Fergus Ewing

Bankruptcy Policies Unravelling

Bankruptcy Policies Unravelling

Fergus Ewing has acknowledged that he got his decision to increase the application fee for bankruptcy wrong. Speaking in response to the third quarter insolvency statistics for 2013-14, he has said “Scotland’s bankruptcy legislation has to do more to provide a safety net for vulnerable, low-income debtors and their families.”

However, despite this, with the new Bankruptcy and Debt Advice (Scotland) Bill 2013, lessons are still not being learned

For the fourth quarter in a row, Low Income, Low Asset bankruptcies (LILA) in Scotland have increased as an overall percentage of all bankruptcies, now representing 39.6% of all bankruptcy awards in Scotland.

The increase, reported in the Accountant in Bankruptcy’s (AIB) third quarter insolvency statistics for 2013-14, show that LILA bankruptcies as a total percentage of all sequestrations are now returning to their pre-first quarter levels for 2012-13, when the application fee was increased by 100% from £100 to £200, which reduced LILA awards by 60%.

However, although as a proportion of all bankruptcies the numbers of LILA awards continue to increase, LILA numbers themselves remain significantly reduced from their pre-fee increase levels, with many organisations such as Citizen Advice Scotland and Money Advice Scotland, claiming many debtors are still being priced out of any formal remedy for dealing with their debts.

In acknowledgement that they got it wrong, the Scottish Government in the Bankruptcy and Debt Advice (Scotland) Bill 2013 are now proposing a new Minimum Asset Procedure (MAP) to replace the LILA route into bankruptcy.

This new type of bankruptcy it is anticipated will reduce fees to £100 or less, but it is anticipated will only be available to 75% of all current LILA applicants with debtors only being able to apply if they have debts of less than £17,000, whereas under the current LILA route, there is no debt level cap.

For those debtors unable to apply using the new route, they will have to apply for normal bankruptcy and pay the full application fee, which is likely to be significantly more.

Although it is to be welcomed that the Scottish Government are now beginning to accept that for most bankrupts the purpose of bankruptcy legislation is to provide a social safety net, with more than eighty percent of all applications being debtor applications, and more than three quarters being unable to make a contribution from their income to their bankruptcy, more needs to be done.

This includes looking again at their decision in the new bill to increase contribution periods from 36 to 48 months against overwhelming evidence from debt charity NGOs, regulatory professional bodies and even creditor organisations that such a policy is wrong. They also need to reconsider their decision to replace the Low Income, Low Asset route into bankruptcy with a more restrictive type of bankruptcy which will exclude rather than include more debtors.

They also need to ask themselves, although it is commendable that they have accepted in sequestration and protected trust deeds it is wrong (and illegal) for debtors to make contributions from social security benefits, why is it correct for those debtors to have to use those same social security benefits to apply for bankruptcy, when prior to 2008 (and the SNP minority Government) they would have been covered by a fee waiver.

Debt Arrangement Scheme

The other revealing figures from the third quarter statistics relate to the Scottish Debt Arrangement Scheme.

Although still very much the little brother of all Scotland’s formal statutory debt remedies (representing 26.1% of all remedies used), the Scottish Government have wrongly reported in their press statements that applications have increase by 20.9% on the same period last year.

The actual increase is only 10.7% (applications 3rd quarter 2012-13: 1,067; applications 3rdquarter 2013-14: 1,181).

On the last quarter, the increase is less than 1%, confirming the view of many that, allowing for occasional seasonal variations, take up of the Scheme has now plateaued.

What is increasingly of concern, however, is the number of Schemes being revoked. Although the Minister has claimed only 3% of Debt Payment Programmes under administration are being revoked quarterly, some research by others in the insolvency industry suggests this amounts to 13.9% per annum and the cumulative effect of which will mean over 50% of all average length programmes (6.8 years) will fail.

Evidence of this can be seen in the figures for 2013-14, which show although 3,551 programmes were approved by the end of the third quarter, 1,064 have been revoked.

There are clearly a significant number of debtors entering the Debt Arrangement Scheme for whom the Scheme is not suitable and for whom it is failing to provide a sustainable, lasting solution.

There was always a danger with the Debt Arrangement Scheme that it would be seen, for political reasons, as a panacea for all debtor’s debt problems, but it has never been more than just another tool in the toolbox: suitable for some, but not others.

As the fee increase for bankruptcy has shown, policy decisions in this area without supporting evidence from those at the coal face or other empirical evidence risks unintended consequences. The danger now is we will see more of those unintended consequences if the Scottish Government continues with its policy of trying to make bankrupts pay more in sequestration, whilst hailing the Debt Arrangement Scheme as a one size fits all solution for all debtors, whilst failing to research why, for so many debtors, it continues to fail to provide solutions for their problems.

