Consumers who refuse to repay their debts are increasingly being taken to court, with litigation at levels last seen in the run-up to the 2007-08 financial crisis.
New figures show there were 910,345 county court judgments in the nine months to the end of September. This is an increase of 34 per cent per on the same period in 2016, and compares with 827,000 in the whole of 2008, at the onset of the financial crisis.
The rise in court judgments is another indication of the high levels of unsecured debt weighing on British consumers, with Bank of England data showing that borrowing through credit cards, overdrafts and car loans has topped £200bn for the first time since the global crisis.
Although UK unemployment is at all-time lows, growth in real incomes and the savings rate have both deteriorated in recent months, suggesting household finances are worsening. Many economists are predicting a slowdown in what has been robust consumer spending.
The court data do not identify who is litigating. But Malcolm Hurlston, who heads the Registry Trust, a non-profit organisation that collates the statistics for the Ministry of Justice, believes much of the rise is because of increased activity by debt collectors — known in industry parlance as debt recovery companies.
Such companies buy portfolios of non-performing consumer debt from banks, finance companies and retailers. They pay a discount to the face value of the loans — typically about 10p on the pound — hoping to collect as much as 20p on the loan.
Companies use largely automated models for determining collection levels, based on large data sets such as the type of debt, the degree of contact with the borrower — and also whether the account has been “worked” by another debt collector.
Collection involves contacting debtors via telephone or letter and, if unsuccessful, launching litigation and hiring bailiffs to enforce court awards.
Michael Agboh-Davison of the StepChange debt charity, points to separate Ministry of Justice figures that show the number of bailiff warrants issued doubled from 98,000 in 2014 to 190,000 in 2016.
He also cites an increase in activity by private sector bailiff companies such as Marston or Andrew Wilson & Co, which are paid based on what they recover. “You can see the motivation for acting more assertively” Mr Agboh-Davison said.
Arrow Global, the UK’s only listed debt collector, last week disclosed it had made a £16m “investment” in litigation in the past three months to pursue collections from borrowers in its so-called back book.
The increase in judgments “sounds alarming, but it could have a good outcome if it acts as a flag to another lender,” said Peter Wallwork, chief executive of the Credit Services Association, the industry body that represents around 200 UK debt collectors that handle distressed consumer debts with a face value of £65bn.
Mr Hurlston agreed. “Lenders should go for judgments,” he said. “It’s in the public interest for people whose finances are in a mess to be helped not to borrow more.”
Another explanation for the rise in litigation, according to one debt recovery executive, is companies bringing forward court actions to avoid new forbearance rules imposed by the Financial Conduct Authority, which took effect on October 1.
But Eddie Nott, managing director of 1st Credit, the UK operations of Intrum, Europe’s largest debt recovery company, disagreed: “We don’t believe rising county court judgments are the result of the pre-action protocol. Regulators would not look favourably on firms taking that approach.”
Mr Nott also insisted litigation was a last resort. “Only when all attempts to establish a relationship with a customer and agree a way forward have failed should litigation be considered,” he said.
One of the main beneficiaries of the rise in court judgments is Non Standard Finance, a high-cost credit provider set up in 2015 by John van Kuffeler, who formerly ran the Bradford-based doorstep lender Provident Financial.
His branch-based lending operation, Everyday Loans, targets “credit impaired” consumers, who are unable to borrow from regular high street banks because of a county court judgment against them.
Everyday Loans has increased its branch network by 50 per cent since 2016, choosing sites “one or two streets behind the main shopping area, either on the ground floor or one floor up and usually close to the bus station or municipal car park”, Mr Van Kuffeler says.
He argues that companies such as Non Standard Finance provide a vital service for those unable to access regular credit.
He added: “And when we’re dealing with debt consolidation, we make sure we pay the money directly to those whose debt we’re paying off, just so they don’t get distracted by William Hill [betting shop] on the way home.”
