Sources: Record Year for Personal Insolvencies, , Business Credit Management UK 223 people per day petition for bankruptcy, , Business Credit Management UK TDX Group commentary: As predicted, Q statistics reported an increase in the number of individuals becoming insolvent. We expect to see an overall increase in the number of IVAs in 2010 despite the improving economic climate. This is in part due to a commitment by all political parties to a reduction in overall public sector spending, which is sure to see an increase in the number of public sector employees becoming insolvent. See our IVA Data Bank on page 5 for more information. Company news Top 5 UK bank: New business win One of our leading Financial Services clients, a leading UK Bank, has significantly increased the allocation of debt it apportions to TDX Group a testimony to the impact that our unique position within the market has on net liquidation of debt. We would like to take this opportunity to thank all our colleagues for their hard work in achieving this result. Top Utility company: New business win A top utility company has signed a long-term, exclusive contract with TDX Group, which will see TDX Group manage their final debt portfolio and will enable them to benefit from the same level of service, brand protection and value generation that TDX Group has been delivering to other companies within the sector. A major part of TDX Group s role will be to rigorously select, manage and oversee the activities of all DCAs and ensure that the new client s customers in recoveries continue to be treated in line with best industry practices and with the utmost dignity, respect and fairness. Credit Today Awards We look forward to seeing you at the Credit Today Awards in London and would like to offer our congratulations to some of our clients and suppliers who have been nominated for awards at this event. Subscribe to The Debt Review If you have any questions or comments on The Debt Review, or have suggestions on how it could be improved to be more useful to you, please do not hesitate to contact us. If you or a colleague would like to subscribe or unsubscribe to The Debt Review, please contact us stating whether you would prefer to receive the electronic or the print version. e. info@tdxgroup.com THE DEBT REVIEW by TDX GROUP Q

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