Accountant in Bankruptcy

Are Further changes Required for Minimum Asset Bankruptcies in Scotland?

Are Further changes Required for Minimum Asset Bankruptcies in Scotland?

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The UK Government has announced several new changes that it intends to introduce for Debt Relief Orders (DROs), that apply only in England, Wales, and Northern Ireland.

These solutions are like Scotland’s Minimum Asset Bankruptcy Procedure (MAPs) and offer consumers with little income, and little to no assets, a solution for dealing with their debts and writing them off after a relatively short period of time. 

However, there are several key differences between the solutions and these differences will soon become more pronounced when changes proposed by the UK Government to Debt Relief Orders come into effect.

The Question is, then, is there more the Scottish Government should be doing to improve the Minimum Asset Procedure in Scotland?

Already, because of Covid 19, they have introduced emergency laws last year, that have now become permanent, and have improved the Scottish option in many areas, but still in one key respect, the level of income ignored, the Scottish solution still lags.

Maximum Debt LevelIncome IgnoredAsset LevelsCar ExemptionDuration Application Fee
MAP£25,000 (2)£0.00£2,000 (3)£3,0006 Months£50 (4)
DRO(1)£30,000£75£2,000£2,00012 Months£90

Notes

  1. Proposed changes
  2. In Scotland, Student Loans are ignored when calculating the maximum debt level
  3. No single asset can be worth more than £1,000
  4. Application fees are waived when someone is in receipt of a benefit. The vast majority of MAP applicants will pay no application fee in Scotland

Maximum Debt Levels

Both options are similar in the maximum level of debt you can introduce, however, the new proposed changes to DROs in the UK will mean up to £30,000 in debt can be included, whereas the maximum debt that can be included in Scotland is only £25,000.

However, in Scotland, where you have Student Loans, which liability for is not discharged in either solution, these are ignored when calculating the maximum debt levels. This for some will mean a MAP is a viable option in Scotland, when they have higher non-student loan debts, than it will in the rest of the UK, even when their non-student loan debts are lower.

However, this will not help those in Scotland without student loan debt, who may find if they lived in England could do a DRO, but in Scotland cannot. This, however, won’t prevent them using a Full Administration Bankruptcy in Scotland, which may only last12 months, like a DRO in the rest of the UK.

Income Ignored

This is one of the biggest differences between the two options, with DROs ignoring the first £75 of someone’s disposable income (what is left after their essential expenditure is taken off their income). In Scotland, no such provision is made, meaning if you have just £5 left each month from income that a contribution can be taken from, you cannot use the Minimum Asset Procedure.

It should be noted, however, that no contribution in either solution can be taken from benefits, so the only income that a contribution can be taken from is non-benefit income.

This undoubtedly is a shortcoming in the Scottish Solution, as what it means is in England, Wales, and Northern Ireland, where you have under £75 per month, you can keep it. In Scotland, not only can you not keep it, but you cannot use the Minimum Asset Procedure. You would then have to use the Full Administration Procedure (the equivalent to Bankruptcy in the rest of the UK) and unlike in England, Wales, and Northern Ireland, you would need to pay the money for four years and not just three.

Assets Levels

Although in relation to both solutions these look the same, with the maximum assets you can own being anything up to £2,000, in Scotland, there is one key difference in that no one asset can be worth more than £1,000.

However, in Scotland’s defence the extent of assets that are disregarded for the purpose of MAPs are more extensive (see here).

Car Exemptions

Scotland since 2010, has set the value of a car that is exempt for the purposes of a MAP and Bankruptcy at £3,000 (although it has not increased since then), whereas in the UK the value of car exempt for a DRO will only be set at £2,000.

The only other caveat in Scotland worthy of note, is the applicant must show they have a reasonable requirement for the car.

Duration

This is the other big difference between the solutions, in that in a MAP in Scotland, the solution only last 6 months, and after that the consumer becomes debt free. In the rest of the UK, the solution lasts 12 months.

Although it should be noted, in Scotland, even if you have £5 disposable income per month, you will not be able to use the Process and instead will have to use Full Administration Bankruptcy and pay for 4 years.

Fees

The other big difference now, since Covid 19 emergency legislation was introduced, is the amount it costs someone to apply for the procedure. In the rest of the UK, the fee is £90 (as it was for Minimum Asset Bankruptcy prior to Covid 19). In Scotland, however, that fee has now reduced to £50 and where the applicant is in receipt of several different benefits, the fee is waived. This means almost no-one in Scotland will pay an application fee, whereas in the rest of the UK, even after the new changes are introduced, the fee will remain £90.

Conclusion

There are several differences between both solutions, as can be seen, but on the face of it where the Scottish solution lags, when considered more widely, it is not as far behind Debt Relief Orders as it may appear. In actual fact, in many respects, MAPs appear superior.

However, it does appear the big difference in relation to both is the difference in how disposable income is treated, with many consumers having to use Full Administration Bankruptcy in Scotland for relatively small sums of disposable income.

Considering this may result in them having to pay for four years, this appears to be disproportionate; and from a policy perspective may be counterproductive. It may result in low-income households giving up relatively small additional sources of income, like part time jobs, just to avoid being excluded from the Minimum Asset Procedure.

The arguments in favour of Scotland, therefore using a similar approach to the rest of the UK and disregarding the first £75 of disposable income, appears overwhelming

Bank Arrestments are Forcing Thousands into Hardship

Bank Arrestments are Forcing Thousands into Hardship

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The rise in the use of Bank Account Arrestments in Scotland (also known as Actions of Arrestment and Furthcoming) , to recover debts, is a growing cause for concern and forcing thousands of Scots to experience serious financial harm each month.


In many cases, the debt recovery tool that can only be used by Sheriff Officers, is forcing thousands of Scots into having to choose between buying food, paying rent or heating their home.


In the worst-case scenarios, the legal debt recovery tool is forcing many to seek help from food banks.


Even where the Bank Arrestments are not successful, because someone has insufficient funds in their account, they  still have the costs of the process added to their debt and banks add on a £25 administration fee (which when you only have Universal Credit can leave you suffering severe financial harm until your next payment).

Bank Arrestment Numbers Continue To Rise 

Last year in Scotland over 173,000 non-earning arrestments were executed by Sheriff Officers, with the vast majority being bank account arrestments (a 33% increase on the number since 2011-12).


These arrestments, once served, then force the bank to arrest all sums in the account over £529.90 (the Protected Minimum Balance) up to the amount of debt that is owed.


Unlike Wage Arrestments, however, Bank Arrestments do not restrict how much Sheriff Officers can take over the Protected Minimum Balance (PMB) of £529.90.

With a wage arrestment, only 19% of the amount above the PMB can be taken (until the monthly sum earned is over £1,915.32, when the percentage increases to 23%).

This means if you get your wages arrested and earn only  £1,200 per month, you will only have £127.19 taken. However, with a Bank Arrestment,£670.10 will be taken (assuming your debt is that or more).

It is no wonder, therefore, that last year in Scotland, when over 170,000 Bank Arrestments were executed, approximately only 70,000 Earning Arrestments were carried out.

Why arrest someone’s wages when, if you wait for them to be paid into their bank account, you can get £670.10 instead of £127.19?

Unduly Harsh 

Scots Law has always recognised the potentially harsh effects of Bank Account Arrestments, which is why in 2008 the Protected Minimum Balance was introduced.

However,  the level of protection the PMB provides is grossly inadequate. It has always been linked to the Protected Earnings Limit that exists in Wage Arrestments, but has never included the additional protection of restricting the amount that can be taken above the PMB.

Also, although it has always been possible to challenge a Bank Account Arrestment, on the grounds it is Unduly Harsh, this a Court Based procedure and can take over 8 weeks before you get a hearing in front of a Sheriff. By then it is too late and the undue hardship has already been suffered.

Statutory Debt Solution Review

I would call on the Scottish Government to use its recently announced Review of Statutory Debt Solutions as an opportunity to review what remedies consumers have when their bank acccount is arrested.

There is no question, that Bank Arrestments, one of the harshest forms of debt recovery available, are now excessively being used and risk bringing the whole procedure into disrepute.

Equally, how can leaving families, often with children,having to choose between  heating their homes and feeding themselves not be described as unduly harsh?

As an immediate solution, subject to eventually increasing the level of protection for funds held in bank accounts, I would urge the Scottish Government to replace the Court based procedure for challenging a Bank Account Arrestment, with an administrative procedure.

This would mean allowing people, with the assistance of a Money Adviser or Insovency Practitioner, to apply for a Bank Arrestment to be recalled or restricted to the Accountant in Bankruptcy’s Office.

Such a process would be free, quick and would also require the person  to seek advice, whilst avoiding them having to choose between feeding themselves and their children, heating their home or paying their mortgage or rent.

