Debt Arrangement Scheme (Scotland) Amendment Regulations 2019

Debt Arrangement Scheme: What is Changing?

6th October 2019 2 comments

The Scottish Debt Arrangement Scheme (DAS), the UK’s only formal debt repayment plan, is intended to help people struggling with problem debt and will be changing from the 4th November 2019.

The changes, that will come into force are contained in the Debt Arrangement Scheme Amendment (Scotland) Regulations 2019, and ARE intended to introduce a number of improvements to the Scheme.

Private Management Fees to be Abolished

The first of these change are that no-one who applies to the Scheme will have to pay a fee, even if they apply to the Scheme through a private debt management firm or insolvency practitioner.

In actual fact, charging a fee to the consumer in relation to the Scheme will be illegal after the 4th November 2019.

Automatic Approval

Second, whenever someone makes a proposal to the Scheme, it will now be automatically approved, even if some of the creditors object to it, providing they don’t have more than 10% of the total debt owed.

Where they are owed more than 10% of the debts in a proposal, the proposal will go to a fair and reasonable test administered by the Debt Arrangement Scheme Administrator, who will decide whether or not to approve the programme. However, with 96% of all applications being approved by automatic approval or the fair and reasonable test, it is anticipated even if more applications are not approved, those that are, will be approved quicker after the change are introduced.

Changes in Circumstances

Thirdly, where someone is already in a Debt Payment Programme, the Debt Arrangement Scheme Administrator, must approve that variation if all the creditors agree to it; or the change in the payments will mean the Programme will finish sooner than was originally proposed.

Payment Breaks

Finally, it will now also be possible for those in the Debt Arrangement Scheme to request up to two payment breaks each year (each break cannot be for more than one month), if they experience an unexpected crisis. Where they experience such a crisis, it will be for their money adviser to approve the payment break.

Questions for the Minister

14th September 2019 0 comments

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, 17^th 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 12^th 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 4^th 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

6th September 2019 0 comments

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.

Lenders need to Pay Fair Share for Debt Advice

26th August 2019 0 comments

*First published in the Herald under the title Free debt advice must be properly funded.

The announcement that the debt charity, Christians Against Poverty (CAP), are now unable to take on new clients until after the new year is a body blow for the free debt advice sector in Scotland.

Although CAP have not attributed a lack of funding as their problem, the reality is many of the advice agencies left to serve the clients CAP would have saw, are facing themselves an existential threat from a lack of funding.

The largest funders of free debt advice in Scotland has always been local authorities, but facing their own challenges, they cut their funding for free debt advice by 45% between 2014 – 2017(Improvement Service).

With both consumer and council tax debts now on the rise, the need for the Scottish Government to form a comprehensive strategy for funding free debt advice is greater than ever.

Some steps have been taken by laying new Regulations in front of the Scottish Parliament. These propose increasing the amount creditors pay from 10% to 22% when someone enters into the Debt Arrangement Scheme (DAS), Scotland’s formal debt repayment plan. The hope is some of these funds will be returned to free advice agencies.

However, the proposals are inadequate as they will only apply to new cases, and don’t address the issue of how 7,000 existing cases, being operated by Citizen Advice Bureaus and Local Authorities, will be paid for.

These cases return £15-20 million each year to banks, credit card companies, local authorities and HMRC, but are dependent on advice agencies being adequately funded.

If the Scottish Government, however, were to amend these regulations, so the new fee structure could be applied to existing cases, an extra £2-3 million could be raised immediately for free debt advice in Scotland.

However, it is not enough for the Scottish Government to look at just raising funds from one solution, as that creates the risk that solution may be mis-sold by unscrupulous firms and services in order to generate fees. They must ensure advice agencies are properly funded regardless of the solutions the client uses; or indeed doesn’t use.

The emphasis must be on ensuring consumers receive best advice.

Another funding model I have proposed is to create a Scottish Debt Advice Levy that can be applied to all formal debt solutions.

A recent Working Group established by the Scottish Government considered this proposal and recommended the Scottish Government should consider it.

The idea is the Levy would aim to recover some of the costs of free debt advice from those who benefit from it, namely the creditors. In a sense applying a polluter’s pay or fair share model.

