The Legal Services Act is set to open up collections market. Charles Wheeldon and Fred Crawley report.
From October, the Legal Services Act 2007 (LSA) will allow non-solicitors to own, manage and finance law firms. With banks, insurance companies and retailers allowed to buy law firms, the reform has been dubbed the Tesco Law.
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The reform will to put it simply allow debt collection agencies (DCAs) and even motor finance companies to provide their own legal service offerings. Needless to say, those planning to do so will be in prime position to integrate legal experience very closely with collections activity.
This in turn will prompt firms of solicitors to evaluate their relationship with the collections process, and may cause them to start acting more like the legal-savvy DCAs: in practice, this means a new way of working in which the legal resource is no longer reserved for last resort litigation.
Sean Lawson and Jill Cox are two people deeply involved in exploring the new models. They have recently moved to DCA Close Credit Management (CCM) from Weightmans LLP, where they were responsible for building the law firms commercial recoveries team from two to 70 staff in just 18 months.
The team was working with cases from a large consumer finance provider, which as is often the case with lenders when working with litigation specialists was passing through all its collection work which had passed the threshold of threatening customers with going legal.
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By GlobalDataCox and Lawson, however, put most work into developing their pre-litigation team, based on the understanding that the more information they could glean from the front end of the lenders collections function, the more effective action would be when things reached the litigation stage and the more chance that a profitable outcome could be reached before that eventuality.
Setting the precedent
"That set the precedent for what we are doing now at Close Credit Management," Lawson says.
He explains that there is a gap in the market for a DCA offering a full legal service, adding that while many DCAs offer legal services, they are only for use as an end-process to be used if standard collection methods have failed.
"Our legal service is independent enough to sell on its own," Lawson asserts. "We could go out and compete with solicitors firms for business.
"We have always stressed that litigation is just another collections tool, and that if legal assistance can help to collect money earlier on, then all the better."
"Unlike many solicitors, when we get notification of a debtor issuing a defence, we make every effort to settle.
"We have no urge to have our day in court if the judgement wont offer the best return for the client."
Lawson thinks that, as the law business is deregulated at the end of the year, CCMs way of thinking may become more common.
"We are ahead of the curve," he says.
"I am sure other DCAs will start offering their own legal services. Big firms of solicitors have cause to worry in debt recovery soon DCAs will be able to do it on their own."
The legal market will not be unprepared when deregulation takes place, however. While DCAs have to wait until later this year to develop a legal services offering, law firms have been free to develop their own collections provision for some time, and many have taken the initiative.
In early February, solicitors Wright Hassall made a decisive move by appointing Phil Wilding formerly a director of collections agency Equidebt to set up a full blown DCA within the firm.
Wilding says that law firms have set up DCAs before, but that they have traditionally targeted specific sorts of debt collections, for example high-balance debts on behalf of banks.
He explains that his operation at Wright Hassall will not take on all aspects of field collections at first.
"We wont be collecting on doorsteps, but will outsource using well established, well regulated suppliers to do that for us," he says. "We will mainly communicate by letter, telephone and email."
Furthermore, his DCA will use new technology known as a "virtual agent", which will allow debtors 24-hour access to a website where they can set up a payment plan or negotiate a settlement.
If a debtor proposes an unacceptable agreement, or if his team rejects it, the plan will be to route the case to a call centre staffed by 10 collectors at the Wright Hassell headquarters in Lemington Spa.
This is not the first time Wright Hassall has stepped beyond legal services provision, however. One year ago, the firm established a portfolio and collections team under the leadership of Gill Payne, who, although not a lawyer, is now a partner in the firm.
Payne has built up a portfolio of clients for whom she manages accounts in arrears, including GE, Fiat, First Response and Moneyway.
Her team has also designed an IT system capable of debt collection and able to manage live portfolios on behalf of clients. She also manages a litigation team who do the bulk suing, able to issue requests for county court judgements at the touch of a button, which are processed at the bulk court centre in Northampton.
Payne says: "My team uses its knowledge and skills to negotiate settlement or arrangements and make real commercial decisions as to whether to sue or not, depending on the agreed strategy with our clients. Obviously this incorporates all regulatory and compliance requirements.
Legal expertise
"My collectors have been on secondment with some of the major asset captives sitting with their collectors and becoming an extension of their team and I am often asked to help with compliance issues and in-house coaching and training."
But while Wright Hassall is taking on the mantle of a DCA in order to bring legal expertise more closely in line with asset finance collections, other firms believe they can achieve the same symbiosis using the traditional model of an external legal provider.
At Chafes Solicitors, partner Julia Williams is head of debt and asset recovery. She is a strong advocate of close so-operation between collections agencies and their lawyers, maintaining that this approach is essential for companies to maximise their recovery rates.
"It is crucial that the legal supplier understands the creditors pre-legal collections strategy," says Williams. "Working in conjunction with the internal collections operation is recommended as this will promote a seamless transition when the debt takes the stage of being passed on to a solicitor."
If collections staff present data which highlights any pre-legal collections steps taken, she argues, a solicitor can much more easily choose a course of action more likely to promote a recovery for the creditor.
"There is no doubt a solicitors letter at a stage when the account may only be in very early default will encourage results," adds Williams.
"The debtor will recognise the seriousness of the situation and is likely to place the creditor in an advantageous position compared to other unsecured creditors."
By this stage of a collections case, debtors may well have a number of creditors looking for returns.
Their reaction, says Williams, is "to pay the creditor who is screaming loudest". In her opinion, there is no doubt early legal intervention can help a creditor achieve this status.
"Depending upon the relationship, it is a tool that the creditor can dip in and out of at different stages of the early collections life-cycle, without necessarily committing to taking formal legal action through the courts," she says.
One challenge that arises from legal intervention is that it allows a customer the immediate opportunity to challenge any claim made, and for a court to determine whether there is an arguable case for the customer to proceed.
Ruling out such challenges at an early stage which Williams argues is easier when solicitors are informed by the front end of the collections process leads to faster recovery in comparison to a challenge received late in the life-cycle of a case.
Strategic decisions
Williams concludes: "Engaging the services of a specialist debt and asset recovery solicitor will not only produce results when the debt goes legal, it should also be used so that internal strategic decisions are taken with the input of the specialist solicitor.
"This will help the creditor to work the debt correctly internally, which will always have a positive effect on recovery rates."
There seem to be as many answers to the question of how lawyers and collections agents should work together as there are companies and law firms involved in the recovery of asset finance debt.
One theme, however, appears to be common to all.
Whether through direct integration of legal services, or through smarter communications with external providers, collections teams need to be using the legal resources available to them at every stage of a case.
