Collections outsourcing, a per-pound incentive and a non-material classification

Materiality The 'non-material' classification is difficult to defend. Materiality depends on the importance of the service, not the size of the contract fee. This arrangement covers 400,000 retail customers, is central to collections and recoveries, and would be difficult to replace quickly because of data, systems and customer disruption. Weakness or failure would impair the bank's ability to treat customers fairly and comply with its obligations. Applying the usual criteria - criticality, customer impact, revenue, substitutability, concentration and regulatory importance - the arrangement looks material. It should be reclassified, notified to the regulator as required and brought under full third-party risk management.

Conduct issues The per-pound incentive with a recovery bonus creates a direct incentive to pressurise customers. A 60% rise in complaints and published recordings are outcome indicators, not just reputational noise. The bank must consider Consumer Duty outcomes, fair treatment, vulnerability, forbearance and the adequacy of redress. If calls were not recorded for three months, the bank cannot evidence what was said or investigate complaints properly.

Outsourcing issues No audit rights is a clear gap: the bank must be able to access and audit the provider. Unapproved subcontracting to a second site is a further breach of the outsourcing arrangement and increases concentration and oversight risk. The 30-day termination right is too short to migrate a service of this scale, and the absence of service credits weakens accountability.

Accountability A named senior manager should be accountable for the relationship and the conduct outcomes under SM&CR, with clear statements of responsibilities and board reporting.

Remediation priorities

1. Stop or pause the incentive scheme. A per-pound bonus that correlates with aggressive calls should not continue while the bank investigates. Replace it with measures that balance recovery with fair treatment, complaint rates, quality assurance and vulnerability handling.
2. Restore call recording and evidence. Confirm coverage, retention and access. Until restored, introduce alternative contemporaneous records and review a sample of calls.
3. Investigate complaints and remediate harm. Root-cause the 60% increase, review upheld complaints, identify vulnerable customers and assess redress. Report to the board and the regulator.
4. Take control of subcontracting. Require approval, due diligence and monitoring of the second site, or require repatriation.
5. Reclassify the arrangement as material and update the outsourcing register, risk assessment and board reporting.

Contract changes

• Audit and access rights, including onsite and remote access, and rights over subcontractors.
• Service levels, service credits and consequences for failure.
• Call recording, quality assurance and complaint-handling standards.
• Conduct requirements, incentive governance and the right to approve or veto incentive schemes.
• Subcontracting approval and notification.
• Security, resilience, data protection and incident notification.
• Termination assistance and a transition period longer than 30 days, with an exit plan.
• Regulatory access and cooperation clauses.

Reasoning The bank cannot delegate its regulatory obligations. Contract terms are the mechanism by which it retains control, but they are not enough without monitoring. The remediation should be sequenced so that customer harm is stopped first, evidence is restored second, and contractual and governance weaknesses are fixed third.

Conduct metrics

• Complaints per 1,000 accounts, upheld rate and average redress, split by collections stage.
• Call quality assurance scores and the percentage of calls recorded.
• Vulnerable customer identification and forbearance outcomes.
• Incentive pay compared with recovery and complaint outcomes, by team and site.
• Collections quality: percentage of arrangements kept, repeat contact rates and escalated calls.
• Redress and remediation volumes, including aged cases.

Third-party metrics

• Service levels and breaches, including call answering and complaint handling.
• Subcontractor concentration and percentage of work performed by unapproved sites.
• Audit findings, overdue remediation and security incidents.
• Attrition and training completion at the provider, especially for temporary staff.
• Contractual issues: expiring terms, missing clauses and exit-plan testing.

Interpretation The board should not read a fall in complaints as automatically good; it may reflect poor recording or suppression. Rising recovery rates alongside rising complaints is a warning that the incentive is working against customers. The board should ask for the direction of travel, the root causes and the link to incentive design. Metrics should be owned by the first line, challenged by risk and compliance, and linked to the senior manager's objectives.

Board response The board should require a remediation plan with dated milestones, a customer harm assessment and a regulatory communication plan. It should also approve the reclassification of the arrangement as material and receive an independent review of the provider. Monthly metrics should be accompanied by a narrative explaining what changed and why, not just a dashboard.