economy energy and fair work committee
MSP Case Study on Trust Deed Raises Questions
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.
Proposed Reforms to Trust Deeds
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.
Protected Trust Deeds – Is there a Future?
This is a submission I have made to the Economy, Energy and Fair Work Committee in response to their call for evidence on Protected Trust Deeds.
I have extensive experience of Protected Trust Deeds (PTDs) as a Money Adviser and have previously been employed as a Senior Manager in the personal insolvency industry and was also employed in the Republic of Ireland in 2015 as Personal Insolvency Practitioner.
In 2016-17 I was also employed as a Project Manager with Govan Law Centre with their Personal Insolvency Law Unit, which involved taking on problematic cases where people were in Protected Trust Deeds and providing people with advice and assistance.
During my time in that role we highlighted the alarming failure rates of some Personal Insolvency Firms, with some Firm’s having failure rates as high as 88% for Protected Trust Deeds. Govan Law Centre also called for action by the Scottish Government and The Accountant in Bankruptcy (AIB). That call was ignored, and no action was taken.
The History of Protected Trust Deeds
Trust Deeds historically are a creation of Scottish solicitors and date back to the 19th century.
A common law solution, based on Trust Law, they were created as an alternative to sequestration, to allow people struggling with debt to voluntarily enter into arrangements with their creditors. Trust Deeds, however, required all creditors to agree to them and did not include any provisions for debt write off.
In 1985, PTDs were created to address some of the shortfalls of Trust Deeds, by introducing a statutory process that allowed them to become protected. This process involved the appointment of a licenced insolvency practitioner. There was also a voting procedure introduced where two-thirds of creditors had to agree before a Trust Deed could become protected.
In turn, where a Trust Deed was protected, the Trust would propose, after 3 years normally, the consumer would receive relief from their debts.
Between 1985 and 1993, there was almost 25,000 Protected Trust Deed proposed, but less than one percent became protected. This was due to non-engagement by creditors, which meant the requirement of obtaining creditor agreement was never achieved.
However, as failure to obtain protection constituted apparent insolvency (which was pre-requisite for a consumer to apply for their sequestration), failed Trust Deeds became an important route for consumers to enter bankruptcy, and over the same period, there were 24,861 Trustee petitions for sequestration.
In 1993, the Bankruptcy (Scotland) Act, changed the voting rules for PTDs, so creditors with one-third in value had to object before it failed.
Between 1993/94 and 2003/04, almost 24,566 Trust Deeds were protected. Numbers increased over the following decade with the numbers peaking in 2009 with 9,188.
Use of Trust Deeds by Free Sector
PTDs were widely used by the free money advice sector up until 2010.
Prior to then, free money advice agencies referred cases to private insolvency firms (as only private sector firms can do Trust Deeds).
The perceived advantage of a PTD was it was easy to access and did not require the client to prove apparent insolvency, which they had to if they wanted to petition for their own sequestration.
This was difficult to do and often relied on creditors taking legal action, meaning consumers were often unable to access bankruptcy and would have been left in debt limbo if it had not been for PTDs.
Trust deeds were also not viewed as having as damaging an effect on people’s credit rating.
Prior to the credit crunch, for example, it was common for people in PTDs to be able to re-mortgage and release equity, so they didn’t have to sell their home.
Also, prior to 2008, the general view was when a PTD failed, the only option available to a Trustee was to sequestrate the consumer (and usually where the failure had arisen from a genuine inability to make payments, to appoint the AIB as the Trustee).
The effect of this was failed Trust Deeds were not perceived to be the problem they are today, as the Trustee would use sequestration to address the consumers over-indebtedness.
Trust Deeds in the Post 2010 Landscape
In the post 2010 era Trust Deeds have been less used by the free sector, as the Homeowner and Debtor Protection (Scotland) Act 2010 introduced Certificates of Sequestration, which allows money advisers to certify a consumer should be allowed to apply for their sequestration (Certificates removed the legal obstacles that had existed with apparent insolvency being a pre-requisite for bankruptcy).
Also, after 2008, Trustees could refuse a consumer a discharge from their Trust Deed and to request their own discharge, therefore, removing the need to sequestrate the consumer to bring the Trust Deed to an end.
This over time has led to a dramatic increase in the number of consumers who have entered PTDs and had them failed, even after paying years of contributions and being given all their debt back with interest. Over time this has discredited Protected Trust Deeds in the eyes of many, as it is now viewed to be a product that often fails and does not produce the benefits that are used to sell it as a debt relief solution in the first instance.
