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Cape Town - How does a debt of R99 balloon into almost R12 000? It is clear that while debtors often default on their debts, debt collectors don’t always play nicely either.
Clark Gardner, CEO of Summit Financial partners, said the collection industry still seems to charge excessive fees and charges. This makes it a very profitable business opportunity - at the cost of the borrower.
Responding to a request from Fin24 for comment on the burgeoning debt collection industry, Gardner sent as illustration a bill from an electrician who had an outstanding debt capital amount of R99.95.
After adding collection charges stretching from text messages, telephone and fax costs to ‘return of service' (27 times), warrants of arrest and post and petties among other things, his total outstanding debt came to R11 986. (Actual bill below.)
However, Association of Debt Recovery Agents CEO Marius Jonker said cooperation from the consumer rather than the avoidance of debt is critical in avoiding escalating costs. Consumer costs escalate drastically especially where non-cooperation leads to legal action.
“Such drastic, traumatic and costly consequences can be avoided by the consumer providing his full cooperation in finding an amicable solution.
“Unfortunately many consumers tend to stick their head in the proverbial hole, hoping the problem will go away. This will however only escalate it."
Outsourcing debt collection
Many companies do not have the capacity to deal with delinquent or arrear accounts, according to debt management expert Wikus Olivier from Debtsafe. These firms are increasingly outsourcing their debt recovery activities to specialised debt collection companies.
He told Fin24 that companies outsource the account to a debt collector, who charges them a collection commission.
"This commission can be anything from 10% to 30%, depending on the agreement and type of collection."
Quick to take legal action
According to Olivier, debt collection companies are typically geared to litigate or initiate legal action much faster than the original creditor.
Gardner said it is this kind of behaviour that leads to a bill of R99 ballooning into almost R12 000 – behaviour that should have been prevented, checked and prosecuted long ago by the regulators of these services, "but instead, a lack of action has left the door open for further unscrupulous opportunists in the field of debt collection”.
Jonker told Fin24 that the industry has evolved rapidly into a highly regulated sector demanding expert knowledge, experience and extensive dedicated resources. He said that was mainly due to drastically increased legal and compliance requirements in debt collection.
Jonker said practising as a debt collector without being registered as one is a criminal offence. Consumers are urged to report such rogue operators to the South African Police Service as well as the Council for Debt Collectors.
“Unfortunately there are many rogue operators bringing the debt collection industry in disrepute, and Adra strongly supports all attempts at eradicating and prosecuting such entities and individuals.”
Billions chased
Rob Rafferty, chief financial officer at FutureSoft, a company which designs software to aid debt collecting, told Fin24 the debt collection industry in SA employs tens of thousands of people and while statistics are hard to come by, a reliable source claimed in 2014 that at the time debt collectors were chasing debt worth more than R75bn.
At first sight it would seem that the debt collection industry should be experiencing a boom. This is however not the case as more consumers are unable to service their debt, said Jonker.
“No exact figure can be placed on delinquent debt as not all arrear debt is reported on the credit bureaus. In terms of the National Credit Act (NCA) only debt originating from an agreement governed by the NCA is to be reported to credit bureaus.
“In practice it appears that less than 50% of a consumer’s credit exposure originates from agreements governed by the NCA. Other debts such as debt due to municipalities, educational and healthcare institutions to mention but a few are also not governed by the NCA and as such not reflected on credit bureaus.
“For example, we know that in 2014 it was announced that more than R94bn is due by consumers to municipalities alone.”
Rafferty is, however, adamant that the debt collection industry is a huge market. “At the end of the day, they may only recover a few cents in the rand, but it is nonetheless a huge market”, he said.
Over-indebted consumers
According to the Council for Debt Collectors database, there are currently 17 455 active registered debt collectors.
Council of Debt Collectors spokesperson Lulekwa Mengane told Fin24 that since the inception of the council in 2003, it has received 76 213 applications of which 74 555 were approved.
According to the council's 2014 annual report, it appears that since 2005 the total number of applications received has increased in excess of 6 000 per year.
Source: Council for Debt Collectors 2014 Annual Report
"The growth in (the number of debt collectors) might be as a result of an overwhelming number of consumers who are over-indebted and debt has to be collected only by registered debt collectors," she said.
Jonker said the 6 000-a-year new applications for debt collector registration must be viewed in context.
“Employers in this industry experience an extremely high personnel churn rate. Although there is substantial number of new registrations, there is a similar number of deregistrations.
“We also find employers do not attend to deregistration of staff leaving their employ as diligently as they should. Many such deregistrations only take place after the employee's annual renewal of registration as debt collector and payment of annual subscription fees become due and payable with the Council for Debt Collectors, and it is discovered that the individual has left the debt collection industry.”
'No gain, no pay'
According to Rafferty, many companies do not have the internal skills or resources to effectively chase debt, and outsourcing has the benefit of operating on a “no gain, no pay” principle.
“This means that companies only pay recovery specialists when debt is actually recovered. If the debt collection entity is successful, this route can save companies considerable expense and bolster their coffers through the increased debt recoveries,” he said.
He said his company has observed an increasing trend of companies handing over their debtors at an earlier stage.
“Many [companies] prefer to outsource the collection of debt earlier than in the past, as the fresher debt requires less effort to recover. The staler the debt, the more effort is required to recover it,” said Rafferty.
Jonker agreed, saying responsible creditors do tend to outsource their debt to professional debt collectors and also to do so earlier (60-90 days in arrears), which increases recovery rates drastically.
“As the recovery of arrear debt is not their core business and due to this increased reliance on industry-specific expertise and resources, creditors do outsource their debtors' books.”
Fees guided by Debt Collectors Act
Debt collection companies are guided by the Debt Collectors Act and use it as a guide when charging fees.
"These fees are recoverable from the debtor. Debt recovery agents also negotiate with the credit provider for a performance commission based on what is recovered," according to Rafferty.
"This is typically done in terms of the Contingency Fees Act, which specifies certain restrictions. These commissions are not recovered from the debtor and is for the account of the credit provider," he said.
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