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sidley

Questions are growing about a possible bubble in the debt industry.

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There is an interesting article in The Times Business section today about a possible debt bubble within the Debt Collection Agencies. Seems ironic!

 

Search, using your favourite search engine, - The Times with "Questions are growing about a possible bubble in the debt industry"

 

It claims financial experts are worried about the expansion of the debt purchasing industry is creating a bubble that will soon burst.

 

They say that most of these 'toxic' debts have scant paperwork; time barred or belong to the poorest sections of our society. Therefore, they will find realising these potential assets will not work. That is they will have difficulty getting the money. Since these DCAs have borrowed heavily to purchase their port folios they will soon run into financial trouble.

 

It goes on to say that these companies have become more aggressive ( and in a lot of cases illegal) in their activities to collect on these debts. They list some of the complaints inc. spitting in envelopes sent out to people. Yuck!

 

Cabot, Lidorff, Intrum, Arrow, Hoist, Lowell are amongst some of the names mentioned as having unstable business models.

 

Hedge fund managers are worried a lot of these companies will go bust.

 

I wonder what will happen to all the debts purchased?

 

sidley

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You raise a very interesting subject that really intrigues me. There is a huge problem with credit in general. It drives the capitalist system and the 2007/08 crash proved that the current world economic model is bust.

 

Just think about the total value of debt that is written off every year. These debts will include credit cards, store cards, personal loans etc all used to purchase consumer goods. If the credit was not available, you would not have the level of economic activity to generate the jobs, tax income, shareholder dividends, income for pension funds etc.

 

Where do Debt Buyers and DCA's fit into this system ? Why is there a lack of effective regulation such as that applies to Banks ?

 

The truth is that Debt Buyers/DCA's are used by Banks and Governments to hide debts. They are not only a collection industry, but a quiet debt write off industry. And I expect if you looked very closely, you will find Debt Buyers/DCA's hide some of these non performing debts offshore in tax havens. They will be held in a different companies name, so if the write offs exceed profits, they close the companies down.

 

The reason I expect tax havens are a major part the Debt Collection industry, is that I have noticed that many of them seem to hold the debts under a different subsidiary companies based in the Channel Islands etc. When they work chasing the debts, I bet some of the money collected ends up going through tax havens. Many of the debt companies are foreign owned and they will receive their profits via tax havens to minimise tax payable.


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Hi Unclebulgaria,

 

Thanks for your interesting post.

 

I think the main reason that this article was published, is because Cabot are about to float (front page business section). There has already been 1 aborted attempt earlier, they estimate their flotation at approx 1 billion pounds. Industry experts estimate it at 100- 200 million - and that's being generous- and are worried that fund managers, etc. will buy into this company and their investment will be worthless.

 

I've always assumed that DCAs change their name frequently because they get their license revoked by the FCA, but you think it maybe cos they have to many bad debts?

 

sidley

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Yes and it is about risk management.

 

For example.

 

Parent company A is the main listed company. They are a debt buyer but they don't buy them under that company name.

 

Instead they invent other companies to hold debts as well as service payments. And if they have lots of different companies, with many held in different tax havens, then it spreads the debts and no doubt the profits collected are more tax efficient when they come back into the parent companies account UK accounts.

 

Company B, that buys £x value of debts.

Company C, that buys £x value of debts.

 

Etc etc.

 

Rather than have one company holding everything, they have one parent company and 100 or more separate company accounts holding different types of debt. Then if they ran into trouble with a batch of debts, they no doubt write them off, without contagion to the parent company.

 

Just my guess based on what I have read. A friend of mine was an accountant for a large international insurance group, where they had a huge range of different risks, assets, liabilities and rather than manage it through one big companies accounts, it was split up into many different companies accounts.

 

All of this is totally legal and agreed with HMRC, as well as other tax authorities. It is just the way big companies operate.


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as said, the city is getting wise to the risk of all of this but the banks have happily loand out millions on the back of the value of the debt being real. They dont learn do they?

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Yes, the article says ..... "that due to the spiralling costs of collecting debts......and despite increased court claims activity their returns have started to dwindle (pat on the back CAG). More than 40% of collections that debt servicers can hope to make come in the first 2 to 3 years after purchasing a portfolio as they pick the lowest hanging fruit. Collecting the rest is much more difficult."

 

It goes on to state "that debt purchase managers are more aggressive in the debt portfolio market which in turn has pushed up the prices that they pay for a portfolio, making returns even less attractive."