With £74 million being paid last year to lenders via formal debt solutions, even after private insolvency firms and the Accountant in Bankruptcy took tens of millions in fees, the levy would aim to recover some of the costs of the free sector, as presently they receive nothing.

Such a model would also benefit creditors, as evidence shows when free debt advice is under capacity, for every £1 invested, between £4 and £9 is returned to creditors.

Even a 5% Levy, therefore, would not only help fund free debt advice in Scotland, but help return tens of millions to creditors each year.

The truth is there is no commercial reason for not funding free debt advice properly; and significant political reasons why the public purse should not bear a disproportionate burden in relation to the cost.

The Debt Arrangement Scheme (Scotland) Amendment Regulations 2019

20th July 2019 0 comments

The Debt Arrangement Scheme (Scotland) Amendment Regulations 2019 broadly propose to do four things:

First, they will increase the fee’s that are charged to creditors from a maximum of 10% to 22%;
Second, they will amend who can act as a Payment Distributor (PD) with a view to encouraging greater private sector involvement in delivering the Scheme and allow the Accountant in Bankruptcy to become a PD;
Third they will make several changes to how Debt Payment Programmes (DPPs) under the Debt Arrangement Scheme (DAS) are administered, with a view to streamlining the process;
Finally, they will ban any private sector fee being charged to the consumer for the provision of a DPP under DAS.

I propose to address only point 1, as I have no issues with the other three points.

My concerns with the increased fee and model for applying it are:

The proposed fee structure is not transparent, fails to acknowledge the role of the money adviser in the process and places at a disadvantage money advice services, which are not payment distributors, such as Citizen Advice Bureaux, Local Authorities and small independent insolvency practitioner firms and their clients;
The fee structure will likely result in a consolidation of the market into the hands of two or three high volume providers, reducing competition and choice for consumers not only in who they can access the service through, but how they access it;
The proposed fee structure provides no benefits for anyone, other than the Accountant in Bankruptcy (AIB), raising the question why it was chosen when a more obvious structure would have allowed for a money adviser fee;
The funding model proposed is one that incentivises providers to supply a specific solution and creates a risk provider’s will be rewarded for providing inappropriate solutions, increasing the risk of consumer harm.

I would ask that these Regulations are rejected, to allow the fee structure to be restructured to allow a “Money Adviser Fee” and that the Regulations specify what both the “Money Adviser” and “Payment Distribution” Fee should be.

Fee Structure

The proposed fee structure is not transparent and hides within the Payment Distribution Fee the cost of providing money advice services. It is the fact the cost of providing money advice is being transferred to creditors that is justifying the increase in the cost to creditors from a maximum of 10% to 22%.

Such a fee structure will be detrimental for Citizen Advice Bureaux, local authorities and small insolvency practitioner firms who do not act as payment distributors and their clients. These providers, if not payment distributors, will have no legislative right to charge a fee and, therefore, have no legal way to recoup their costs, unlike large volume providers like Stepchange, who through the payment distribution fee will be able to recoup their advice costs.

It acknowledged the AIB have said they will redistribute funds back to public sector when their clients choose them as their PD. It is not, however, specified in the regulations, how much that will be or by what means it will be returned.

However, it should be noted that the decision as to what Payment Distributor is appointed is legally the consumers, as the PD works for the client and not the money adviser. Where the consumer chooses to appoint a PD other than the AIB, then the money advice agency has no statutory right to be paid by the PD.

A similar problem exists for small insolvency practitioner firms, who do not have the means of the capacity to provide a payment distribution service, in that they will be required to negotiate with other firms a share of the payment distribution fee when they appoint them their cases. By virtue of the fact Payment Distributors will be larger and likely the competitors of small firms, there is a strong danger the fee structure will distort the market and act as a barrier to small independent providers entering or remaining in the market.

If the purpose of these regulations is to increase greater take up of the Debt Arrangement Scheme, it is likely these changes will result in a decline in face to face services, which will have no benefit for the consumer or the creditors, as the volume producing, call centre providers will continue to charge 20% of all funds distributed.

The only beneficiary of this fee structure is the Accountant in Bankruptcy, as it pressurises public sector providers to “encourage” their clients to use the AIB payment distribution services for reasons of self-interest and will allow the AIB to acquire a significant market share of payment distribution services, which is currently being provided by the private sector.

