Regulation is often used in political scaremongering. There’s too much red tape in the business world, according to some. And in certain cases, that may be true. Especially when it comes to the legal complexities of debt collection.
But is more regulation (or less, for that matter) inherently bad for collections? It’s possible to speculate at length, but the best route is to examine the varied regulatory regimes across the world.
From low-touch frameworks that rely heavily on technology, to burdensome and opaque procedures heavily influenced by local traditions, let’s take a look how collections operations in different countries and regions are affected by changing regulation.
More or less regulation - what’s better?
We’ve written in the past about Saudi Arabia (and the Middle East generally) being one of the most challenging environments for debt collection.
The country is highly traditional and the state exercises tight control over numerous sectors. Establishing legal entities and obtaining licenses from appropriate ministries requires a long lead time.
So it would be natural to assume that the challenge in Saudi Arabia is heavy regulation. But the opposite is actually true: In Saudi - as with all Gulf Cooperation Council countries - the law doesn’t actually regulate late payment. And when Saudi citizens have $48.5bn of outstanding consumer credit, this is a difficult situation: A lot of debt, but difficult to collect.
The challenges posed to collections teams in the Middle East actually stem from a complete lack of regulation, and not too much red tape. Tradition, in many ways, trumps any attempt at regulation: Islamic law expressly forbids the accrual of interest, and collection costs cannot be recovered from the debtor unless a specific agreement has been decided by the parties.
The Saudi legal system is notoriously complex, and many of the nation’s laws aren’t codified. As a result, debtors will often try to negotiate discounts in exchange for prompt payment, and over time these losses add up. These are the sort of shortcuts you have to rely on in a light touch legal environment.
The difference between red tape and regulation
Effective collections, to a large extent, rely on effective regulation. And technology - like specialised collections software - is better suited to a clear legal framework, and can quickly expand and contract as local laws and regulation change.
The most prominent recent example of increased regulation is the European Union’s General Data Protection Regulation (GDPR). GDPR became enforceable on 25 May 2018, and the regulation aims to enrich individuals’ right to privacy and enhanced protection of their data.
GDPR integrates all EU member states (and post-Brexit Britain) into a single set of binding rules. It affects how banks can contact debtors, and with Europe’s combined household debt sitting north of £6 trillion, there’s a lot of money at stake.
Critically, even non-European entities are bound to the regulations if they collect or process personal data belonging to individuals located inside the EU. If you run collections operations anywhere in the EU, you must comply.
The costs of non-compliance are onerous: fines of up to €20m or 4% of global turnover and compensation claims for damages suffered. Not to mention the reputational damage caused.
At a glance, this would appear burdensome to collections teams, making it harder to chase delinquent debtors effectively. But the regulations are, in effect, making best practice a legal requirement.
Businesses that already have the strategy and systems in place will find that GDPR can dovetail neatly into their existing systems with minimal fuss. Regulation, with the right technology, can actually be a market opportunity by enforcing high standards that many competitors won’t be able to match.
Is strict regulation necessarily bad?
Regulation and red tape can certainly impede the collections process. The US, for instance, is a well-regulated market - but the country’s federal court system is complex and the regulations are pro-debtor.
But regulatory burdens aren’t reflexively bad. Consider the new International Financial Reporting Standard 9 (IFRS9). This new accounting standard went live in January 2018 and changes how credit losses are recognised on the books.
IFRS9 enforces earlier recognition of credit losses. Financial institutions will have to provide for possible future credit losses in the very first reporting period a loan goes on the books – even if it is highly likely that the asset will be fully collectible.
Essentially, this means more pressure on the debtor. This new approach will more accurately reflect your current debt portfolio, and that’s good. But it requires more analysis and has a greater level of complexity, increasing the requirement for specialised software with built-in analytics tools and the swift settlement of delinquent debts.
The IFRS9 changes, much like GDPR, add a new layer of regulatory complexity for collections teams. But they’re also indicative of how regulation actually offers a chance to reinvigorate and improve your debt recovery process.
Governments, norms and priorities change, and often regulation goes with them. In some territories, like Saudi Arabia, it’s the lack of agreed laws that provide an obstacle.
The reality is there’s no ‘good’ or ‘bad’ regulation. Or, at least, it’s not your job to make policy. You have to react to it as best you can, and you’re measured on results.
Debt recovery is one part of a wider loan ecosystem, in which every element has an impact on the eventual repayment. And within this process, there are steps you can take independent of laws and regulation: automate your processes, offer your customers a wide variety of ways to settle debts, improve your management of staff and third-party collections agencies.
For financial institutions with customers across many countries, these different legal environments present a big challenge to collections. Technology can help, and your systems must be configurable. Planning makes it possible to succeed, even in the most challenging environments.