Opinion column: Alan McIntosh

Opinion column: Alan McIntosh

First pubished in The Journal of the Law Society of Scotland.

The proposal to extend the contribution period in bankruptcy from 36 to 48 months is unsupported, and arguments contradict ministerial statements relating to protected trust deeds

In money advice and personal insolvency, it is accepted as a truism that the longer people pay into any debt repayment plan, the likelihood of them defaulting increases. However, this is not universally accepted. The Minister for Energy, Enterprise & Tourism, Fergus Ewing, believes debtors can pay for longer and have not been paying long enough for the last 28 years, since the Bankruptcy (Scotland) Act 1985 was introduced.

In support of this belief, he has cited evidence from the Scottish Debt Arrangement Scheme, where the average payment period is six and a half years: if these debtors can pay that long, he believes others can too. He has also made the point that only 3% of all DAS cases are revoked each quarter. Obviously a success, until you realise that some in the insolvency industry who have researched this are equating it to 13.4% per annum and, with the average lifetime of a debt payment programme being six and a half years, are suggesting the attrition rates for DAS could eventually be more than 50% for average length programmes. Not so successful, and not so supportive of the argument that paying for longer is suitable for all debtors.

The minister also believes that bankrupts can pay for longer, despite evidence heard by the Energy, Enterprise & Tourism (EET) Committee during stage 1 of the Bankruptcy and Debt Advice (Scotland) Bill. Organisations such as Money Advice Scotland, Citizens Advice Scotland, the Law Society of Scotland, Stepchange, Lloyds Banking Group and the Consumer Finance Association all opposed the change, fearing it could result in increased defaults, hardship and disputes between debtors and trustees.

Part of the problem with the Government’s proposal is that many feel it is completely left field and was never consulted on. The minister has said it was consulted on, and supported by respondents. He cites question 10:41A, where respondents were asked whether they would support an extension of the payment period in one particular type of bankruptcy product. Only 27 supported retaining the three-year period, while 32 supported a rise to five years.

This ignores, however, that the original consultation had proposals for five different bankruptcy products, and, in relation to another product, question 10:47A, in identical terms to question 10:41A, produced 33 responses for keeping the three-year period and only 28 wanting it extended.

What has been overlooked, however, in relation to both questions is that more than half of the 129 respondents ignored both questions, and many indicated they did not feel any additional products were required. Eventually, the proposal to have five different products was shelved.

The minister has argued that the extension is necessary as payment periods must be harmonised with those for protected trust deeds which, since 27 November 2013, now last a minimum of four years. Without harmonisation, it is said, debtors may opt to use bankruptcy as an easier option for dealing with their debts.

However, on 11 October 2013, while giving evidence to the EET Committee on the Protected Trust Deed (Scotland) Regulations 2013, which extended the minimum payment period to four years, the minister dismissed concerns that introducing such changes ahead of the bill being commenced would result in debtors using bankruptcy as an easier way to deal with debts.

He pointed to the rest of the UK, where individual voluntary arrangements, which normally last five years, remain popular despite bankruptcy only having a three-year payment period. Debtors, he argued, did not take the easiest remedy for dealing with their debts and wanted to pay back what they could.

In my view, the real problem here is that the Scottish Government’s proposals to extend bankruptcy payment periods have not been thought through, and are not supported by research. They are not supported by the vast majority of civic Scotland, who make up the key stakeholders and, bizarrely, for once the debt charities and the trade body of payday lenders are all singing from the same hymn sheet.

The four-year period appears to be completely arbitrary, and the arguments in favour of it are weak. They have also been inconsistent, with the minister arguing one minute that harmonisation is not necessary and the next that it is vital.

The Institute of Chartered Accountants in Scotland has called for more research before stage 2 of the bill to explore what, if any, net benefits there would be for creditors. I would support that, but suggest such research should also extend to consider how debtors will be affected.

The Scottish Government may be launching a new Financial Health Service, but it is no National Health Service, and it is not even clear whether it has a Hippocratic Oath of doing no harm.

Trust Deed Bubble to Burst

Trust Deed Bubble to Burst

No one should be in any doubt, the Scottish Government’s new proposals for Protected Trust Deed reform is about taking the heat out of the Protected Trust Deed market and ending the trafficking of debtors between lead generation and personal insolvency firms.

It’s no secret that with some firms now reportedly paying in excess of £2,000 for referrals, Scotland’s Trust Deed market has become an overinflated bubble with debtors being “mis-sold” products as new lead generation firms sprout up daily and chase down every possible lead for the lucrative fees that some firms are now dangerously paying.