 

 

 

 

MSP Case Study on Trust Deed Raises Questions

MSP Case Study on Trust Deed Raises Questions

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Colin Beattiie (MSP) provides case study on Trust Deed

A Scottish Parliament MSP who presented a case study that concerned a constituent who had been in a Protected Trust Deed, as evidence of what‘s wrong with the personal insolvency remedy, has raised a number of questions.

The MSP, Colin Beattie, used the case study as an example of abuses that go on in Protected Trust Deeds, whilst examining the Accountant in Bankruptcy, Dr Richard Dennis, on how the remedy operates.

He gave the example of a woman, whose family were constituents and who passed away whilst in her 4th year of her Protected Trust Deed.

She had already paid £6,000 into the Trust Deed, which she had entered as she had £20,000 in debt.

As she was a Homeowner, the family received a breakdown as to what the cost would be to wind up the Trust Deed.

That sum was £28,000, which initially appears  ridiculous for a £20,000 debt, especially as £6,000 had already been paid into the Trust Deed, meaning the total cost could have been in excess of £34,000.

In actual fact during the evidence session by the Economy, Energy and Fair Work Committee, he described the eventual cost as not moral and said it was “banditry”.

Colin Beattie provided a breakdown of the figure:

  • £7,000 was for statutory interest 
  • Trustee Fee £2,500
  • Trustee Realisation Contribution Fee 1,270
  • Trustee Realisation Lump Sum Fee 3,000
  • Legal Fees £3,000

He also added there were additional fees such a AIB Supervision fees, which are £100 per year, so for 4 year Trust Deed would be £400.

Not Clear Cut

However, an understanding of how the costs had been arrived at, shows the figures may not be as obscene as believed and in actual fact, if the lady had used any other solution to deal with her over-indebtedness, they may have been similar or possibly even worse.

What would have been the Options?

As it is believed £6,000 had been paid into the Trust Deed over 4 years, it probably safe to assume the Lady was able to pay £125 per month to her debts, or thereabouts.

If this is all she could afford, repaying her debts in full would not have been a realistic solution, as even with interest and charges frozen, a £20k debt would take over 13 year to repay. For most people, the idea of not having any disposable income for 13 years is not an attractive one and many lenders would consider such a lengthy repayment period unreasonable.

It is likely, therefore, if all the options had been discussed with the lady at the time she sought advice, a Debt Management Plan or the Debt Arrangement Scheme would not have been considered a viable option.

The lady may then have looked at insolvency options, such as Bankruptcy or a Protected Trust Deed.

These would have involved her paying the £125 per month for 48 months, or maybe even 60 months, as she was a homeowner, with the last 12 months going towards addressing any equity she had in her home.

We don’t know why the lady eventually chose a Trust Deed over a Bankruptcy, but generally Trust Deeds are considered to be less risky when you own a home, as Creditors will often agree to disregard more equity so you don’t have to sell your home. It may, therefore, mean this was a consideration.

However, when someone passes away, and there are sufficient assets to pay all the debts owed, the law, not just of insolvency, but Succession requires all debts must be repaid from the winding up of the estate.

The £20,000 of original debt would, therefore, have to be repaid in full.

Also, where there are sufficient assets in insolvency, the creditors also must be paid interest on this debt of 8% per annum.

This is known as Statutory Interest, and is owed to the Creditors, not the Insolvency Practitioners. This would explain the £7,000 in Statutory Interest that Mr Beattie spoke of.

Second, the Trustee’s standard fees for managing the Trust Deed over the 4 years are £2,500 and £1,270 (this latter fee is the cost of collecting the 48 payments).

It would appear the legal fees are the costs charged by the solicitors who eventually sold the property and are paid to them.

The £3,000 fee is the percentage the Trustee is allowed to charge on the sale of the property, for the work they have undertaken in selling the property.

All these fees are governed by legislation, except the legal fees and the Scottish Government have the power to change them.

In actual fact, it was Mr Beattie’s Committee, the Economy, Energy and Fair Work Committee that recently approved the Bankruptcy Fees (Scotland) Regulations 2018, which governs many of the fees. So if the fees are immoral, although legal and an example of banditry, it was Scottish Government Regulations that proposed some of them and the Economy Committee that recommended them to Parliament.

It is clear, therefore, the majority of the costs incurred in winding up the estate were not made up of the Insolvency Practitioner’s fees, but were either the costs of paying off the Lady’s debt and winding up her estate, which if it had not been carried out by the Trustee, would have had to some extent been incurred by her Executor on her passing.

What if another Option has been chosen?

However, what if another option had been chosen?

We have already looked at how long it would have taken to repay the debt in full, over 13 years, so it is understandable why a repayment solution wasn’t chosen.

However, if the Debt Arrangement Scheme had been chosen, it could be argued that £6,000 of the debt would have been repaid to creditors leaving only £14,000.

This is possible, but not certain.

One of the things that occurs in a Debt Arrangement Scheme is when someone dies during it, the Programme is revoked and as a consequence creditors can apply all the interest and charges that they could have applied had the person not been in the Scheme.

Even a contractual rate of 5% on a consumer debt of £20,000 is £1,000 per annum and we know many forms of credit have higher levels of interest applied to them.

It legally is possible, therefore, just paying £1,500 per annum to a debt of this level over 4 years, with interest being re-applied would not reduce the debt by much and in actual fact, the debt could increase.

Now the argument is few creditors would reapply interest and charges, but the truth is we cannot be certain. It is legally possible.

Also, its true to state not all creditors stop interest and charges on debt in the Debt Arrangement Scheme, even though the law requires it, but write it off once the programme is completed.

Also it is true that many creditors in the Debt Arrangement Scheme only reduce the balance owing on a debt in the Scheme by the amount they receive, which is not the same as what the consumer pays, as the payment distributor and DAS Administrator fee is deducted first (albeit this is a cost incurred by the creditor). These fees are now 22%.

In practice, therefore, where cases are revoked it is likely these fees are incurred by the Consumer, not the Creditor, unless challenged

The problem is many clients who stop paying their Debt Arrangement Scheme, don’t continue with the advice agency that was helping them, so most probably don’t challenge the fact they have incurred these fees.

On top of that, as the lady passed away the Lady’s family would have had to appoint a solicitor to wind up the estate, as estates with heritable property are not considered small estates.

It, therefore, is possible that had the lady chosen a debt management option like the Debt Arrangement Scheme, the eventual cost of winding up the estate could have been similar, if not close to, the eventual costs in the Trust Deed as a solicitor would have to have been involved in winding up her estate and her debts paid in full.

It is also, likely, had the lady chosen Bankruptcy as the solution to her debt problems, the cost of winding up the estate may have been greater than that quoted by the Trustee in the Trust Deed.

It is hard not to sympathise with families who find themselves, in this situation, as they are struggling with the shock of a bereavement only then to possibly learn for the first time the extent of the deceased family members debts and also that they were in an insolvency solution.

On top this, they then get a bill for £28,000, which although they are not liable for, has to be paid from the estate.

It is clear from information provided by Mr Beattie, the Insolvency Practitioners fees made up only a very small part of the £28,000, and most of the costs were related to the settling of the debt, winding up her estate and paying statutory fees.

Much of which would have been incurred by her Executor if she had not been in a Trust Deed.

Lessons to be Learned

However, some important policy points arise from Mr Beattie’s case study.

First, if the Scottish Government want to present the Debt Arrangement Scheme as a less risky solution than Trust Deeds, because at least if it fails someone’s debts will be lower, then they must change the law to ensure creditors cannot reapply interest and charges if a case is revoked.

It is all very well stating most creditors won’t, but there is every possibility, legally, they could and a consumers debt may end up being higher considering the levels of contractual interest and fees consumer creditors can charge.

Second, they should explore legal devices to ensure if a case is revoked the 22% payment distribution fees and DAS Administration fees are removed from the balance of debts owed.

Third they should also change the law to ensure that the effect of someone dying in the Debt Arrangement Scheme is not their Programme is revoked.

Instead they should apply a 12 month moratorium to the case to allow an Executor to be appointed and settle the debts if there are sufficient assets available to so.

Finally, the Scottish Government should reduce the level of Statutory Interest that is applicable, from 8% to 1-1.5% above the Bank of England Base Rate.

This is long overdue and even in 2016 Scottish Government Minister, Paul Wheelhouse, described it as punitive. They still have not acted.

Could Scotland abolish Sheriff Officers?

Could Scotland abolish Sheriff Officers?

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Does Scotland need Sheriff Officers?

I don’t think so.

I think with several legislative changes, the requirement for Sheriff Officers could be removed and the process as to how debts are recovered could be radically reformed.

This I believe would significantly reduce the costs involved for those seeking to recover debts, and for those who owe debt.