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It is a pat on the back for CAG and all of the other sources of information available online. If the internet info was not available to people, then more court claims would succeed, as debtors would be clueless.

 

Of course claimants use MCOL to make it easy to issue large numbers of claims, but if claims are defended, then DCA's and their Solicitors just don't have the resources available. Even if they get CCJ's trying to enforce them against people who don't want to pay or have limited funds is difficult. Do they really want to pay court fees, only to receive say £10 a month, which the debtor might stop paying later ?

 

Investing money in a DCA is pretty risky, which is why I think one well known DCA was paying a 10% per annum return, when Banks offered very little on savings accounts.


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Thanks again unclebulgaria.

 

Reading through CAG forums you will often here that defendants never receive the documents from the claimant (DCA) or that they don't even bother turning up at the hearing.

 

I assume this is a gamble by them (hedging their bets) that they will win a few cases by default or ignorance of how the court works or their rights. The ones they lose money on, that are defended (with help from people like CAG) outweighed by those they get something from will, at the end of the day, still make a profit.

 

But re-reading the article again it seems that a lot of outside observers in the financial world are getting worried about Debt servicers (DCA).

 

I quote:-

 

At a conference in Oslo last month organised by DNB, a Norwegian Banking group, Baybrook Capital, a hedge fund backed by some of the world's largest investors, gave a presentation on the debt collection industry titled (in Norwegian) "This is totally bonkers"

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" Reading through CAG forums you will often here that defendants never receive the documents from the claimant (DCA) or that they don't even bother turning up at the hearing."

 

This is a loophole exploited by the claimants with the courts backing (Last known address is good service).....and of course debtors not updating their creditors records with change of address (By creditors I mean original creditors not DCAs as in most cases the debtor is unaware that the debt has been assigned/sold)

 

Last known address should be scrapped in the CPR and the claimants made to pay for tracing services.


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Debt buying should be banned.


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The bailiff: A 12th Century solution re-branded as Enforcement Agents for the 21st Century to seize and sell debtors goods as before Oh so Dickensian!

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I'm not sure debt buying should be banned, but there are numerous improvements that could and should be implemented.

 

I think that debt buyers should be forced to disclosed exactly how much they have paid for the debt, and courts should take that into consideration when finding in favour of the claimants case and how much of the debt has to be paid back.

 

DCAs should also, by law, inform debtors of their legal rights and whether the debt is legally enforceable etc. right at the outset. If they don't then a court case cannot proceed.

 

But we can wish.

 

sidley

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I have to agree - Its designed to stop clogging up the Legal System with DCA claims... i remember a comment made by Lowell i think at somepoint where they threatened that if they the Stat Barred laws changed to 3 or 4 years, they would dump all debts into county court claims and clog up the system for years....

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Thanks Andyorch.

 

A very interesting read.

Especially about written agreements as in

PAP 3.1(a)(iv) where the debt arises from a written agreement, the date of

the agreement, the parties to it and the fact that a copy of the written agreement can be requested from the creditor;

 

So you can ask for the CCA and if they can't get it they must explain why.

 

5.2 If the debtor requests a document or information, the creditor must –

(a) provide the document or information; or

(b) explain why the document or information is unavailable,

within 30 days of receipt of the request.

 

That's going to screw them up! I know some DCAs will still send out a poorly copied application form with little or no T&Cs but then according to the new protocols:

 

ADR may simply take the form of discussion and negotiation, or it may involve

some more formal process such as a complaint to the Financial Ombudsman

Service where the dispute concerns a debt regulated under the Consumer

Credit Act 1974.

 

you can use the Ombudsman to mediate, I'm sure the FoS are going to love that!

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Thanks Andyorch.

 

A very interesting read.

Especially about written agreements as in

 

So you can ask for the CCA and if they can't get it they must explain why.

 

 

 

That's going to screw them up! I know some DCAs will still send out a poorly copied application form with little or no T&Cs but then according to the new protocols:

 

 

 

you can use the Ombudsman to mediate, I'm sure the FoS are going to love that!

 

Remember the DCAs are regulated by the FCA and are members of the FOS so no difference there. But thinking about it, you can tie them up proper as FOS take ages to investigate stuff.

Even worse, if they refuse to go through the FOS etc it will be frowned upon by judges etc...

Could be interesting to say the least.

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Hi fkofilee,

 

I've tried years ago to get the FoS to mediate with a DCA regarding lack of any CCA, they were v. reluctant. Eventually, they did until they lost patience with the DCA.