It also means the AIB is entitled to the 20% and it is for the AIB to determine how much is returned to the free sector and by what means it is returned.

A more obvious, and transparent, fee structure would have been to have three components to the fee structure:

A Payment Distributor Fee;
A Money Adviser Fee; and
An AIB Administration Fee

This is the model that the UK Government is proposing for the UK statutory repayment plan scheme. It is a more obvious fee structure, as it recognises the different roles in the Debt Arrangement Scheme.

If such a fee structure was adopted in Scotland, it could specify in the Regulations what the fee for each component should be.

Such a structure would have no detrimental effect on the creditors, as they would still pay a maximum of 22%; it would ensure consumers are truly free to choose the payment distributor of their choice; and it would cause no detriment for large volume providers like Stepchange and other private sector providers. They would still receive the full 20% as providers of both money advice and payment distribution services. In fact, they would arguably benefit from such a model, as consumers using other free sector providers could appoint them as their payment distributor and the free advice agency would have a statutory right to recover their costs from the case.

It would, however, impact on the Accountant in Bankruptcy, as they would only be able to charge the administration fee and the payment distribution fee, where they act as a payment distributor. They would also be forced to deliver their payment distribution services for a cost that would be capped in legislation, which is the position that every private sector payment distributor has been in since 2004. It would, however, be of huge benefit to local, face to face services as it would ensure they have a statutory right to recover some of their costs.

The Risks of a Product-Related Incentivisation Scheme

I fully accept there is a need to look at how the provision of free money is funded in Scotland, particularly in times of the reducing availability of public funding.

I believe an important part of how money advice is funded going forward, should contain an element that is based on a “polluters pay” or “fair share” model. That is creditors should be asked to contribute to the funding of free money advice services in Scotland.

My preference is for a Scottish Debt Advice Levy, that could be applied fairly across all creditors in all formal debt solutions and distributed to all free sector providers of advice, regardless of what solutions their clients use and what the demographics of an advice agency’s client group is. I expand on this idea at the end of my submission.

However, there is an inherent risk for consumers and creditors in adopting a funding model that incentivises organisations to provide one solution over others. It creates a risk of mis-selling and that vulnerable people become commodities to be traded for commission.

These regulations include no measures to mitigate against that risk and there was little or no discussion of the risk in the DAS Regulatory Working Group.

The AIB, as a regulator, has not shown itself to be an effective regulator in relation to other markets and has displayed what I would argue is a high level of tolerance when it comes to consumer harm.

Funding of Free Sector Advice

The current funding of free money advice in Scotland can be categorised as coming from three main sources. These are:

Local Authority Funding;
FCA Debt Advice Levy Funding;
Fair Share Scheme Funding;

Local Authority Funding

Local authorities are significant creditors because of council tax arrears, but also the largest funder of free money advice services in Scotland, primarily through local authority services and Citizen Advice Bureaux.

However, as has been reported by the Improvement Service this funding has fell by 45%, between 2014 and 2017 (2014-15 £21m; 2015-16 £13.3 m; 2016-17 £11.72 m) This trend is continuing at a time when Council Tax bills are again on the rise and arguably has contributed to the fall in the take up of the Debt Arrangement Scheme over the same period.

FCA Debt Advice Levy Funding

This funding is raised across the UK by the FCA from consumer credit lenders. However, no funds are raised from utility firm providers, HMRC or telecommunication firms, who are all significant creditors, but contribute little to the cost of providing free money advice. The Scottish share of this Levy has now been devolved to the Scottish Government since January 2019.

Fair Share Funding

This is operated by the central clearing banks, for Debt Management Plans, which involves two providers being allowed to retain a percentage of any funds ingathered from repayment plans (believe to be around 10-11%)

The only providers who benefit from this are the debt charity Stepchange (who raised £42.8 million in 2017 from DMP fees); and Totemic (Payplan), a private company (which raised £12.3 million in 2017 through DMP fees). No other free sector provider benefited from this source. This Scheme is often criticised as some believe it incentivises the delivery of only one solution and leads to criticism that solution is preferred over others for clients for reasons of self-interest.