Scottish Diligence Statistics

The reason for me believing this has been brought on by the recent release of Scotland’s Diligence Statistics for 2018-19, which cover the types of legal debt recovery procedures that are used by Sheriff Officers.

These statistics bring into sharp focus the issue of how Council Tax debts in Scotland are being collected.

What the statistics show is that almost 88% of all work carried out by Scotland’s equivalent of Bailiffs, Sheriff Officers, is to recover Council Tax debts,  and probably adds close to £30 million onto those debts in the form of Sheriff Officer fees (Unanswered questions over local authority debt statistics – The Herald; 18th December 2019)

The type of work carried out by Sheriff Officers on behalf of Scottish councils includes:

Now this is concerning, as what the statistics also show is that the use of Sheriff Officers to recover debt by non-local authority creditors has fallen by 24.3% since 2011-12, but over the same period Scottish local authorities increased their use by 27.8%.

Also, in 2018-19, this continued with the use of Sheriff Officers by non-local authority creditors falling by 42%, whilst local authority use increased by 15%.

Which begs the question are Sheriff Officers advising Local Authorities to take a more aggressive approach to debt recovery to compensate for the loss of work by other creditors?

It also raises the question whether a radical overhaul of how Diligence (legal debt recovery) is executed in Scotland could significantly reduce the amount of fees that are being applied to the debts of those in default?

Scottish Councils should have their powers to recover debts increased

Now, a simple answer to this problem may simply be to increase the power of Local Authorities to recover debts.

Take, for example, Direct Earning Arrestments. These are types of wage arrestments that are used by Local Authorities and the Department of Works and Pensions for benefit overpayments. They are effectively wage arrestments.

However, unlike Earning Arrestments (which are governed by the Debtors (Scotland) Act 1987), there is no requirement for Local Authorities to use Sheriff Officers to execute a Direct Earning Arrestment. They simply send the Arrestment Schedule to the Bank themselves.

This begs the question why for Earning Arrestments, we could not allow local authorities to do the same ? If they can do it for one type of wage arrestment, why not for another, removing the requirement to use a private sector Sheriff Officer.

Which then begs the question, why then not also allow them to do the same for Bank Arrestments?

And if we are going to allow them to do that, then why not also allow them to send Charge for Payments by post?

This would arguably save tens of millions of pounds being added onto Council Tax Bills in the form of Sheriff Officer fees.

Council’s would not be alone in having such enforcement powers. As mentioned above, the Department of Works and Pensions also have the power to execute Direct Earning Arrestments without using Sheriff Officers.

The Child Support Agency and Child Maintenance Agency also have similar powers when it comes to Direct Earning Orders for child maintenance payments.

But not all debts are for Council Tax

However, this raises the question what about other debts, as not all debts are for Council Tax and not all debt recovery procedures are those mentioned above.

Well there is a simple answer to that question, in that these remaining types of debts and procedures could be recovered and executed by Court Enforcement Officers employed by the Courts.

In Northern Ireland such a model already exists where it is Court Officers rather than private Bailiffs that recover debts.

Court Enforcement Officers could therefore be employed on a full cost recovery basis by the Scottish Courts and Tribunal Service to recover these other types of debts and to carry out other types of enforcement procedures, for both Local Authority and non-Local Authority debts. They could also take on the role of Fine Enforcement Officers, who already exist in every court and can also execute bank and earning arrestments without having to use Sheriff Officers.

As all this would be done on a cost-only recovery basis, I believe it would help reduce the cost of recovering debts in Scotland for both those in debt and those that are owed debts.

It would also bring forward some radical reform to how debts are recovered in Scotland, which inevitably will have to occur anyway.

The simple fact is, if our entire system of enforcing Court Orders is being susidised by a form of Local Government taxation that none of the major political parties support, then reform will eventually be inevitable, as will how debts are recovered in Scotland.

It would seem logical to me, to begin that process of reform, sooner rather than later as currently Sheriff Officers have become overly dependent on Local Authorities for work and this is only adding to the misery of those struggling with Council Tax debts, as they are disproportionately bearing the burden of funding this no longer sustainable industry. 

Proposed Reforms to Trust Deeds

Proposed Reforms to Trust Deeds

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Below is a paper I have drafted for consideration by the Economy, Energy and Fair Work Committee of the Scottish Parliament, as part of their inquiry into Protected Trust Deeds.

The papers makes a number of proposal to amend the Bankruptcy (Scotland) Act 2016 using Scottish Statutory Instruments. 

These proposals are:

  • For a process that allows a creditor to apply to not be bound by the discharge of a debtor or a trustee from a Protected Trust Deed;
  • To require a Trustee to apply to the Accountant in Bankruptcy where they wish to refuse a Debtor a discharge from their Protected Trust Deed; and
  • Finally, to introduce a new procedure to allow a Debtor, through a Money Adviser to apply for the early termination of a Trust Deed, without a discharge, to allow remedial action where people have been mis-advised and to end the practice of people being Trust Deed Prisoners, where the solution is no longer appropriate.

A PDF version of the paper can be downloaded here. A previous submission I made to the Committee can be found here.

Background

The background to this paper, is to contribute to the inquiry by the Economy, Energy and Fair Work Committee of the Scottish Parliament into Protected Trust Deeds.

That inquiry has been launched because several Stakeholders have raised their concerns with Protected Trust Deeds, a form of personal insolvency in Scotland.

The concerns primarily relate to:

  • The way that Protected Trust Deeds are marketed and a view by some that they are being mis-sold;
  • A view that some consumers would have been better using another formal debt solution;
  • The failure rates in Protected Trust Deeds and the consequences that this has for the consumer; and
  • Finally, a view by some smaller creditors that Protected Trust Deeds have a disproportionate effect on them, and Insolvency Practitioner Fees lead to poor returns for them.

In response to this, although accepting there is no consensus within the sector, the Accountant in Bankruptcy has mooted several proposals.

These can be summarised as:

  • Increasing the minimum level of debt, a consumer has before they can enter a Protected Trust Deed;
  • Extending the duration of the Protected Trust Deed;
  • Amending the rules how Protected Trust Deeds are approved to increase Creditor engagement and to allow AiB more power to refuse a Trust Deed Protection; and
  • Finally, requiring a Trustee to set a fixed fee at the point of proposing the Trust Deed;

Concerns with Proposals

I have a few concerns in relation to these proposals.

First, they are unlikely, in themselves to significantly reduce the number of Trust Deeds becoming protected and even if they were, this is not necessarily a desirable outcome.

Trust Deeds levels are not actually at a level that they should be causing undue concern. Even if they were to rise to 2009 levels, of just under 10,000 per year, that would still only represent one-tenth of one percent of the entire Scottish population.

For an advanced consumer credit-based society, I would argue that such levels of personal insolvency are not a matter of concern. There is always going to be consumers who are not able to repay their debts, or even repay them with a reasonable period of time, so personal insolvency will be an appropriate solution for many and this is healthy if it addresses historic problem debts that people have. The key question is are those solutions appropriate for the consumer and is the level of consumer insolvencies across Scotland rising to a level that could pose a risk to the health of the wider economy?

Second, by just making it harder for people to enter Protected Trust Deeds, we may inadvertently drive people into less appropriate solutions such as bankruptcy, or even the Debt Arrangement Scheme, where the failure rate is believed to be currently twice what it is for Protected Trust Deeds in their first five years.

Thirdly, changing the voting arrangements for Protected Trust Deeds in not likely to reduce the number of Trust Deeds becoming protected, as due to the engagement of many commercial creditors through Creditor Agents the outcome is not likely to change in most cases and the smaller creditors are still not going to be able to object to Trust Deeds becoming Protected.

Finally, in relation to the AiB having increased powers or scope to refuse protection to a Trust Deed, this is likely to be problematic. First it will require guidance to be published to indicate when Trust Deed protection is likely to be refused. If this doesn’t happen, it will be harder to advise consumers on when Trust Deeds may be a suitable option for them.

The decision of the AiB will also have to be subject to review and appeal and even where a Trust Deed is Protected, but later fails, resulting in the consumer possibly losing out, it could be argued the AiB could be subject to complaints that they made the wrong decision and didn’t consider affordability etc. and as result the consumer has suffered harm and loss.

Understanding the Problem

The primary problem with Protected Trust Deeds is that many feel that from the perspective of being a creditor, or a consumer, who they don’t work for, is they are not fair.

However, personal insolvency is by its nature unfair to most Parties that are affected by it. The essential purpose of a Trust Deed is to wind up the financial obligations of a consumer whose can no longer meet their financial obligations.

By implication this means their creditors will be losers. It also means the consumer themselves will often be losers, as they will be denied access to further credit for several years, will have to pay over almost 100% of their disposable income for 4 years and may even have to realise and surrender assets.