This concern peaked in 2015, when the AIB reported in their annual report one firm had a failure rate of 88% for 392 cases that year. That equated to 344 cases where the consumer did not get their debt relief and the funds that were paid were kept by the Trustee firm. In none of those cases were a dividend paid to the creditors.
Despite this issue being flagged up to the AIB by Govan Law Centre’s Personal Insolvency Law Unit and the Herald newspaper giving it editorial attention, no action, that is known of, was taken by the AIB.
It is generally accepted this situation has now improved, but it has left PTDs widely discredited across the advice sector and the AIB discredited as an effective Regulator in protecting consumer interests.
It is also worth noting, the AIB has never consulted on the failure rates in PTDs or proposed any remedying action.
In this regard, it must be asked whether the failure to act has been motivated by the AIB’s dependency on Trust Deed fees?
In 2018-19, for example, of the £10.7 million the AIB had in operating income, £3.2 million came from PTDs.
Certainly, I have found the AIB have demonstrated a reluctance to give “directions” to Trustees in PTDs, which is a power they were given in 2013, suggesting a unwillingness to become involved, even where there is evidence that a consumer is not refusing to co-operate.
The Benefits of Protected Trust Deeds
However, there is without a doubt a benefit to Protected Trust Deeds.
In 2018-19, for example, 7,485 PTDs came to an end. Of those 1,540 failed (20%), but 5,945 people did become debt free.
Trust Deeds also retain benefits in that they allow assets to be dealt with more flexibly than sequestration does, particularly in relation to the principal home.
A consumer with equity in their home has fewer options for keeping their home in a bankruptcy, than they do in a PTD.
Lenders have also shown they are willing to let people keep their home, even where there is equity, in exchange for a couple of more year’s contributions.
Although this practice has been frowned upon by the AIB, it has been allowed by large commercial consumer creditors, who take a similar approach in Individual Voluntary Arrangements across the UK.
This home-friendly approach has been necessary as the Scottish Government have not looked at the treatment of the home in personal insolvency since 2010 (when they gave an undertaking they would).
Also a type of PTD that was introduced by the Scottish Government in 2010 to exclude the home has been an abject failure, and this policy failure has never been addressed.
Also, the average dividend in Protected Trust Deeds in 2018-19 was not the 16p in the pound that had been anticipated, but 20p in the pound, suggesting they outperformed what creditors had hoped for when they agree to them.
Smaller Creditors – Credit Unions
It is no secret, however, that some of the biggest critics of Protected Trust Deeds in recent years has been Credit Unions. This is understandable from their perspective as personal insolvency can have a disproportionate effect on them.
However, Government legislation cannot make bad loans good.
If people cannot pay their debts within a reasonable time, they will seek other solutions, and if it is not Protected Trust Deeds, it will be sequestration, or just non-payment.
Credit Unions are also already in a far stronger position than most other creditors are, being able to use Summary Diligence, but still are suffering from increasing levels of bad debts that are nothing to do with personal insolvency.
The question must be asked how sustainable many small credit unions can be in a highly commercialised consumer credit market?
One must ask whether the process of consolidation, which is already happening amongst credit unions, needs to be accelerated, so they can be more sustainable in a landscape when their customers are not just borrowing from them, but also from guarantor loan firms, credit card firms, pay day lenders and car finance companies. The risk to credit unions in the lending market has increased and it is nothing to do with personal insolvency.
As to suggestions that it is credit union members savings that are being put at risk through rising insolvencies, it must be noted that all savings are protected by the UK’s Financial Compensation Scheme
Is there a future for Protected Trust Deeds?
I believe there is a future for Protected Trust Deeds, however, there must be significant changes.
The AIB has failed as a Regulator and as a result of this, what we have seen in the last ten years can only be described, to varying degrees, as a dysfunctional market.
The worse of that may be over; however, free sector money advisers do come across significant number of cases where consumers have been refused discharges, through no fault of their own, and as result have seen years of contributions go nowhere to reducing their debts.
However, when we consider failure rate, we need to place these in context.
In the Debt Arrangement Scheme, the failure rate is believed to be as high as 40% in the first five years (contrast that with a 20% failure rate for PTDs over a similar period). Forcing people to pay longer, rather than giving them realistic debt relief is not a realistic solution.
Debt management does not work for everyone and restricting access to debt relief is not the answer.
With Trust Deeds more must be done to protect consumers who genuinely cannot afford to maintain their contributions. Refusing a discharge should only be allowed in those minority of cases where people can pay but refuse to pay.