Scottish Debt Advice Levy

In 2017-18, £74.1 million was the net amount distributed to creditors through Scottish formal debt advice solutions, after the AIB, private Insolvency Practitioners and Payment Distributors took their outlays, expenses and fees.

Of that £14.2 million was from sequestrations; £22.3 million was from Protected Trust Deeds; and £37.6 million was from Debt Payment Programmes.

I don’t have the complete figures for what was taken in fees, outlays and expenses, but have gathered what I can from the AIBs Annual Report.

The AIB paid insolvency practitioners through their agency scheme £5.1 million for sequestrations; they also ingathered £12.3 million in fees for themselves (although not all from cases). As Payment Distributors charge anything from 4-8% for their services, they would have taken anything from £1.5 million to £3 million.

In addition to that of the £60.4 million that was ingathered in Protected Trust Deeds in 2016-17, only 37% was paid to creditors in the form of dividends (£22.3 million) meaning £38.65 million was taken in fees, outlays and expenses (some of which was payable to the AIB).

As of the end of the 2017-18, however, there were 12,924 live DPPs. Currently there is approximately 7,000 public sector active cases in DAS (roughly 54% of all cases). As a percentage of the total sums distributed in 2017-18 this equates to public sector cases generating roughly £20.3 million for creditors.

These are cases, still actively being managed and worked on by largely local authority funded services (including CABx), but which have saw a 45% cut in their funding between 2014-18

The amount returned to those agencies from these cases in 2017-18 was £0.00.

The current DAS Regulations do not propose the new fee structure would be applied to these historic, but live cases, but advice agencies will continue to work on them.

If the new fee structure proposed for DAS was applied it would generate an extra £3 million per year in fees and with no payment distributor currently charging more than 8%, would mean roughly half of that could be distributed to the agencies managing the cases.

However, an alternative funding model would be to augment existing funding sources of the free sector by creating a Scottish Debt Advice Levy that could be applied to all funds ingathered into formal Scottish Debt Advice Solutions.

Even a levy of 10% applied to just the net amount distributed to creditors could generate an extra £7.4 million for free advice providers.

Such a levy would have the advantage that it would also be applied to all creditors, including local authorities, utility firms, telecommunication firms, HMRC, and consumer credit firms. It would also acknowledge the vital role that local authority money advice services, law centres and Citizen Advice Bureaux play in providing the vital infrastructure that supports Scotland’s formal debt solution framework.

It is also likely to increase returns for creditors, as it is widely acknowledged that at time of under capacity, which is the current situation for free money advice services, investing in money advice services has a multiplier effect of returning between £4-9 to creditors for every £1 invested. This is evidenced by the fact DPPs alone, administered by publicly funded advice agencies, are already generating more for creditors than the agencies themselves are receiving in funding.

If Carlsberg Drafted Legislation (it wouldn’t have drafted this)

16th June 2019 0 comments

It shouldn’t come as a surprise, but less than six months after the car crash that was the Common Financial Tool (Scotland) Regulations 2018, the Accountant in Bankruptcy are back at the legislative wheel with the Debt Arrangement Scheme (Scotland) Regulations 2019, displaying all the same hubris and poor judgement they did with the 2018 Common Financial Tool Regulations.

The new Regulations are the Accountant in Bankruptcy’s latest attempt at trying to improve the Scottish Debt Arrangement Scheme.

However, it’s not their first attempt, with Regulations having previously been laid in 2004, 2007, 2009 (withdrawn), 2011, 2013, 2014, 2015, 2018 and now 2019.

However, the proposals contained in the 2019 Regulations are likely to be more far reaching than all previous proposals contained in earlier Regulations (and most likely to lead to unintended consequences).

Of all the Debt Arrangement Scheme Regulations, these ones warrant, more than any other, the robust scrutiny of the lead Parliamentary Committee when it considers them.

What’s in the Debt Arrangement Scheme (Scotland) Amendment Regulations 2019?

What they propose are:

Statutory fee changes that will increase the cost to creditors from a maximum of 10% to a standard 20%; and will allow everyone who needs a Debt Payment Programme to access one for free, with all private sector money advice fees to be abolished;
Changes to the role of the Accountant in Bankruptcy, to allow them to become a Payment Distributor for the Debt Arrangement Scheme, to administer payments for free sector cases; and
Finally, to introduce administrative changes that are likely to streamline the process for people once they are in the Debt Arrangement Scheme

Most of these proposals have broadly been accepted by a wide variety of Stakeholders across the sector, from Creditors, Insolvency Practitioners, Money Advisers, Debt Charities and Credit Unions.