However, occasionally, it is possible when looking at Trust Deeds, to see in certain cases that the solution was not appropriate for the consumer at the outset, or their circumstances have changed, so it is no longer appropriate.

When this happens the AiB, who have supervisory and regulatory powers, have not been known for being pro-active in making interventions in cases, even though they have had the power to do so for several years.

This often leads to consumers either being refused a discharge and having their debts returned to them or becoming a Trust Deed prisoner with no easily accessible process for reversing what may have been the consequences of bad advice in the first place, or their own misfortune.

Thirdly, even when creditors feel that the proposals being made are so fundamentally unjust, they feel powerless to influence the process or represent their interests and are often outvoted by larger creditors who can weather the insolvency process better.

All this has led to Trust Deeds becoming discredited as a solution.

Proposed Solution

As a solution to these problems, I would like to suggest some amendments to the Bankruptcy (Scotland) Act 2016, which won’t require primary legislation and could be achieved by regulations made by the Scottish Ministers.

The primary legislation that governs Protected Trust Deeds is the Bankruptcy (Scotland) Act 2016.

The specific part of the Act that deals with Protected Trust Deeds is Part 14 and Section 194 of the Act allows the Scottish Minister to make Regulations that modify or add to Part 14, providing the change that could be made could have been made by the Minister under paragraph 5(1) of Schedule 5 of the Bankruptcy (Act ) 1985.

This is below :

The primary legislation that governs Trust Deeds, therefore, can be amended by way of a Scottish Statutory Instrument, using I believe the negative procedure

The proposals avoid changing the essential characteristics of Trust Deeds, that if done out with a full review of all formal debt solutions in Scotland could have unintended consequences, such as denying people options, but also increasing the number of people forced into applying for their own bankruptcy.

The proposal instead would introduce three new provisions into the 2016 Act, which arguably AiB have already powers under section 179(1) they could use to achieve the same effect (the power to issue directions to Trustees), but would also introduce new procedural processes for applying and making these directions and would make a political statement that AiB must increase its regulatory role in how they supervise and regulate Trust Deeds.

The proposed provisions are:

Creditor application to not be bound by the Discharge of the Debtor or the Trustee

This provision would allow a creditor that has objected to a Trust Deed becoming protected to make an application to AiB that they should not be bound by the effects of the Debtor or the Trustee receiving a discharge from the Trustee.

The creditor would have to show that the Trustee’s proposed intromissions with the Trust Deed estate would be unduly prejudicial to their interest.

This would not be a judicial process and so, therefore, would be quicker and less expensive than the Creditors having to use any existing powers the 2016 Act gives them.

However, Creditors would only be able to apply where they had notified the Trustee of their objection to the Trust Deed before it became protected and providing the application was made within 28 days of the Trust Deed becoming protected.

It would also, if successful not be fatal for the Trust Deed, so the Debtor and Trustee could decide whether or not to continue with the Trust Deed or whether the Trustee or the Debtor should be able to apply for the Trust Deed to be terminated and another option used.

There would be a right to review of any decision on any application for all parties, with an ultimate right to appeal to the Sheriff on a point of law.

Trustee to seek Approval from AiB to Refuse a Debtor a Discharge

Currently, a Trustee must seek the approval of AiB to provide a Debtor with a Discharge, but not to refuse a Discharge.

This provision would introduce a new provision into the 2016 Act that would require the Trustee to seek the approval of the AiB if they wish to refuse a Debtor a Discharge.

AiB as part of this process would have to allow the debtor and the creditors to make representations as part of this proposal and have the power to refuse the Trustee’s application. They would also be able to issue directions to the Trustee as part of their decision.

It is not specified in the provision what these directions may be, but it could include reducing the contribution the Debtor is to pay or even directing the Trustee to apply for the Discharge of the Debtor.

It is hoped this would tighten up protections for consumers in Protected Trust Deeds, and have a cautionary effect on Trustee’s refusing Debtors a Discharge, and would also require AiB to ensure that the interests of all concerned are considered before a Debtor is refused a Discharge.

Debtor Application to seek Early Termination of a Trust Deed without a Discharge

This provision would allow a Debtor to seek an early termination of their Protected Trust Deed without a Discharge, but only through a Money Adviser.

Again, this would be an administrative process where the application is made to the AiB, so should be faster and less expensive than any existing court procedures that are available.

It is hoped this provision would allow a consumer, where they believe they have mis-sold or mis-advised a solution to seek remedial action that restores them, to the extent that is possible, back to the position they were in prior to granting the Trust Deed.

It would also allow AiB to issue directions, as it is appreciated terminating a Trust Deed early could leave many matters unresolved, such as what to do with funds already ingathered or what happens when assets have been sold or are in the process of being sold and what happens to contributions that have already been made or possibly have been taken from benefits, when they should not have been.

Equally, it is appreciated that some consumers may try and use this process when they anticipate they are about to come into possession of assets that could be used to pay their debts. In such cases, AiB could refuse the application or could agree to grant it only on compliance with a direction.

The power to issue a direction would, therefore, allow AiB to address any unresolved issues to help restore the consumer back to the position they were in prior to granting the Trust Deed and end the problem of Trust Deed prisoners where a Trust Deed is no longer the appropriate solution for a consumer.

It would also require the Debtor, on the Advice of a Money Adviser, to state how they intend to address their over-indebtedness, whether that is through sequestration or a Debt Arrangement Scheme.

The provision would be subject to a right of review or appeal to the Sheriff on a point of law only.

Conclusion

I believe these proposals would avoid any fundamental changes to Protected Trust Deeds, which for the reasons mentioned above, I believe are likely to have unintended and undesirable consequences and should only be considered as part of a full review of all formal debt solutions.

However, in recognition, there are genuine concerns by many stakeholders, I believe the above proposals could begin to address some of the concerns that have been raised and allow remedial action to be taken on a case to case basis.

I also believe, the accumulated effect of these provisions on Trust Deeds and the Trust Deed market will be to improve current practices, as providers will be reluctant to take cases that pose a risk of being reviewed under the above provisions or applying for a Debtor to be refused a discharge, without exhausting all options first.

I also believe as such they will help restore confidence in Protected trust Deeds, that is overdue and necessary, without restricting their availability where they are an appropriate solution for consumers.

Finally, whereas I don’t believe there is any consensus for the AiB’s proposed amendments, I believe there could be consensus across the sector for these proposed amendments.

Proposed Amendments

Below are draft versions of the proposed amendments to the 2016 Act that I believe should and can be made.

These draft versions are for illustrative purposes only (not being a legal draftsperson), however, I believe they are helpful in considering the proposals, in that they focus attention on what procedures should be used and hopefully,  will help others contribute to the discussion.

After s178 insert S178A

178A Creditor’s application to not be bound by the Debtor or Trustee’s discharge

(1) A creditor who has notified the trustee of their objection to the trust deed within the relevant period may apply to AiB under this section within 28 days of the Trust Deed’s Protection being registered on the Register of Insolvencies

(a) On receipt of an application by a Creditor, AiB must notify the other creditors, the Debtor and the Trustee and provide them with a copy of the Application that has been made and invite them to make representations to AiB within 28 days of receipt of the notification.

(b) After the time allowed under (a) for representations to be made, AIB, if satisfied, on grounds other than those on which a petition under section 177(1)(b) has been or could have been presented by the creditor, that the Trustee’s proposed intromissions with the estate of the debtor will be so unduly prejudicial to the creditor’s claim that the creditor should not be bound by the debtor or trustee’s discharge, AIB may order that the creditor is not to be so bound.

(c) On deciding the application under (b), AiB must send a copy of their decision, with reasons to the trustee, the Creditors and the Debtor.

(d) Any party to the Trust Deed can request a review of AiB’s decision within 14 days of receipt of their notification of the decision

(e) On receipt of a request for a review AiB should notify the other parties to the Trust Deed of the request and complete the review within 28 days of the request being received. AiB must notify all parties to the Trust Deed of the outcome of the review.

(h) In completing a review of their decision, AiB must either decide to uphold their original decision or amend their decision as if they were deciding an application under (b).

(i) Any Party to the Trust Deed can appeal AiB’s decision under (h) to the Sheriff within 14 day of being notified of that decision. Appeals are on a point of law only. The Sheriff’s decision is final.

