Debt Collection Agencies: How They Buy Debt and Why They Chase

This guide explains how UK debt collection systems work. It does not constitute financial, legal, or debt advice.

When a consumer falls behind on a debt, the original creditor does not always pursue the balance itself. In many cases, the debt is either passed to a specialist firm for collection or sold outright to a different company. These firms — debt collection agencies and debt purchasers — operate under distinct business models, each governed by UK financial regulation.

This article explains the mechanics of how debt collection agencies and debt purchasers operate in the UK, the legal framework that governs their conduct, the rules that determine what they can and cannot do, and the key timelines that apply. It covers the difference between a firm acting as an agent and a firm that has bought the debt, how debts are legally transferred, and the statutory protections that apply to consumers throughout the process.

The focus throughout is on regulated consumer credit debts — the kind most commonly encountered by individuals. Unregulated debts, such as council tax, most utility arrears, and most business-to-business debts, operate under a different set of rules and are addressed separately where relevant.

Debt collection agencies in the UK generally operate under one of two models. Some act as agents on behalf of the original creditor, chasing the debt in return for a fee or commission. Others purchase the debt outright, acquiring ownership of it, and then pursue recovery for their own benefit. Both types of firm must be authorised by the Financial Conduct Authority (FCA) if they are dealing with regulated consumer credit debts.

When a debt is sold, the purchaser typically pays a fraction of the debt's face value. The debtor still owes the full outstanding balance (subject to the terms of the original agreement), but the new owner has taken on the risk of collecting it. The original credit agreement's terms continue to apply — the debtor's rights under that agreement do not disappear simply because the debt has changed hands.

Key statutory protections — including requirements for proper notice, default procedures, and limitation periods for legal action — remain in force regardless of whether the debt is held by the original creditor, a collection agent, or a debt purchaser.

Two Business Models

Debt collection agencies operating in the UK may work under two distinct structures. The first is the agency model: the firm acts on behalf of the original creditor, pursuing the debt in return for a commission or contingency fee. Under this model, the creditor retains ownership of the debt. The collection agency does not bear the financial risk of non-recovery; its role is to contact the debtor, negotiate payment, and remit collected funds back to the creditor.

The second is the debt purchase model: the firm buys the debt from the original creditor, acquiring legal ownership of it. The purchaser then pursues collection for its own account. The original creditor receives an upfront sum and is no longer involved. The debt purchaser assumes the full financial risk — if the debtor cannot or does not pay, the purchaser absorbs the loss.

Firms applying for FCA authorisation must describe their activities and operating model (for example, whether they collect as an agent or purchase debts). This distinction matters because debt purchasers and collection agents occupy different positions in the chain — one owns the obligation, the other does not — but both must comply with the same conduct rules when dealing with consumers.

How Debts Are Purchased

Debt purchasers acquire portfolios of debts from original creditors. According to industry reports, purchase prices typically fall in the range of 10% to 20% of the debt's nominal (face) value, though this figure is an estimate drawn from financial press and industry analysis rather than a regulated or fixed amount. In practice, the price paid depends on factors such as the age of the debt, the type of credit product, the quality of supporting documentation, and broader market conditions.

The legal mechanism for transferring a debt in England and Wales is governed by Section 136 of the Law of Property Act 1925. For a legal assignment to be effective, three conditions must be met: the assignment must be absolute (not conditional or partial); it must be in writing signed by the assignor (the original creditor); and express written notice must be given to the debtor. If proper written notice is not given, the assignment may still take effect in equity, but this can create complications — for example, the assignor may need to be joined in any enforcement proceedings.

Notice of assignment must be given in writing. In some cases, courts have accepted notice given by email as valid depending on the facts and any agreed methods of service.

Why Debt Purchasers "Chase"

A debt purchaser has paid money to acquire an asset — the right to collect the outstanding balance. Its commercial viability depends on recovering more than it paid. Because the purchase price is typically a fraction of the face value, there is a margin between what was paid and what is owed. The purchaser's business model is built around collecting enough of that margin, across its portfolio of debts, to generate a return.

This commercial structure explains why debt purchasers pursue collection actively. It also explains why they may be willing to accept less than the full balance owed — though the specific terms of any settlement are a commercial matter between the parties, and this guide does not address what any individual debtor may be offered.

