Will Wonga-gate put the morals and ethics back into debt collection?

Posted by Brian Rogers, director of regulation and compliance services at Legal Futures Associate Riliance

Rogers: are banks crossing the ethical line?

The recent headlines about Wonga, Lloyds and other large institutional organisations using fictitious law firms as a means of ‘upping the ante’ with debtors has really focused minds on the morals and ethics adopted by such organisations.

Initially, when it was only Wonga in the frame, many people put the behaviour down to that of what they saw as just a typical payday lender. However, as pressure has mounted from regulators and members of Parliament, it has been shown that the likes of Lloyds, RBS, Barclays, Halifax, and HSBC have also engaged in such questionable behaviour; it is likely that even more organisations will be flushed out as time moves on.

There has been a mixture of reactions to the Wonga revelations, including from people who say that the letters would not have been necessary had the debtors paid what was owing to the organisation. But does this justify sending out tens of thousands of letters over many years, giving what many have seen as the misleading impression that they were from a law firm rather than an in-house legal team?

The CEO of Lloyds recently told the Treasury select committee that “views on transparency and clarity have changed. Accordingly, we took the decision in March this year that the use of SCM Solicitors would cease as soon as the necessary changes could be made to our IT system”.

He went on to say: “An important part of the rationale for the use of such letterheads was to address those customers in financial difficulty who have not responded to our previous attempts to engage with them because they do not read or respond to bank letterhead correspondence, exacerbating the problems they face. It is in both our and the customer’s interests to engage and address the financial difficulty at the earliest moment. However, we recognise that transparency is now a priority and hence the changes we’ve introduced.”

Richard Moorhead, director of Centre for Ethics and Law at University College London commented: “They are in classic territory for moral wrongs. Create some moral wrong in your opponent and allow yourself licence to do wrong yourself. It’s a recipe for disaster. A business that thinks it is okay to gain the upper hand by misleading their customers and still thinks it’s just a shift in standards which makes that wrong is a business that has not grasped the need for honesty and good faith in business and law.”

Many organisations incentivise their debt collection staff by way of bonuses, but does such an environment then lead to staff crossing the moral or ethical line as has been seen in these cases?

It is clear from the recent parliamentary questioning that this issue is not going to go away anytime soon, particularly when you consider the response from the committee chairman Andrew Tyrie, who said: “This is very concerning. The sample letter seems calculated to mislead. Lloyds failed to convince us that this was not the case, or to provide any satisfactory explanation as to why it issued letters in this form, but at least this practice has been brought to an end.

“Banks have repeatedly assured Parliament that they are raising standards and now have robust procedures in place to bring consumer detriment to an end. But examples of bad practice like this keep on surfacing.”

So where does this leave the lawyers?

On the one hand this is a good time for external lawyers to show that they are best placed to deal with such matters, as long as they don’t get involved in improper or abusive litigation – a risk identified in the Solicitors Regulation Authority’s (SRA) Risk Outlook 2014.

However, on the other hand in-house lawyers will need to review their compliance systems to make sure they are complying with the appropriate rules in the SRA Code of Conduct, and particularly those relating to publicity. In-house lawyers have now been put on notice by the SRA in relation to this matter but it will be interesting to see whether their organisations put them in the firing line again in future.

Many commercial organisations may now consider setting up separate law firms under an alternative business structure to get around their current problems, but I wonder what the SRA would say if faced with such an application from those currently ‘in the frame’?


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