Replace section 184 (8) with:

Section 184 Protected trust deed: discharge of debtor

 (8) If, on request by the debtor or as soon as reasonably practicable after the end of the period for which payments are required under the trust deed, the trustee believes the debtor should be refused a  discharge, the trustee must make an application to AiB for the Debtor to be refused a discharge and

(a) inform the debtor and the Creditors that an application has been made by notice in writing—

(i) of the facts and the reason why a refusal should be granted,

(ii) that the debtor will not be discharged from their debts and obligations in terms of the trust deed if the application is granted, and

(iii) of their right to make representations to AiB within 28 days of receipt of the notification as to why the application should or should not be granted

(iv) The Trustee must advise the Debtor they can seek independent advice from a solicitor or from a Citizen Advice Bureau or Local Authority Money Advice Service and provide details of free money advice services within the local authority area the Debtor resides

(b) The Application will be in the form of a statement (being a statement in such form as may be prescribed for the purposes of this paragraph) and must specify:

  • The reasons why the Trustee believes the Debtor has failed to meet their obligations under the Trust Deed and failed to co-operate with the administration of the Trust Deed;
  • Whether the Debtor has consented to the Application being made;
  • Outline what funds have been ingathered
  • What the fees and outlays of the Trustee are at the date of the application;
  • What dividends have been paid to Creditors and are likely to be paid in any final distribution by the Trustee

(c)  AIB must not decide whether any application should be granted or rejected until 28 days have passed from receipt of the application

(d) In considering the application AiB must decide and have regard to any representations that are made, whether it is fair and reasonable to grant the application having regard to the interests of the Trustee, the Debtor and the Creditors.

(e) In deciding the application AiB can only:

  • Grant the application
  • Grant the application and issue a direction to the Trustee under section 179 (1)
  • Reject the application
  • Reject the application and issue a direction to the Trustee under section 179 (1)

(f) AiB decision on the application must be notified to the Trustee, the Creditors and the Debtor with a statement as to the reasons for their decision and a copy of any direction issued.

(e) Any party to the Trust Deed can request a review of AiB decision within 14 days of receipt of their notification of the decision

(g) On request for a review AiB should notify the other parties of the request and complete the review within 28 days of the request being received. AiB should notify all parties to the Trust Deed of the outcome of the review.

(h) In completing a review of their decision, AiB must either decide to uphold their original decision or amend their decision as if they were deciding an application under s184 (8) (e).

(i) Any Party to the Trust Deed can appeal AiB’s decision under (h) to the Sheriff within 14 day of being notified of that decision on a point of law only. The Sheriff’s decision is final.

(j) The status of a Trust Deed should not be amended on the Register of Insolvencies until the review and appeal process has been completed or the time allowed to seek a review or appeal has lapsed.

Insert after s184 (8)

(8A) A Money Adviser may make an application on behalf of a Debtor to AiB for the early termination of their Trust Deed (without a discharge from their liability to repay their debts), if that Money Adviser is a Money Adviser for the purposes of section 9.

  • The Application will be in the form of a statement (being a statement in such form as may be prescribed for the purposes of this paragraph) and must be sent to the Trustee in the Trust Deed at the same time as the application is made to AiB and specify:
  • The Name of the Money Adviser and their employers contact details
  • The reasons why they believe the Debtor should be released from their Trust Deed, including any information they believe relevant as to how the Debtor entered the Trust Deed and how it has been administered
  • How the Debtor proposes to deal with their debts should they be released from their obligations under the Trust Deed
  • On receipt of the Application AiB must contact the Trustee and invite them to indicate within 28 days whether they support the Application and to make any representations they believe AiB should consider in determining whether to grant the application or reject it.
  • On being notified of the Application, the Trustee should have regard to the interests of general body of Creditors to the Trust Deed.
  • AiB should decide the application only after the Trustee has had 28 days notification of the application
  • In deciding the application AiB must either:
  • Grant the Application
  • Grant the application and issue a direction to the Trustee under section 179 (1)
  • Reject the Application
  • Reject the application and issue a direction to the Trustee under section 179 (1)
  • AiB’s decision on the application must be notified to the Trustee, creditors and the Debtor with a statement as to the reasons for their decision and a copy of any direction issued
  • Any party to the Trust Deed can request a review of AiB decision within 14 days of receipt of their notification of the decision
  • On request for a review AiB should notify the other parties of the request and complete the review within 28 days of the request being received. AiB should notify all parties to the Trust Deed of the outcome of the review.
  • In completing a review of their decision, AiB must either decide to uphold their original decision or amend their decision as if they were deciding an application under s184 (8A) (e).
  • Any Party to the Trust Deed can appeal AiB’s decision under (h) to the Sheriff within 14 day of being notified of that decision on a point of law only. The Sheriff’s decision is final.
  • The status of a Trust Deed should not be amended on the Register of Insolvencies until the review and appeal process has been completed or the period allowed to seek a review or appeal has lapsed.
Increased use of Sheriff Officers By Scottish Councils is a Cause for Concern

Increased use of Sheriff Officers By Scottish Councils is a Cause for Concern

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New statistics, produced by the Accountant in Bankruptcy Office show that in 2018-19 Scotland’s Local Authorities increased the number of times they instructed Sheriff Officers to recover Council Tax debts by over 15%, adding, it is believed, up to £30 million in Sheriff Officer fees to  those in debt.

Also,  the type of action the Local Authorities have been instructing Sheriff Officers to take appears to be focused on one particular type of enforcement action: Bank Account Arrestments, which many believe are a particularly harsh form of debt recovery. 

Bank Account Arrestments for Council Tax Increase by 21%

In 2018-19 there were 167,356 bank account arrestments by Local Authorities for Council Tax debts (up 21% on the 138,021 there was in 2017-18).

When a bank account is frozen, any funds that are held in the account that are above the Protected Minimum Balance of £529.90 are frozen, up to the level of the debt that is owed.

So if there is £1,000 in an account and £1,200 is owed, then all funds that are in the account that are above £529.90 are frozen. If only £200 was owed then the first £529.90 would be protected, the next £200 would be taken by the Sheriff Officers and the remainder of the balance would be returned to the bank account holder.

The problem is people are usually only left with the £529.90 and this frequently leaves them without enough money to pay their mortgage, rent, gas, electricity or to buy other household essentials such as food.

If the funds held in the account are below the Protected Minimum Balance of £529.90, then the Bank Account Arrestment fails, but the Sheriff Officers fees are still added to the debt and most banks will still add a £25 administration fee to the person’s account.

So for most, whose only income is social security benefits, and whose funds in their account are never above £529.90, the pointless arrestment plunges them more into debt.

In contrast to the sharp increase by Councils in their use of Bank Account Arrestments is their use of other types of arrestments, such as wage arrestments, (there were 71,835 in 2018-19, which only increased by 4% on the 68,858 there were in 2017-18).

Wage Arrestments are not as harsh as Bank Account Arrestments, as  although the first £529.90 per month is protected, the amount that can be taken after that is only a percentage of the remaining funds, based on a sliding scale, meaning people are not just left with £529.90.

The increased use of Bank Account Arrestments by Local Authorities is, therefore, an indication that they are opting to increase their use of one of harsher forms of debt recovery, even if it means forcing more people into hardship.

This is not a proportionate debt recovery strategy.

Increased use of Sheriff Officers to Recover Council Tax Debts

What the Scottish Diligence Statistics also clearly shows is that Local Authorities are now some of the most aggressive creditors in Scotland.

Whilst their use of Sheriff Officers increased by over 15%, other creditors (Banks, Credit Card Companies Etc.) saw their use fall by 42%.

What this suggests is whereas commercial creditors are not using coercive debt recovery tactics, possibly because they don’t consider it to be effective, Councils are increasing their use of it.

If the Commercial Creditors are correct and it is not an effective form of debt recovery, then Councils have to show why their increased use of it is, as in addition to causing hardship, it is significantly increasing the levels of debt that people owe. 

With nearly 90% of all legal debt recovery procedures executed by Sheriff Officers now being for Council Tax arrears, the picture that is being painted  is one where Sheriff Officers are almost exclusively working for Local Authorities.

The question has to be asked is this increased use in  the best interests of local authorities or is it in the best interest of those Sheriff Officer that advise them?

The figures also demonstrate, that contrary to claims that Scotland is better than the rest of the UK, where the over-use of Bailiffs has been criticized by bodies such as the House of Commons Treasury Select Committee, the situation here does not appear to be much better.

Local Authority Debt Recovery Strategies Need to be Revised

Scottish Local Authorities now need to revise their debt recovery strategies by increasing the amount they are investing in free money advice services, which are believed to have been cut by 45% between 2014-2017 and is now believed to be worth less than £11.72 million per year.

Contrast that with up to £30 million in fees it is believed Sheriff Officer action is adding to people’s Council Tax Debts each year.

In addition to this the Scottish Government need to accept some responsibility.

If they are going to allow Local Authorities to increase the level that Council Tax rates can be increased by next year, they must also ensure with that power comes the responsibility to ensure those who are most affected can access advice and assistance to help mitigate the worst effects of any hike.