Commission Rates for Agency-Model Firms

For collection agencies operating on a contingency or commission basis (rather than purchasing debt), industry sources indicate that commission rates typically range from around 5% to 25% of the amount collected. In most cases, fresher debts attract lower commission rates, while older or more difficult debts command higher rates. These figures are drawn from industry publications and agency disclosures rather than from regulatory sources.

Regulatory Authorisation

Any firm engaged in collecting debts or purchasing debts involving regulated consumer credit agreements must be authorised by the Financial Conduct Authority. "Collecting debts" is classified as a regulated consumer credit activity under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. Operating without FCA authorisation is a criminal offence.

When applying for authorisation, debt purchasers must submit detailed information to the FCA, including their due diligence procedures for assessing debt sellers, their approach to managing customer liabilities, and the details of any collection agencies they intend to use. The FCA application process typically takes between six and twelve months, though there is no fixed statutory deadline.

• FCA Conduct Rules (CONC 7): The FCA Consumer Credit Sourcebook, Chapter 7 (CONC 7), sets out the rules and guidance governing arrears, default, and recovery for regulated consumer credit debts. These provisions require proportionate action, fair treatment of vulnerable customers, and include restrictions on the use of continuous payment authorities. Some provisions within CONC 7 are mandatory rules; others are classified as guidance. Both debt purchasers and collection agents acting in relation to regulated debts must comply.
• The Consumer Credit Act 1974: The Consumer Credit Act 1974 provides a framework of statutory protections for consumers with regulated credit agreements. These protections include requirements for creditors to issue default notices before taking enforcement action, the obligation to provide notices of sums in arrears (NOSIA), and requirements around notices and enforceability before certain enforcement steps can be taken.
  • A notice of sums in arrears must be given within 14 days once the statutory arrears trigger is met (commonly, where two instalments have been missed on monthly-payment agreements). If this notice is not provided within the prescribed timeframe, the debt becomes unenforceable until the notice is given. While arrears persist, further notices must be issued at intervals of no more than six months.
• The Consumer Duty: The FCA's Consumer Duty (set out in PRIN 2A of the FCA Handbook) applies to regulated firms buying and selling portfolios of regulated products. It came into force on 31 July 2023 for open products and 31 July 2024 for closed products. Under the Duty, sellers of debt portfolios must provide sufficient information to enable buyers to comply, and buyers must conduct appropriate due diligence covering product design, fair value assessment, and customer characteristics.
• Limitation Periods: The Limitation Act 1980 establishes a six-year limitation period for bringing court action on simple contract debts in England and Wales. This period runs from when the cause of action accrues (often linked to the missed payment, demand, or default, depending on the agreement and circumstances). In Scotland, a separate regime of "prescription" applies, with a five-year period. In Northern Ireland, the limitation period is six years.
  • The limitation period can be reset. Under Section 29(5) of the Limitation Act 1980, a written acknowledgment of the debt, or a part payment made by the debtor, restarts the six-year clock from the date of that acknowledgment or payment. For an acknowledgment to have this effect, it must be in writing and signed by the debtor or their authorised agent. A verbal acknowledgment does not reset the limitation period.
  • Certain categories of debt have different limitation periods. Mortgage shortfalls have different limitation periods: typically 12 years for the capital element and 6 years for interest. HMRC time limits vary by tax and circumstances; in some cases extended time limits apply (for example, where behaviour is careless or deliberate). For court judgments, enforcement after six years usually requires the court's permission, and different rules can apply to interest.
• Pre-Action Protocol for Debt Claims: Before a creditor or debt purchaser can commence court proceedings against an individual debtor or sole trader, the Pre-Action Protocol for Debt Claims (part of the Civil Procedure Rules) requires them to send a Letter of Claim. The debtor then has 30 days to respond. For business-to-business debts between companies, a general Practice Direction applies instead, with a 14-day response window. Failure to comply with the Pre-Action Protocol may result in costs penalties imposed by the court.
• County Court Jurisdiction: Under Section 136(3) of the Law of Property Act 1925 (as amended), the county court has jurisdiction for interpleader proceedings where the value of the debt does not exceed £30,000.

"The debt has been sold — do I still owe it?" The sale of a debt from one firm to another does not extinguish the underlying obligation. What changes is the identity of the party entitled to collect it. The terms of the original credit agreement continue to apply. The debtor's statutory rights under the Consumer Credit Act 1974 (for regulated debts) also remain in force.