Then they tried with the OC (Barclaycard) with my permish, they stalled as well 'til the adjudicator said cough it up. Barclaycard eventually admitted no CCA existed. Never heard anything from them again.

 

This new PAP at least says regulated agreements should use FOS to mediate, it's going to be hard for the FoS to refuse now.

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3.1 - (iii) where the debt arises from an oral agreement, who made the

agreement, what was agreed (including, as far as possible,

what words were used) and when and where it was agreed;

 

(iv) where the debt arises from a written agreement, the date of

the agreement, the parties to it and the fact that a copy of the

written agreement can be requested from the creditor;

 

Interesting for Telecoms debts. My view is that a telecoms account is provided under an agreement but all the DCAs claim that an agreement cannot be found (Especially with Vodafone - they state that all agreements are stored in different locations and cannot be found)

So does this derail the telecoms claim as they must provide an agreement? Or who the agreement was with etc?

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for Telecoms debts. My view is that a telecoms account is provided under an agreement but all the DCAs claim that an agreement cannot be found (Especially with vodafoneicon - they state that all agreements are stored in different locations and cannot be found)

So does this derail the telecoms claim as they must provide an agreement? Or who the agreement was with etc?

 

Not sure if telecoms agreements are covered by 1974 consumer act, but anyway,they have to tell you why they cannot get the agreement.

 

So, I would def. go to the FoS then to mediate see what they say!

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Sorry fkofilee, the new PAP states for the purpose of a regulated debt that the FoS can get involved. It implies only regulated debts under the consumer credit act 1974 can go to the FoS.

 

ADR may simply take the form of discussion and negotiation, or it may involve

some more formal process such as a complaint to the Financial Ombudsman

Service where the dispute concerns a debt regulated under the Consumer

Credit Act 1974.

 

They will still have to supply a copy of any written contract or explain why they can't.

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But my understanding is that of a debt is sold to a DCA... YYou can complain to the FOS about the behaviour of a DCA and failure to provide documentation etc?

 

It gets transferred into the *Financially Regulated Debt Market* under which DCAs are regulated...

 

Also the moment it is sold, the FCA CONC Sourcebook rules kick in for arrears management..

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Yes, in a previous experience I made a complaint to the FoS - they were reluctant to get involved at first - but the new PAP implies (IMHO) that you can ask them to mediate but only those cases covered by the Consumer Credit Act 1974.

 

Any unreasonable behaviour by a DCA can be reported to the FCA or FoS regardless of the 1974 Act. My daughter, a solicitor, says that you have to give reasons (to the court) why missing documentation(contract/agreement) embarrasses your case. You simply cannot say that - due to missing documentation you owe nothing.

 

CAG i'm sure will always advise what reasons you could site re. missing contracts.

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Very much so...

While i dont speak for or on behalf of CAG,

I do know that CAG doesnt condone Debt Avoidance in any form but helps people get in control and makes sure that the DCA has all their ducks lined in a row...

back down to it...

 

For me this debt bubble is completely correct.

 

I had seen the article on my way to work this morning and was amazed by what i read...

 

I knew Cabot was going for another Float but to see someone potentially care 80 - 90% of the actual price they are worth is shocking to say the least.

 

Think i dealt with Cabot once and they were seen off in a week - They picked up a defaulted Lloyds account that shouldnt have been sold - I had it wiped from my CRA and clerical error forced it to be sold.

I provided them evidence and they humbly apologised and disappeared off, never to be seen again...

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I agree with you fkofilee,

 

I also don't speak for CAG, and do not condone debt avoidance.

 

Saying that, however, when banks willing sell a debt for approx 10 - 20% of its face value, I would be willing to buy my debt off from the bank with that much discount!

I think there should be a consumer law that before a bank sells a regulated delinquent debt, they should offer the option of selling the debt to the debtor for as little as the DCAs give.

I don't think that is going to happen any time soon though.

 

So, when I deal with the DCAs : a £10,000 debt is now worth £1,000 - £2,000.(the asset/commodity has been devalued by this sale) That is how I look at it, therefore anything that gives me bargaining chips in negotiations with the DCA is a plus. Often you will read threads on here where a DCA, with little or no chance of chasing it through the courts, offers discounts of anything between 50% to 80%. The DCAs have made a small profit. The banks have obviously got it off their books and are satisfied. The debtor has paid off their debts for a fraction and should also be satisfied. All perfectly legal.

 

CAG just gets us in a better bargaining position to deal with these debts.

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