This could be done by increasing funding for free money advice by introducing a Scottish Debt Advice Levy and also national best practice guidance for Council Tax Debt Recovery, that places an emphasis on ensuring Local Authority Debt Recovery departments work in collaboration with local advice agencies and current year council tax is prioritised over arrears.

The Scottish Government could also, as part of the Accountant in Bankruptcy’s review of Diligence, look at how bank account arrestments are working in practice.

In particular they could review whether the Protected Minimum  Balance of £529.90 offers sufficient protections and whether the process to recall or restrict a bank arrestment could be made more effective, by transferring the powers from the Courts to the Accountant in Bankruptcy, with a right to appeal to the Courts only on a point of law.

The Scottish Parliament could also take a leaf out of the House of Commons Treasury Select Committee’s book and independently launch an inquiry into the issue of Council Tax debt recovery.

Then again, the Scottish Government could just see through on its promise and reform local government taxation and introduce a more progressive model of Local Government funding.

The Accountant in Bankruptcy’s Shame: Bankruptcy Application Fees

The Accountant in Bankruptcy’s Shame: Bankruptcy Application Fees

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New Research carried out for the Accountant in Bankruptcy (AIB), has provided an invaluable insight into Scotland’s Minimum Asset Bankruptcy procedure (MAP).

Importantly the research has also provided the first real insight into how consumers find the application fees that are required for them to apply for bankruptcy.

The fees are charged by the Accountant in Bankruptcy and are £90 and £200 respectively for Minimum Asset and Full Administration Bankruptcies.

The research carried out by EKOS, an Independent Economic and Social Research Consultancy based in Glasgow, investigated the experience of people using bankruptcy as a means of dealing with their over-indebtedness and focused on Minimum Asset Bankruptcies in particular.

What are Minimum Asset Bankruptcies?

Minimum Asset Bankruptcies are a type of Bankruptcies that allow people who cannot afford to contribute to their bankruptcy to use an administrative lite version of the Full Administration Bankruptcy process.

In addition to not being able to contribute anything financially to their bankruptcy, applicants must also have debts of less than £17,000 and cannot own any heritable property, such as a home.

In 2018-19 of the 4,873 bankruptcies awarded in Scotland, 44% were Minimum Asset Bankruptcies.

The Application Fee

Ever since 2008, Scots who have applied for their bankruptcy have had to pay an application fee. 

No fee waiver is available for application fees, even if the applicants are on a low income or wholly in receipt of social security benefits, which is almost always the case in relation to those that use Minimum Asset Bankruptcy.

This is in stark contrast to the position prior to 2008 when a legal fee waiver was available for those in receipt of an income-based benefit.

The research found that of those surveyed over one third of those who applied for Minimum Asset Bankruptcies had to either borrow the money or apply to a charity for the fee to be paid.

The report also found that almost three quarters of those surveyed found that paying the fee was either “somewhat hard”, “Hard” or “Very Hard”.

The research also provided an insight into the reason people who use MAP became over-indebted in the first place.

Only 31% attributed their problem debts to overspending, with the remaining 69% attributing the cause to changes in their circumstances that led to financial hardship. Importantly, 62% attributed the cause to health problems.

Additional insight was also provided by the research that shows of those surveyed 77% said they suffered mental health problems, whilst 48% said they had mobility issues and 35% said they had physical health problems that affected their stamina, breathing or left them feeling fatigued.

Despite the research painting a picture of people that on the whole appear to be suffering from low incomes and were suffering financial hardship as a result of changes in their circumstances, and who were struggling with both physical and mental health problems, disappointingly EKOS does not recommend an abolition of the bankruptcy fee or the introduction of a fee waiver.

Why, is unfathomable, as it would appear the only reasonable conclusion that can be reached is the application fee for both Minimum Asset and Full Administration Bankruptcies is causing some of the most vulnerable financial hardship.

EKOS, does state in defence of the application fees:

“There is a clear rationale for the upfront application fee. It makes a contribution towards the administration cost associated with processing MAP bankruptcy applications and awards. Further, the decision to apply for MAP bankruptcy should not be taken lightly, and the fee helps people consider this formal debt solution more seriously. It has appropriately been pitched lower than that which applies to Full Bankruptcy”

However, such a conclusion can only be treated with some cynicism.

Conclusion

First, EKOS has no expertise in the area of debt and bankruptcy.

Second, access to debt relief is an access to justice issue. Prior to 2008, Bankruptcy was a court process and it was only removed from the Courts for administrative purposes. When it was part of the court process, fee waivers were available through the legal aid system. The nature of bankruptcy has not changed, an as such as a legal remedy, it should be available to people regardless of whether they can afford it or not.

Thirdly, the idea that people who are bankrupt are being forced to borrow money on the eve of their bankruptcy is highly irresponsible. Particularly as by their own admission and that of their  money adviser or insolvency practitioner, they cannot pay their debts as they fall due.

Fourthly, it is nothing short of cruel and inhumane to force people, many of whom are suffering mental and physical health problems, to go through a process many find difficult financially, and clearly causes many further hardships. This is particularly the case when you consider many of those applying for Minimum Asset Bankruptcies will be having some of their debts (council tax arrears, benefit overpayment, Universal Credit Advances) recovered from their benefits, and these will not be stopped until the bankruptcy application is made.  These people are, therefore, trapped between a rock and hard place of having debts recovered from their benefits, so they cannot afford the application fee, and cannot stop the deductions until they do.

Fifthly, it is a sad indictment that both the Scottish Government and the Accountant in Bankruptcy are knowingly relying on funds intended for charitable purposes to pay for their administration of bankruptcies, when in 2018-19 they distributed £18 million to creditors from bankruptcies, whilst recovering over £2 million in various fees they charge to bankruptcies themselves.

Sixthly, the cost of application fees is not just one borne by the bankruptcy applicant, their family and friends or charities, but also by the free advice sector who have to undertake the work of assisting clients to make applications to charities for bankruptcy fees.

Seventh, the argument that a fee has a cautionary effect on consumers, is absolute nonsense.

As EKOS research showed 76% of those surveyed only found out about the Minimum Asset Procedure after they spoke to a money adviser, so this idea that applicants would recklessly be making applications for bankruptcy if it wasn’t for the fee is nonsense.

Also, no bankruptcy application can be made without the assistance of a money adviser or insolvency practitioner, which provides important safeguards. This is strongly supported by the result from those surveyed on how they found the advice process, with high numbers of people stating they felt they were properly informed and advised of all options.

The simple truth is applications fees cause varying degrees of hardship for many very vulnerable people and the fee has no cautionary value, but acts a financial obstacle to people getting relief from their debt.

It’s appears obvious because of EKOS’s lack of experience in this area, few of these points were considered in making their recommendations and unfortunately means what is a good report, ends in a whimper.

Equally,  the fact that such weak arguments are made by the Scottish Government, whilst they blind themselves to the effects of their policies, is nothing short of dishonesty.

This is about money and it is about the Scottish Government being prepared to raise that money from some of the most vulnerable in society, even if it causes them suffering and even if they must beg and borrow to raise it.

That is morally bankrupt.

Questions for the Minister

Questions for the Minister

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Scottish Government Minister for Business, Fair Work and Skills, Jamie Hepburn, is due to give evidence to the Economy, Energy and Fair Work Committee on Tuesday, 17th September.

The evidence session will be to help the Committee further consider the Debt Arrangement Scheme (Scotland) Amendment Regulations 2019 and follows previous evidence that has been given by the Money Advice sector , the insolvency industry, credit unions and the Accountant in Bankruptcy.

So what line of questioning and what questions may the Committee want to take up with the Minister?

The first question that Mr Hepburn will most likely answer when he begins to give evidence is whether he is willing to withdraw the Regulations, to allow them to be amended, as the Committee has asked, before re-tabling them?

This would  be to allow the 20% Payment Distribution Fee to be split into a Payment Distribution  Fee, a Money Adviser Fee and a Debt Arrangement Scheme Fee.

Money Adviser Fee

Concerns have been raised about the lack of transparency in the Fee Structure by Citizen Advice Scotland, Money Advice Scotland and UK Finance (who represent over 250 Creditor organisations).

In addition  to this, on the 12th September, at a Ministerial meeting with Jamie Hepburn and the money advice, insolvency and creditor industry, it was brought to the Minister’s attention that the two largest Payment Distributors and providers of the Debt Arrangement Scheme, Stepchange and Carrington Dean, would support a short withdrawal to allow the Regulations to be amended and re-tabled. Citizen Advice Scotland also supported the Regulations being withdrawn and amended.

However, at the Ministerial Meeting, the Minister said he was not sure if he could do what he was being asked.

However, there is no question that he can.