The AIB as a Regulator must be more involved in approving the refusal of a discharge, with a stronger obligation on them to issue directions where necessary, including a direction to set a “nil contribution” order where appropriate.
We also need to examine how equity in the principal home is dealt with in personal insolvency and to that end the Scottish Government should make good on their promise to consult on how the home is dealt with.
Finally, we need to accept that personal insolvency is about the failure of someone’s ability to meet their financial obligations and about managing the conflicting claims of their creditors.
Unfortunately, this means all parties are losers, including the consumer.
Denying access to debt relief, however, doesn’t transform that situation and make any Party a winner, nor should it.
Questions for the Minister
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.
Is Minister receiving good Information on Common Financial Tool?
As welcome as the announcement is that Jamie Hepburn is suspending plans to immediately introduce the Standard Financial Statement, questions now need to be asked, has the Minister been receiving the best information on the policy? The Common Financial Tool (Scotland) Regulations have now been laid twice in front of the Scottish Parliament and withdrawn twice by the Minister.
They propose changing the tool that determines how much people pay in a bankruptcy or a Protected Trust Deed in Scotland. The current tool is the Common Financial Statement with the regulations proposing the Standard Financial Statement should be adopted.
After considering extensive evidence from the money advice sector and personal insolvency industry and taking oral evidence from the Minister himself and his senior Civil Servants, the Economy, Energy and Fair Work Committee unanimously recommended against the introduction of the Standard Financial Statement at this point (for information on the concerns raised see here; for information on the evidence laid, see here).
Instead the Committee recommended:
- Examination of how the administrative burden created by the Common Financial Tool on advice workers can be reduced;
- Research into how the Common Financial Tool impacts on consumers; and
- Further research into what constitutes a reasonable standard of living.
In agreeing to not relay the draft regulations at this point, the Minister has indicated that he is not prepared to accept all the recommendations of the committee; and has also indicated that even if the research carried out results in a conclusion that fundamental reform is required, this is unlikely to be possible due to the fact it is highly likely changes to primary legislation will be required.
The Ministers letter can be read here.
Is Jamie Hepburn getting Good Information on the Common Financial Tool?
However, throughout the lengthy process these draft legislation have been through, concerns have been raised in relation to statements the Minister has made to the Economy, Energy and Fair Work Committee, which suggests he may not be receiving the best information.
For example, when the original regulations were laid in June 2018 and then withdrawn in September 2018, he stated in his letter:
“Since laying the Regulations, the Accountant in Bankruptcy has received representations from some advice sector organisations seeking a longer lead in time before commencement of the revised regulations. In particular, they have highlighted delays in the development of IT Systems incorporating the revised common financial tool and suitable provisions for staff training. Other than timing issues, there has been no other fundamental concerns raised by these organisations about the regulations.”
Jamie Hepburn, Minister for Business, Fair Work and Skills, 10th August 2018
This statement about no fundamental concerns being raised came as quite a surprise in the money advice sector, as it was clear there were many fundamental concerns, in addition to that of timing, that had come out during an earlier consultation the Accountant in Bankruptcy had run on the draft regulations, the regular meetings of the Common Financial Tool Working Group and even in the submissions that were made to the Committee before the Regulations were withdrawn.
Again after the draft regulations were withdrawn for the second time, concerns again were raised with further statements from the Minister in his letter to the Committee:
“I should say at the outset I have some concerns that the evidence you have received at these sessions does not represent the full array of opinion on the effects of the regulations. I recognise that inevitably there will be differing views on any legislative provision, either in primary or secondary legislation, but believe it is important that the Committee is provided with a full picture of the issues relating to this instrument. I do not believe that evidence you have been presented with to date is representative of the majority of the sector’s views”
Jamie Hepburn, Minister for Business, Fair Work and Skills 9th November 2018, withdrawing the draft regulations a second time.
This statement, suggesting the Committee had not been presented with the full picture was strange, as already evidence had been provided in writing by:
- Money Advice Scotland
- The Institute of Chartered Accountants of Scotland
- The Money Advice Service
- Association of Business Recovery Professionals
- Stepchange
- Citizen Advice Scotland
- The Accountant in Bankruptcy
- Chartered Institute of Credit Management
- Falkirk Council
In addition to that the Committee had already taken evidence orally from:
- Money Advice Scotland
- The Institute of Chartered Accountants of Scotland
- The Money Advice Service
- Association of Business Recovery Professionals
- Inverclyde Council
- Aberdeen Council
- East Renfrewshire Council
- WRI Associates (Insolvency Practitioners)
Finally, concerns have arisen again with the letter sent to the Committee from the Minister stating he was suspending plans to immediately reintroduce the regulations:
“Second, the need for a more fundamental re-examination of the way in which debtor contributions are calculated beyond the simple question of which mechanism we should use for the Common Financial Tool currently built into legislation. The Committee suggests we could conduct such a review within what is in effect the first half of the new financial year with the hope that this could lead to consideration of a different approach to be introduced from 1 April 2020. We have already committed ourselves to undertaking such a review as part of the wider review of the 2015 legislation due to start shortly, and likely to take most of the summer. But I would not want to mislead the Committee over the likely time necessary to implement any fundamental change of approach coming from that review. This would be highly likely to require primary legislation – and there is no prospect of further primary legislation in this area that would be effective from April 2020.”
