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UK Debt Purchase / Collection Industry Benefits from Tougher Regulation and Creditor Panels, Finds New Report


Lewes, DE -- (SBWIRE) -- 01/22/2015 -- Debt purchase and debt collection are increasingly important UK industries with their services being used ever more widely. In the financial sector, their use has helped banks not only to improve recoveries but also to meet capital ratio requirements. The services are also increasingly being used in other areas where there are significant consumer debts, such as telecoms and utilities, as well as in areas of the public sector.

The fortunes of the industry have varied significantly in response to the economic environment. Having been boosted by the increase in consumer borrowing over the last decade, debt collection agencies have more recently been hampered by collections difficulties during the prolonged downturn in the economy and the unbalanced recovery which has, so far, failed to deliver real wage growth. Debt purchase has returned to growth following the credit crunch with both volumes purchased and prices paid increasing strongly in the last couple of years.

With the FCA assuming responsibility for consumer credit, regulation has become more strict, imposing costs but also improving industry structure. Debt collection agencies must now do far more work to ensure that debtors are able to make repayments without causing serious financial hardship. While this has imposed costs on the industry, it has been helpful for the larger incumbents who have the scale to invest in developing new processes and who can expect to benefit from increased barriers to entry.

Inquire about this report: UK Consumer Debt Collection and Debt Purchase: Market Insight 2014

Market attractiveness

The debt collection industry has some attractive characteristics. It has benefitted from the expansion of consumer credit – which, as the chart above shows, almost doubled from 2001-8 – and which is now increasing again from its 2011 low point. The industry offers scope for attractive margins if good collections performance is achieved. Greater regulation of the industry, which requires a significant investment in creating processes to monitor and ensure compliance, has increased the entry barriers. Finally, panels of debt collectors introduced by banks and, in particular, HMRC, have provided an entry barrier and helped profitability by leading the industry away from pure price-driven competition.

However, it also has some structural drawbacks. A collections capability represents a significant fixed cost. If collections performance does not meet expectations, the profitability of the operation is vulnerable until the cost base can be realigned through redundancies or other cost reduction. The industry, like the credit markets, has proven to be cyclical. The significant increase in household debts during the boom years leading up to the credit crunch has been followed by a period with little net change. Furthermore, the industry suffered during the current downturn as many debtors have been unable to make repayments.

Debt purchase has several attractive structural characteristics. For example, the industry offers potential to earn better returns through focusing on an area and developing a competitive edge: Arrow Global has adopted a strong analytical approach and built up a large debtor database which helps it both in valuing portfolios and in collections, while 1st Credit has placed considerable emphasis on Treating Customers Fairly, which has helped it to gain places on some important seller panels. Recent trends have been favourable. The advent of seller panels, the toughening of regulation and the ongoing development of more sophisticated data analysis techniques have all raised barriers to entry. Lender panels also reduce the market from purely price-driven auctions which should lead to increases in profitability.

However, both recent UK experience and also longer-term trends in the US show debt purchase to be a cyclical market with exposure to both the health of the overall economy and credit market shocks and cycles. The US market, which developed earlier than that of the UK, suffered a reversal during the post-dot com economic downturn in 2001, as collections rates fell, but subsequently recovered, driven by similar forces to those which operated in the UK. The UK market suffered in 2008-09 from the combination of the credit crunch reducing the volume of debts available to purchase and the impact of recession on collections rates.

Competitive dynamics
Provision remains relatively fragmented with several hundred collections agencies and over 60 buyers believed to have purchased debt portfolios. The largest companies include those which are primarily contingent debt collection – such as Wescot, Moorcroft, Capita (Akinika) and arvato (BCW) – and those which focus on debt purchase – such as Cabot, Lowell, Arrow Global, Link, Max Recovery and 1st Credit.

Debt purchasers have continued to be innovative in seeking necessary funding with further successful high-yield bond issues. The successful flotation of Arrow Global appears likely to pave the way for further IPOs in future.

M&A activity has continued with both market consolidation amongst the leading players, and new entrants from Europe and North America, often making acquisitions in order to gain access to key panels. Recent entrants include:

- UK companies with operations in adjacent areas, such as IDEM Capital, part of Paragon, the mortgage group and Sigma Financial, which was built on the debt recovery practice of a solicitors firm

- US debt purchasers, such as PRA, which entered the UK market via the acquisition of MacKenzie Hall, Encore Capital, which entered via the acquisition of Cabot and subsequently Marlin Financial and CarVal investors, a subsidiary of Cargill, which is both a fund manager and debt buyer, having bought large debt portfolios from banking groups in recent years and set up a JV with Arrow Global to buy student loan debt.

- European players such as arvato which acquired Credit Solutions in 2010 followed by Gothia in 2013. arvato merged Credit Solutions with BCW Group (Gothia's UK business) in 2013 and the entity now trades as arvato Financial Solutions Limited, and Hoist Finance which purchased Robinson way in November 2012 and more recently acquired Lewis Group in August 2013.

Market outlook

Future overall growth appears likely given the success of several large purchasers in raising additional capital, the strong levels of debt sales in recent years and the appetite of creditors to continue selling. However, uncertainty remains with lack of real wage growth hampering ability of consumers to repay debts and preventing the overall economic recovery leading to growth in consumer confidence and significantly increased borrowing.

Our latest report on the UK consumer debt purchase and debt collection markets explores these, and other, issues in depth and sets out how we forecast the market to develop in future.

Inquire about this report:
UK Consumer Debt Collection and Debt Purchase: Market Insight 2014

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