Section 7 (1) (b) of the Debt Arrangement and Attachment (Scotland) Act 2002 makes it clear the Scottish Minister’s can make Regulations concerning the operation of the Debt Arrangement Scheme, and in particular s7 (2) (ub) gives them the powers to make Regulations relating to the remuneration of Payment Distributors and Money Advisers.

Furthermore, Regulation under 7 (y) the Scottish Minister’s can make regulations in regards tos

(i) the consideration of applications for the approval, or the variation, of a debt payment programme;

So the Minister can create a three pillar fee structure, that includes a Money Adviser, Payment Distributor and Debt Arrangement Scheme Administrator Fee.

This would ensure Free Sector Money Advisers have a statutory right to be paid, where they are not Payment Distributors, for all their cases regardless  of who the Payment Distributor is.

Some have suggested, however, this is not what the Committee has asked the Minister to do. Instead, they have suggested that a Money Adviser fee be created which allows Free Sector Agencies to be paid in every case.

This is not what my understanding is of what the Committee intended, judging from the context of the submissions that have been made and the evidence that has been gave up to date. If such an alternative interpretation of the wording is even possible, the letter is not dictating how the amended legislation be drafted.

It has not been suggested by any of the Stakeholders such provisions be created. There have been proposals for a Scottish Debt Advice Levy, but this would be over all Formal Debt Solutions and would require further consultation and legislation to cover Protected Trust Deeds, Sequestration and the Debt Arrangement Scheme. It could clearly not be done by these Regulations which only address the Debt Arrangement Scheme.

What has been asked for is the creation of a three pillar fee structure for the Debt Arrangement Scheme, which is possible and has the support of UKfinance and Citizen Advice Scotland. I expanded on this fully in my submission to the Committee on the 11th September, which can be read here.

Even Stepchange and Carrington Dean, (the two largest Payment Distributors) and providers of the Debt Arrangement Scheme, have said they would also support a withdrawal to allow the Regulations to be amended.

One can only imagine that those arguing for such an interpretation of the Committee’s letter are trying to conflate two different proposals, to confuse the issue in front of the Committee.

eDen Software – Are the AIB Ready?

During the AIB’s evidence session with the Committee, Richard Lyle with his experience of working in the Debt Recovery industry, questioned whether the AIB were ready to launch the new Scheme on the 4th November.

Dr Richard Dennis gave assurances they were and revealed they had spent £50,000 acquiring new Payment Distribution software that would allow them to become Payment Distributors.

The problem is, apparently the implementation of the software is behind schedule and beleagured with problems.

Currently, existing Payment Distributors are complaining the new system is causing them multiple problems and Sharon Bell of Stepchange, referenced this in her evidence to the Committee and how it is costing them money.

Apparently, eDen has no letters uploaded on it, some debts are missing, balances are wrong and it’s API connection, which allows it to speak to the software of other Payment Distributors, is not working.

Unsurprisingly, Dr Dennis didn’t mention these issues to the Committee.

Possibly he isn’t aware of them or the extent of the problem, otherwise you would have hoped he would have raised them with the Committee members when asked if the AIB were ready.

However, during his evidence session,  Dr Dennis also on numerous occasions misinformed the Committee that the average payment in the Debt Arrangement Scheme was £400 per month, when it is actually £170 per month.

Neither the Head of Policy or the Head of Trust Deeds and the Debt Arrangement Scheme corrected him during the evidence session, despite the fact they would surely have known he was mistaken, as it was in their consultation  document on returning fees to the free sector.

The real problem is they may not know how their Payment Distribution software is going to work when launched to deliver their own Payment Distribution Service.

Both Stepchange and Carrington Dean use their own software for doing payment distribution, but must also upload their information onto the eDen system, so although the fact the AIB’s system is not working will be an inconvenience for them, they will be still operating.

However, as eDen will be the Payment Distribution  system the AIB will use and they have never operated as a Payment Distributor before, questions must be raised in light of the concerns being raised.

This is a further cause for concern, as it is only by using the AIB as a Payment Distributor under these Regulations that the Free Debt Advice Sector has a right to be paid, but with that it appears may come a period of unnecessary disruption and potential reputational damage for those Agencies that use their services.

These problems also make it likely Stepchange and Carrington Dean will not immediately increase their take up of Debt Arrangement Scheme cases until these problems are solved.  This is probably another reason why they are happy if the Regulations are withdrawn for a brief period and then re-submitted.

Conflicts of Interest

Colin Beattie has also pursued a line of questioning with the AIB over the potential conflicts of interest with the AIB acting acting as both a Regulator and a Payment Distributor.

Possibly, in light of the above problems with the AIBs own eDen system, this brings this issue into sharper focus.

Dr Richard Dennis made the point in the evidence session, it is the Financial Conduct Authority that licences Payment Distributors.

However, as was explained by Kelly Donohue,  Head of The Debt Arrangement Scheme at the AIB, although it is the FCA who licences the Payment Distributors, it is the AIB who authorise them to work in the Debt Arrangement Scheme market and ultimately is they who police them.

You may be a FCA licenced Payment Distributor, but if you don’t have AIB approval, you cannot work in the DAS market.

So, how will AIB police Payment Distributors, if their own service and software is experiencing problems and costing the other Payment Distributors money?

It sounds like a conflict that could be a problem soon after the commencement of these Regulations and a few extra months delay to amend the Regulations may not be the worse thing in the world, as it will give the AIB a few more months to get their systems in order.

Existing Cases – Private Sector

Another issue that was raised at the Ministerial Meeting was the issue of existing private sector cases in the Debt Arrangement Scheme, where consumers are paying a private Debt Management Fee.

The new Regulations will mean in all new private sector cases it will no longer be possible for private firms to charge a fee.

However, for those existing cases, consumers will be tied into their existing fee contracts, many of which will see consumers pay £1,000’s more than they would if they had used a free sector provider.  For many this will mean paying for years more than if their scheme was under the new Regulations.

The problem is the new proposals will not apply to existing cases and the current law does not provide them with any mechanism for transitioning over  to the new fee structure.

This then creates the problem, that with 3-4,000 cases under the old Regulations, 1,000’s may want to stop paying their current Debt Payment Programmes to  get them revoked, so they can apply under the new Scheme.

Dr Richard Dennis even admitted in his evidence in nearly every case this would be in their best interests.

He also admitted the AIB had taken legal advice and that came back to say  applying the new fee structure to existing cases would be legal.

In light of that, would it not be wiser to have a slight delay to explore whether a further amendment should be made?

A quick consultation could run for creditors on this point, whilst the new free structure is amended and as Jamie Hepburn said himself at  the Ministerial Meeting, although consensus was important, it was what was best for  the Scottish people that was paramount.

  • Surely, no-one in Scotland having to pay a fee for the Debt Arrangement Scheme was in the public interest?
  • Surely, 3-4,000 people not having to make the impossible decisions as to whether they should keep paying their Debt Arrangement Scheme was in the public interest?
  • Surely, not having rogues targeting existing private sector cases, to encourage people not to pay their Programmes, so they can steal the cases and generate fees of 20% was in the public interest?

However, the simple fact is because of FCA Regulations, these private sector providers may have to give their own clients that advice, to stop paying their Debt Payment Programmes, as they are required to review cases annually, and at that point advise the client, where a solution is no longer the best one for them, what is the best solution.

Paying £1,000’s more than you need to, for years more than you have to, is hardly best advice, regardless of what the AIB say.

As I have already said, The AIB have a high level of tolerance when it comes to consumer harm. The FCA call deciding what is best advice, the “Granny Question”. What would you advise your Granny?

Few would advise them to keep paying £1,000s more than they need to for years more than is necessary.

Surely, generating and extra £1.5-2 million in revenue for the Free Debt Advice Sector, at a time of reduced funding and lack of capacity, so that 7,000 cases, that generate £15 million per year for creditors, are continued to be supported is in the public interest?

Jamie Hepburn conceded at his Ministerial Meeting with the Sector that the existing private sector cases were a problem and he would have to  take advice. He also said the purpose of these Regulations was not to provide anything other than a token amount of funding for the free advice sector.

However, clearly charities like Stepchange and private firms are not going to operate the DAS for a token payment, so clearly the Regulations are about funding someone, as no-one will access the Debt Arrangement Scheme unless services are paid for.

Why would the Scottish Government want to create a scheme of “winners” and “losers” in the advice sector where the Free Debt Advice Sector are losers?

Dr Richard Dennis also said although amending the fee structure for existing cases was legal, applying it would be problematic.

First there is the issue of current Payment Distributors having to accept a new fee structure.

For two of the largest, however, 5% would be an increase on their current fees.

For Stepchange, for those cases they act as Payment Distributors for other Money Advisers, they would see their PD fee fall from 8% to 5%, but for their existing 3,500 cases, they would see their current 8% fee increase to 20%. They would be net winners overall.