Jamie Hepburn, Minister for Business, Fair Work and Skills 15th November 2019,
What is of concern about this statement is if research does suggest more fundamental reform is required to how debtor contributions are calculated, rather than it being “highly likely” that primary legislation will be required, the contrary is true, with it being highly unlikely primary legislation would be required.
For example, looking at the current primary legislation, the Bankruptcy (Scotland) Act 2016, which allows the Minister to make the regulations, the relevant provisions are drafted in such a way that they provide the Minister with a wide power to use the regulations as a vehicle for delivering any model of calculating contributions for debtors.
Inevitably, questions need to be asked, where is the Minister getting his information? It repeatedly seems to be off-mark and poorly informed.
The message also seems to be is although the Minister won’t lay the Regulations again at present, as he knows the Committee would reject them; neither is he willing to allow any new regulations to be informed by the outcome of any research, unless that outcome recommends the adoption of the Standard Financial Statement. It seems likely the Regulations will not even be delayed until the outcome of the research is known.
All of which suggests another show down with the Minister, the Committee and front line advisers again in the autumn.
Section 89: Assessment of debtor’s contribution
(1) The Scottish Ministers may by regulations specify a method (the “common financial tool”) to be used to assess an appropriate amount of a living debtor’s income (the “debtor’s contribution”) to be paid to a trustee after the sequestration of the debtor’s estate.
(2) Regulations under subsection
(1) may in particular prescribe—
(a) a method for assessing a debtor’s financial circumstances (including the debtor’s assets, income, liabilities and expenditure),
(b) a method for determining a reasonable amount of expenditure for a debtor after the sequestration of the debtor’s estate,
(c) the proportion of a debtor’s income that is to constitute the debtor’s contribution,
(d) that a method determined by another person must be used (with or without modification in accordance with regulations made under subsection (1)) as the common financial tool.
Parliamentary Committee Recommends against Standard Financial Statement
The Scottish Parliament’s Economy, Energy and Fair Work’s Committee have now released their Report into the Scottish Government’s draft Common Financial Tool Regulations.
The recommendations of the Committee are that the Scottish Government should not re-lay the Regulations until there has been:
- A full review of the use of the Common Financial Tool, including
- Engagement with the advice sector and debtors; and
- Research into what is a reasonable standard of living.
The full report can be found here.
Background to Common Financial Tool
The Common Financial Tool is the mechanism with which it is decided how much Scottish consumers should pay towards their debts in Bankruptcies, Protected Trust Deeds and the Debt Arrangement Scheme.
They have been controversial and concerns have been raised they may not allow Scots to sustain a reasonable standard of living, which the Scottish Government has disputed. For more information on the background to the dispute read Standard Financial Statement: Is it fit for purpose?
Regulations withdrawn
The Scottish Government initially laid the regulations to adopt the Standard Financial Statement in June 2018, but these were withdrawn after the Parliamentary summer recess because of timing issues.
The regulations were then re-laid, but after evidence was given by various organisations, including money advisers, the regulations were withdrawn again, although the Minister did indicate in a letter to stakeholders he hoped to relay the regulations so they could commence by April 2019.
Evidence provided by Money Advice Scotland, R3, The Money Advice Service and the Institute of Chartered Accountants of Scotland.
Evidence provided by Aberdeen Council, East Renfrewshire Council, Inverclyde Council and WRI Associates.
Evidence provided by the Accountant in Bankruptcy and the Minister, Jamie Hepburn.
However, after the Parliamentary Committee discussed the matter in private on the 8th January, they are now recommending the adoption of the Standard Financial Statement be delayed for at least a year.
To read the Committee’s letter to the Minister dated the 10th January 2019, see here.
To see all the evidence and submissions relating to the Common Financial Tool, see the Economy, Energy and Fair Work Committee page on it here.