"Can the new owner add extra charges?" In most cases, debt purchasers cannot add interest or charges to purchased debts unless such charges are expressly permitted under the terms of the original credit agreement. This is based on published guidance from debt advice organisations, which states that the purchaser steps into the shoes of the original creditor and is bound by the same contractual terms.

"I received a letter from a company I've never heard of" When a debt is legally assigned, the debtor must receive written notice of the assignment. This is a requirement under Section 136 of the Law of Property Act 1925 for the assignment to take effect as a legal (as opposed to merely equitable) assignment. If a debtor receives contact from an unfamiliar firm claiming to own a debt, the assignment notice is the document that establishes the firm's entitlement.

"Is the collection agency the same as the creditor?" Not necessarily. A collection agency acting on a commission or contingency basis is an agent of the creditor — it does not own the debt. A debt purchaser, by contrast, has acquired ownership and pursues collection for its own account. The distinction matters because the legal relationship between the debtor and the firm differs in each case, even though the conduct rules that apply are the same.

"The debt is very old — can they still chase me?" There is an important distinction between a debt being statute-barred (meaning court action to enforce it is time-limited) and the debt ceasing to exist. The Limitation Act 1980 prevents a creditor from bringing court proceedings on a simple contract debt after six years (in England and Wales), but the debt itself does not disappear. A creditor or debt purchaser may continue to contact the debtor about the debt, though they cannot pursue enforcement through the courts once the limitation period has expired — unless the period has been reset by a written acknowledgment or part payment.

• Unregulated Debts. The statutory protections under the Consumer Credit Act 1974 and the FCA's CONC rules apply specifically to regulated consumer credit agreements. Debts that fall outside this category — such as council tax debts, most utility arrears, debts owed to friends or family, and most business-to-business debts — are not subject to the same requirements. These debts are still governed by general contract law and harassment protections, but the specific notice requirements, enforceability rules, and conduct standards that apply to regulated debts do not extend to them.
• Multiple Assignments. Where a debt has been assigned more than once — passed from the original creditor to a first purchaser, then on to a second — proving title and maintaining compliance with Consumer Credit Act requirements may become more difficult. Each transfer requires proper documentation and notice. In most cases, gaps in the documentation chain or failures to provide required notices at each stage may affect the enforceability of the debt until compliance is achieved.
• Debts That Are Not Immediately Pursued. Debt purchasers may hold purchased debts without taking immediate collection action. In most cases, this reflects commercial or operational decisions rather than any legal requirement. A purchaser may delay contact or enforcement for various reasons, including waiting for documentation or for the debtor's circumstances to change. There is no statutory obligation requiring a debt purchaser to pursue collection within a specific timeframe, though the limitation period continues to run.
• Equitable vs Legal Assignment. If a debt is assigned without proper written notice being given to the debtor, the assignment may take effect in equity rather than at law. This means the new owner may still have rights to the debt, but enforcement could be more complex — the original creditor may need to be involved in any court proceedings. The practical effect is that proper notice to the debtor is an important procedural step.

The debt collection and debt purchasing system in the UK operates within a structured regulatory framework. Firms that collect or purchase regulated consumer credit debts must be authorised by the FCA, and their conduct is governed by the rules and guidance set out in CONC 7, the Consumer Credit Act 1974, and (from 2023/2024) the Consumer Duty.

For consumers, the key practical points that flow from this framework are as follows.

The transfer of a debt from one firm to another does not alter the terms of the original agreement or remove the statutory protections that apply to regulated debts. The debtor's rights and obligations remain as they were under the original credit agreement.

When a debt is legally assigned, the debtor is entitled to receive written notice of the assignment. This notice establishes who now holds the right to collect the debt. Without proper notice, a legal assignment under Section 136 of the Law of Property Act 1925 is not complete.

Creditors and debt purchasers pursuing regulated debts must comply with specific procedural requirements, including the provision of notices of sums in arrears and adherence to pre-action protocols before commencing court proceedings.

The limitation period for court action on simple contract debts is six years in England and Wales (five years in Scotland), running from the date the cause of action accrued. This period can be reset by a written acknowledgment or part payment — a verbal acknowledgment does not have this effect.

Related: Debt Collectors vs Bailiffs | Debt Sold to a New Collector? | Chased for a Debt You Don't Recognise?.