What is the difference between a Debt Collection Agency and a firm of Debt Recovery Solicitors?

It can often be confusing if you have a debt you need collected and you are looking around at different companies to see who can help. Some will refer to themselves as Debt Collection Agencies (DCAs for short) whilst others will talk about being Debt Recovery Solicitors.

Debt collection agencies are businesses who collect debt on what is known as a pre-legal basis. This means they will attempt to make contact with the debtor (usually by post, phone or email) and then try to negotiate payment from the debtor. Often this will be done on a no collection-no fee commission basis where they take a percentage of anything they collect.

DCAs will be regulated by the Financial Conduct Authority (FCA) if they handle debts relating to consumers. The FCA has statutory powers relating to any form of regulated credit agreement. This includes hire purchase agreements, peer-to-peer loans and any form of credit agreement regulated under the Consumer Credit Act. A debt collection agency collecting any of these types of debts must be registered with the FCA and will have to follow their requirements in areas such as identifying vulnerable debtors, treating customers fairly and ensuring collection is carried out in such a way that it doesn’t harass the debtor.

On the other hand, Debt Recovery Solicitors are law firms who are regulated by the Solicitors Regulation Authority (SRA). This usually means they are exempt from FCA regulation as there is an agreement between the SRA and the FCA in order to avoid dual regulation. All Solicitors are classed as ‘officers of the court’ and thus have statutory requirements to act fairly and impartially at all times, as well as always acting in accordance with the SRA’s Code of Conduct. Solicitors who fail to do so can be prosecuted by the SRA as well as being struck off (banned from being a solicitor).

Debt Recovery Solicitors tend to operate on a fixed fee basis – each particular item of work will be charged a fee (for example Lovetts Solicitors charge £5 plus VAT to send a Letter Before Action warning a debtor that they owe money to a credit and need to pay up). If a case is defended in court some Solicitors may charge an hourly rate to continue to work on the case, although more forward-thinking firms such as Lovetts have developed fixed cost pricing packages to try to avoid the traditional law firm spectre of spiralling costs.

How does this affect collection of a debt?

The key difference is that Debt Collection Agencies cannot normally take a case to court – this can only be done by their client (the original creditor) or by a firm of Solicitors. This is because only Solicitors and some other legal professionals (such as barristers and legal executives) are permitted to carry out “reserved legal activities”, and starting a Claim in the court falls into this category. The penalties for breaching this are severe – up to two years in prison.

As a result, the market tends to split in two – DCAs focus on the initial pre-legal stage of the collections process, attempting to obtain payment. This is often considered a ‘softer’ form of collection as at this stage there is usually no direct threat of court action. Some creditors prefer this, especially if they wish to retain some form of ongoing business relationship with their customer.

On the other side of the market you have debt recovery Solicitors who tend to focus on the legal part of the process – from sending a Letter Before Action (a formal legal letter warning the recipient that they will be taken to court if they do not pay) to actually issuing a Claim through the courts, entering Judgment and then arranging for the Judgment to be enforced. This approach is favoured by creditors who have either already exhausted the pre-legal process or where they simply wish to proceed to the legal collection process to recover their outstanding debt as soon as possible.

Guildways – The middle ground?

Here at Guildways we don’t think there should be that artificial division between the work of a DCA and the work of a debt recovery law firm. Instead clients should have the option to use whatever service they feel is best, and should be able to seamlessly move cases between the pre-legal and legal routes whenever is appropriate.

We are able to do this because we are part of Lovetts Ltd, which is a firm of solicitors regulated by the Solicitors Regulation Authority. Through our Guildways brand we offer all the services and capabilities of a Debt Collection Agency (such as no collection-no fee commission-based recovery attempting to collect your debt on an amicable basis) but in the event legal action is considered the most appropriate route, we simply transfer the case to Lovetts Solicitors who continue with the case down the legal process.

Want to know more?

If you’d like to know more about how we are able to seamlessly handle cases on both a pre-legal and legal basis then please don’t hesitate to contact us here.

25 Jan 2021