The credit crunch, over-indebtedness and financial difficulties are issues that affect many of us, personally and in our business lives whether that is as lenders, borrowers, collectors or regulators. It is essential that all parties act responsibly to avoid creating problems and react positively and speedily once things have gone wrong.

Credit assessment and recovery are fundamental to banks, building societies and credit card companies and in the retail banking area, the Banking Code exists to set appropriate standards of behaviour, to make sure that customers who borrow can afford to do so and when they run into difficulties, they are treated sympathetically by the lender.

Set up in 1991, the Code is a voluntary agreement entered into by almost all of the high street lenders and card companies and it is policed and enforced by the Banking Code Standards Board (BCSB).

The Code requires that lenders consider whether customers can afford to borrow and to do so using a range of criteria that may include assessment of income and outgoings, their borrowing track record, information held by Credit Reference Agencies and using their own credit scoring models. In addition, if customers do get into financial difficulties, lenders are required by the Code to treat them sympathetically and positively and to help them to get free debt advice where necessary.

At the BCSB we monitor compliance with the Code using a range of monitoring techniques including full subscriber reviews covering all applicable Code requirements and themed reviews looking at particular aspects of the Code. We have reviewed lending and recovery practices annually across the industry.

These reviews have covered a cross-section of the lenders and their collection agents, and include overdrafts, personal loans and credit card debts. We completed our most recent review in May of this year and while we found that, in the main, staff in the banks and in the collection companies are trained to act sympathetically and positively, customers in difficulty do not always get the best possible help. Our research suggested there are a number of ways that creditors and their agents could do more to achieve a better outcome for all.

Reassuringly, in most collections teams we found that attention was given to assessing whether arrears were short term or evidence of more deep rooted financial problems but sometimes lenders focussed more upon managing accounts through their own internal processes (typically following defined letter-writing and calling strategies) than really understanding the nature of the problem.

This meant that where early action would have been helpful, such as where borrowers had lost their job or their relationship had broken down, they were treated similarly to someone whose problems were of a more temporary nature.

Of course indicators of looming problems can become apparent often before the customer realises that there is reason for concern. Late payments, overdraft excesses and gradually increasing card balances may all be warning signs and calling the customer to discuss the issue at an early stage is far more powerful than waiting until things get really serious and then having to work out a repayment/recovery plan.

I think we would all recognise that once someone gets seriously into debt, often with multiple creditors, the relationship is not one of equals. Calls from the bank or collection company can appear intimidating and highly stressful, no matter how helpful the collector is trying to be.

The debtor sometimes feels driven to making promises to pay unrealistically large sums for fear of not meeting the creditor’s expectations. Analysis of income and outgoings during a telephone call can often be unreliable and may lead to unsustainable repayment programmes being agreed by the borrower.

They then miss payments and their standing with the collector or bank is damaged further. We have seen growing use and acceptance by lenders and their agents of the British Bankers' Association / Money Advice Trust Common Financial Statement and this has helped to streamline the process for agreeing debt repayment plans that are reliable and can form the basis for better outcomes for all.

We have warmly welcomed the establishment by a number of banks of early warning teams who monitor account trends and seek to intervene before serious problems occur.

Feedback from debt advisers such as Citizens Advice continues to tell us that despite authorities being given for contact to be made with them rather than the debtors directly, this is not always done. In many cases the debtors are vulnerable individuals and they rely heavily upon the support of their advisers.

The Banking Code specifically requires that contact is made through the third parties where requested unless it is not in the best interests of the client.

The whole area of debt and financial difficulty is one of the most sensitive and complex in the whole bank: customer relationship. The economic signs are that it is going to continue to be an ongoing critical issue and it is one that we at the Banking Code Standards Board will continue to focus upon.

We are keen to encourage good practices across the industry and to ensure that those customers who have found themselves in trouble, and are making efforts to deal with their commitments honourably, are given every possible help by their creditors. We would always welcome information on initiatives individual firms have used to achieve good results and are ready to provide advice and guidance to Code subscribers and their agents where they would find it helpful

Bradley James Group