A leaner landscape

November 2014

A leaner landscape

Creditors have sized up and sharpened their panels - and for lawyers it’s been no different. What's left is a set of clearer, coherent strategies for litigation in future, amid an onslaught of rule changes. Finding and delivering the right outcome for consumers. This phrase, or familiar versions of it, has become the penchant of directors heading up creditors' recoveries teams across the board. 

But where does this leave the role of litigation? As the operators of a last resort tool used by creditors, when no such outcome is possible, practicable, or even believed achievable by consumers themselves, lawyers in this sector might have wondered how 2014 would pan out.  The answer for now seems to be so far, so familiar. Many creditors still require the same kinds of assistance and expertise to select the right cases for litigation.  

To highlight an example, when finding solutions for cases beyond the typical homeowner roughly £2,000 in arrears, it seems this remains the area where litigation partners' experience, know-how and analysis comes into its own.   And while some of the large legal players have traditionally not undertaken high volumes of litigation on the unsecured side, relatively stable numbers on secured cases are still coming through. 

Taking a cross section of views of creditor directors and veteran lawyers in the industry, many believe the reduction in panel size by major banks is not impacting on volumes of litigation. This is especially true for the larger legal firms with long established relationships.  What lawyers are actually seeing is banks' need for greater control and oversight of their suppliers. This is in turn driving both the reduction in legal panel sizes, but also leading to more frequent sales of bigger debt portfolios.  Some believe that the entrance of new debt buyers means that secured litigation levels won't endure a sudden downward curve.  As one industry pundit says: "It is actually the debt buyers that are driving up the volumes of litigation. The arrival of  US debt buyers in the UK market will further fuel that growth as it has a slightly greater focus on litigation than debt buyers in the UK have traditionally had." 

The Financial Conduct Authority's appointment of regulatory powers does put a different spin on the dynamics this year.   The prescriptive rules-based approach gives even shorter shrift than the Office of Fair Trading's guidance. In the long term it could well reinforce creditors' trust, especially in those with an untarnished track record of expertise, demonstrating what those rules mean in practice, with no ambiguities. Optima Legal, commented "FCA involvement will serve to focus more attention on process and that will see some creditors become more confident in their selection of cases for litigation.” "Some will even come to recognise that postponing or bypassing litigation maybe something that exposes the creditor to regulatory risk."

In one of its more notable recent statements, on arrears management, the FCA said mortgage lenders and administrators should focus more on delivering consistent, fair outcomes for customers, based on their individual circumstances. This is also something that the Lending Standards Board has highlighted. But this stance creates a problem for DCAs, lenders and lawyers.  As one head of recoveries at a major bank says: "While the rules mean every customer has to go through a certain process, where is the room for supplier/creditor to treat that customer holistically, and deliver a comprehensive, 'correct', long term outcome for that person?"  The regulator however remains concerned about the risks to borrowers from potential interest rate rises. It wants firms to identify borrowers susceptible to these risks earlier, and ensure they have strategies to treat them fairly. 

Essentially, the FCA wants banks and their suppliers to provide greater flexibility in their practices, and to offer more tailored outcomes for borrowers.

DCAs and lawyers will therefore have to follow suit. Those who survived the panel cull will still have to keep demonstrating that appropriate, indeed bespoke results have been achieved for customers. Arrears management is just one lens though, through which the regulator sees a (minor) point of concern. There will doubtless be others raised in future, but there are many more imminent rule changes sweeping in thick and fast. These aren't all coming from the FCA's well-documented final rules. After a brief look at other new obligations being imposed on lenders, it's no surprise that they've cut litigation panels to a more manageable size.

One set comes in the shape of the Mortgage Market Review. This largely affects point of sale processes, but there is one factor that could have an impact later in the borrower's credit lifecycle. It's an instruction for lenders to make a more detailed assessment of the borrower's expenditure, including normal spending as well as credit card and other loan repayments. Borrowers may also need to produce more evidence of their spending habits and other commitments than before. Aside from the MMR, the UK, along with other EU member states, has two years to implement the mortgage credit directive. As The Council of Mortgage Lender's head of policy Jackie Bennett says: "Lenders have been working flat out to implement the new rules for regulating mortgages in the UK, which came into effect on 26 April."

"Now the (MMR) rules are bedded in, firms will need to begin to prepare for any changes needed to comply with European regulation. It will help everyone affected - consumers, as well as firms - for the process of public consultation to begin as soon as possible." 

While public sector opportunities are emerging at the same time, financial services will still provide by far the greatest amounts of consumer debt.
Of the £16.4 billion stock of defaulted consumer debt expected by 2017, £11.5 billion of this is predicted to come from financial services, followed by £2.5 billion from government debt.

Those same lenders providing the bulk of cases will be looking at 120-month performance trajectories, across the board.