Another huge benefit for all these providers administratively, is all cases would be on the same fee structure. Having some cases on one fee structure and others on another is a problem in itself.

For those creditors that would see their returns being varied, such variations are normal in Protected Trust Deeds and Sequestrations. Also they would be helping to support Free Debt Advice, which they nearly are all on record stating they support and accept they need to pay more for.

There is a further point. Most of these big lenders, who will be impacted, have for years operated a Fair Share Scheme for providers like Stepchange and Payplan and have been paying for Debt Management Plans for years. That Scheme was never extended to the Debt Arrangement Scheme or beyond those two providers, so despite the FCA taking the view that the DAS was the superior product, many have discriminated against Scottish consumers and benefited as a result.

It is only fair that discrimination ends for all existing cases going forward and I cannot think of a more noble reason for the Scottish Government to act in the public interest.

In Summary

The Debt Arrangement Scheme (Scotland) Amendment Regulations are widely supported Regulations, but Regulation 4 is flawed and that is widely recognised across the Sector.

It has many much desired  features , from emergency payment breaks and automatic approval of plans and variations, but we have to ensure these apply to existing cases, as well as new cases; and if they do, why not the fee structure? Effectively all cases need to have their terms varied.

The Fee Structure can be amended by Jamie Hepburn and calls to do so are fully supported by the largest Payment Distributors and providers of the Debt Arrangement Scheme in Scotland.

A short delay is not only supported by the Sector generally, but with the problems with the eDen software, probably wise, and until those problems are ironed out, any delay is unlikely to have a significant impact. We won’t see any dramatic increase in the uptake of the Debt Arrangement Scheme until the software issues are sorted.

It is for Jamie Hepburn to decide what course of action he takes on Tuesday, but if he accepts the Committee’s suggestion, it will be welcomed and supported across the Sector.

Committee Calls on Minister to Review Debt Arrangement Scheme Regulations

Committee Calls on Minister to Review Debt Arrangement Scheme Regulations

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The Economy, Energy and Fair Work Committee of the Scottish Parliament has written to the Minister for Business , Fair Work and Skills, Jamie Hepburn to express their reservations about the Debt Arrangement Scheme Amendment (Scotland) Regulations 2019 (see letter here).

In the letter, which follow on from the Committee taking evidence from Money Advisers, Insolvency Practitioners and Credit Unions, the Committee has expressed concerns that the Regulations were laid too early.

They also express their concerns that the Regulations do not outline how fees generated from the free advice sector will be returned to them.

The Committee’s concerns come despite both the representatives of the Institute of Chartered Accountants of Scotland and Money Advice Scotland, David Menzies and Yvonne MacDiarmid, confirming to the Committee that the Regulations should be allowed to pass, whilst expressing their concerns in their Organisation’s written submissions.

Stepchange, who described themselves as “Winners”, also believed they should be allowed to pass, despite the concerns raised that the Free Advice Sector, like Citizen Advice Bureaus and Local Authority Money Advice Services would be losers.

All those who gave evidence in the first panel session expressed their concern with Regulation 4 and Mike Holmyard, from Citizen Advice Scotland, myself and Angela Kazmierczak called for the Minister to amend them first.

I believe that position is the one shared by the vast majority of face to face, front line money advisers, Creditors and Insolvency Practitioners, despite the views expressed by those who supported them being passed.

So what are the Debt Arrangement Scheme Scotland (Amendment) Regulations 2019?

The Regulations amend Scotland’s formal debt repayment scheme, the Debt Arrangement Scheme. They contain a number of provisions, widely welcomed across the debt advice, personal insolvency and creditor industry that will make it easier for people to apply to the Scheme.

They will also make it easier for people in the Debt Arrangement Scheme to miss payments when they suffer unexpected financial difficulties and allow them to be able to miss up to two payments a year for such reasons, without defaulting on their programme.

What the Regulations also do, however, is increase the costs of the Scheme to Creditors by over 100% from a maximum of 10% to 22%.

These increased costs are to ensure:

  • No one has to pay a private sector fee for entering the Scheme; and
  • The full costs of the Scheme, including the costs of being given money advice, are borne by the Creditors, rather than just the cost of payment distribution which was the previous position

Concerns about new Fee Structure?

Despite the positive nature of the Regulations, serious concerns have been raised in relation to:

  • The fact they were brought forward too early before a consultation on returning fees to the free advice sector was concluded;
  • How the new fee structure introduced gives 20% of the 22% fee to the Payment distributor and does not include any express provision in the Regulations for any funds to be refunded to the money advice agency;
  • How money advice agencies will be paid, if at all, and how much.

Speaking about the Fee Structure the Economy, Energy and Fair Work Committee, in its letter to the Minister, has expressed its concerns that the result of the consultation on returning fees to the free sector should have been released before the Regulations were laid in front of Parliament.

The Committee has also called on the Minister to consider creating statutory provision on funding such free advice agencies.

Finally, the Committee has expressed its concern that a new system of consumers having to choose their own payment distributor has no merit and will create unnecessary work for advice agencies and present consumers with impossible decisions for them to make. Instead they have suggested the Minister considers continuing with the “Taxi Rank” system where cases are allocated on a rotational basis from a panel.

The Committee has also asked the Minister to indicate whether the Scottish Government will give an undertaking to carry out a review of all debt options in Scotland.

What can the Minister do?

The Minister, Jamie Hepburn has a number of options.

He can do nothing, and wait and see if the Regulations will be approved despite the Committee’s concerns. This is a risky option, as two previous Regulations, drafted by the Accountant in Bankruptcy, have in recent years been withdrawn (The Bankruptcy Fees (Scotland) Regulations 2016 and The Common Financial Tool (Scotland) Regulations).

If the Committee chooses to write a Report recommending the full Parliament rejects the proposals, this would be extremely damaging and display an unwillingness to listen to the wider advice, personal insolvency and credit industry, including also the concerns of the Economy, Energy and Fair Work Committee.

Alternatively, he could withdraw the Regulations, amend Regulation 4 and re-table them, which is likely to satisfy the Committee and also ensure they would pass after 40 days with wide approval of the Sector.

Thirdly, he could withdraw them, not amend them and not re-table them and say they will be redrafted at a later date, after possibly a wider review of all debt solutions and the introduction of Breathing Space and the UK’s equivalent Statutory Repayment Scheme, which is not likely to commence until 2021.

The danger with this strategy, is first it in effect is a third Regulatory failure by the Accountant in Bankruptcy and must lead to questions about the suitability of some of those in senior positions to continue in their current roles.

It also leaves organisations like Stepchange with no viable funding model for continuing to provide the Debt Arrangement Scheme, as they claim the current 8% they receive is not sufficient to cover their costs.

It also leaves a free advice sector facing a funding crisis with no further sources of much needed revenue.

It also means, in all likelihood the Scottish Scheme, the First in the UK, and the model the UK model is based on will end up becoming an imitation of the UK Breathing Space and Statutory Repayment Scheme.

Ultimately, it would also seem like the Accountant in Bankruptcy are throwing the baby out with the bath water, and is unlikely to restore any goodwill in the relationship between them and their stakeholders, something that is in short supply at the moment.

A final option for the Minister is to ask that the Regulations be passed and promise to bring further regulations forward quickly to explain how free advice agencies will be funded.

However, the problem with this, is it would be a further set of Regulations, commencing at a later date, in a Debt Arrangement Scheme landscape littered with Regulations amending the Debt Arrangement Scheme (Regulations) 2011.

That would be an administrative nightmare for qualified solicitors, never mind money advisers. It would be quicker and cleaner to amend Regulation 4 now.

What should the Minister do?

What the Minister should do is bite the bullet, accept that there is a broad consensus on the Regulations across the Sector (something rarely achieved) and that by withdrawing them and retabling them with Regulation 4 amended, they would likely pass without contest in 40 days.

Those amendments should include:

  • Reintroducing the system of allocating free sector cases using the “taxi rank” system and a panel;
  • Allowing the fees to be applied to all current cases using the variation process to increase funding to free sector advice agencies;
  • Introducing a fee structure of:
    • Payment Distributors – 5%
    • Money Advisers – 15%
    • Debt Arrangement Scheme Administrator – 2%

He should then give an undertaking to carry out a full review of all Scotland’s Debt Advice solutions.

It would put Jamie Hepburn in a strong position, strengthening Scotland’s debt laws at a time when problem debt is on the rise and everyone across Scotland is facing a financially uncertain time. What is there not to like?

It would also provide an immediate injection of new funding into Scotland’s free advice agencies at a time of when funding is at crisis levels and would be a positive compliment to the launching by the Scottish Government of its Debt Advice Route Map, later this month.