So what is the problem?

Well, as always, the problem is in the detail, which is where the unintended consequences arise and the fact the Accountant in Bankruptcy chose to lay the Regulations whilst a consultation on the details was still ongoing (see here), meaning none of the feedback from that consultation will ever find its way into the Regulations.

The problem is also the Accountant in Bankruptcy chose to lay the Regulations just over two weeks before the Scottish Parliament goes into recess, which inevitably will curtail the ability of the lead Parliamentary Committee to scrutinise the Regulations; repeating what they did when they laid the Common Financial Tool (Scotland) Regulations 2018 (which eventually were withdrawn twice, before being abandoned).

Finally, it’s the fact the model the Accountant in Bankruptcy have adopted, which was never agreed, is one that places no value on the provision of money advice in the Debt Arrangement Scheme and allows for no statutory fees to be charged for that service.

This is a model that will serve the AIB’s own interest, allowing them to charge 20% on all sums paid through Debt Payment Programmes, where they act as a payment distributor, with no statutory obligation on them to refund any specific percentage back to the free sector.

Nor will there be any regulatory provisions on how those sums are refunded.

Considering this is what the current consultation relates to, laying the draft regulations now is seen, by many, as an act of bad faith on the part of the AIB, and sharp practice. It basically, puts them, and not the Regulations in charge of how much Citizen Advice Bureaux, Local Authorities and Independent Advice Agencies receive, and who receives it.

It’s a bit like being asked to a discussion with another party, only for them to then break off the discussions prematurely and take their own preferred course of action, regardless of what you say.

It’s also a new low for the Accountant in Bankruptcy, an agency that has a reputation for not listening to its own consultations, in that it now isn’t even waiting for them to finish.

If anything is likely to damage already damaged relations with Stakeholders, this is it.

It is also outrageous that of the three service providers that exist in the Debt Arrangement Scheme: The DAS Administrator (The AIB), The Payment Distributor and the Money Advice Provider, the only one whose work has no value represented by a statutory fee is the money advice provider (bizarre as it’s a remedy provided by money advisers).

Without there being a statutory fee for Money Advice, ultimately it must be questioned, who the money adviser is working for: the client or the Payment Distributor? It is not surprising such nuances are lost on an organisation that fundamentally has a debt collectors mentality.

There is no question there was broad agreement across the sector on the big points in these Regulations, but the model that has been adopted by the Accountant in Bankruptcy has all the hallmarks of previous AIB legislative errors.

It is poorly thought out, will likely lead to abuses in the markets (something the AIB as a regulator have shown themselves to be unwilling or unable to address in other markets) and will likely result in issues arising in futue about whether the AIB is returning enough funds to the free sector, or feathering their own nests (it’s a clear conflict of interest to allow a government agency to draft legislation which builds in big financial rewards for themselves).

What Next?

The problem is nothing much is next.

The Scottish Parliament will go into recess on the 30^th June. The Scottish Government’s consultation on the How Funds Should be refunded to the Free Sector will continue to the 20th August, (but don’t be surprised if there is a poor response to that in light of the fact the Accountant in Bankruptcy have already chosen to lay the Regulations).

When the Parliament returns the Economy, Energy and Fair Work Committee will have limited time to receive written submissions (because the AIB’s decision to lay the Regulations 2 weeks before the Parliamentary Recess), consider them and then decide whether they want to take oral evidence.

If they choose to, evidence sessions will need to be scheduled within the limited time available after the 1st of September.

What should Happen?

What should happen is the Minister, Jamie Hepburn should advise his Civil Servants in the Accountant in Bankruptcy, he is withdrawing the Regulations until they return to the discussion table and complete the current consultation.

He should also instruct them that there needs to be a division of fees between the Payment Distributor and the Money Adviser and the free advice sector fee needs to be put on a statutory footing.

Advice agencies also require a statutory right to be paid the fee by the payment distributor in the legislation.

If he won’t do that, then we can only hope the Economy, Energy and Fair Work Committee will send them back to the table.