The exorbitant fees have resulted in saturation level TV and radio campaigns that push and sell statutory remedies as products and don’t promote best advice. For some firms, the use of the products themselves in their company names, like Trust Deed, give away the game.

However, what many debtors are unaware of is in actual fact many of these firms are just lead generators whose entire business model is about trafficking debtors to insolvency firms for ridiculous referral fees. In addition to this, many debtors don’t realise that such levels of fees have created a high risk culture of mis-selling, with many being pushed into solutions that are not appropriate and are destined to fail when payments are not maintained and debts are handed back; but only after the lead generator has been paid and the debtor has made months of contributions towards a remedy that was never going to work.

The practice of paying fees has been allowed in Scotland since 2008, but only for work done. The logic being where someone else has gathered information about a debtor and passed it to an Insolvency Practitioner, then it is acceptable for that practitioner to pay that intermediary for the work they have done. This removes the need for the practitioner to do the work and prevents duplication, although they are still obliged to validate the information provided.

However, whereas such fees began at £2-300, they have exploded in recent years with some English firms now paying in excess of £2,000 per referral, allowing them to buy up significant portions of the Scottish Market.

However, the new Protected Trust Deed regulations which will be laid before the Scottish Parliament in early September and are expected to come into force by November are the clearest sign yet that the Scottish Government intends to curb the practice and clamp down on the mis-selling culture.

The new provisions that will be introduced will no longer allow trustees to recover referral fees as part of their outlays for a case and instead will require them to include them as debts into the case, where they will only receive a dividend on the fees and be treated like other creditors.

The way trustees charge their fees against cases will also change, meaning they will no longer be able to charge on a time and line basis and will have to propose a setup fee at the outset to creditors, with proposals thereafter only to take a percentage of the ingathered funds from the case. Effectively this will mean trustees will have to share the risk of the case failing with the creditors throughout the lifetime of the case and, logically ensure only those cases likely to succeed are taken on at the outset.

In addition to this new provisions will be brought forward extending the minimum time a trust deed lasts from 3 to 4 years, whereas the duration a debtor pays into a bankruptcy will, for the time being anyway, remain at 3 years. This means many debtors faced with the prospect of having to pay a trust deed for 4 years are more likely to opt for a bankruptcy where they will only pay for 3 years; or alternatively where they want to avoid that remedy and can repay their debts within a reasonable timeframe, a debt payment programme under the Debt Arrangement Scheme.

The only obvious conclusion that can be drawn from a consideration of these proposals, is that the Scottish Government are determined to take the air out the over inflated bubble that is the Scottish Trust Deed market.

And who can blame them?

The current state of the market is now at a dangerous level. The risks of mis-selling are high and many vulnerable debtors are now being targeted by firms, who to put it simply should not be advising anyone on anything and it would not be unfair to call them rogues.

The end result will probably be more sequestrations and a greater uptake of the Debt Arrangement Scheme by debtors. It will also probably mean that the high profile TV and radio campaigns will also come to an end as the commercials behind such campaigns will no longer be sustainable. We are also likely to see more insolvency firms, who are far better regulated by regulatory professional bodies, having to market themselves directly to consumers.

If this leads to better advice and less mis-selling, then that’s no bad thing.

I am looking forward to it and being able to breathe again.

Fifty Shades of Lay

Fifty Shades of Lay

First published in The Journal Online,  the publication of the Law Society of Scotland.

New rules on lay representation introduced this month, taken with the other schemes that continue in force, have resulted in an excessively complicated picture that should be simplified

The introduction of s 127 of the Legal Services (Scotland) Act 2010 into law should have been a time for celebration: it aimed to introduce wider rights of lay representation into the sheriff court and, therefore, wider access to justice.

Although this objective has been achieved to some extent, we should be cautious with our celebrations. We now have a system of lay representation and support in Scotland which is no longer clear and, with tongue partially in cheek, it could be said litigants would be wise to take legal advice before deciding on which rules they use.

The problem is there now exists a multitude of different types of lay representation in Scotland’s sheriff courts, not including those rules that provide for lay supports, and in some circumstances representatives and supports will now have to choose between the types of representation or support they wish to provide. This requires a knowledge of the system that the majority will not have.

Scope for confusion

The idea behind s 127, which amended s 32 of the Sheriff Courts (Scotland) Act 1971, was that it allowed the Court of Session to introduce a new type of lay representation into the sheriff court, and widen access to justice, by allowing representatives to appear in any category of civil action on behalf of a party and make oral submissions on their behalf. Such rules have now been implemented and have been in force since 4 April 2013.

These new rules are unlike previous lay representation rules in two ways. First, they allow the representation to occur in any category of civil action, whereas in the past such representation was only allowed in specific categories of actions; but secondly, the type of representation allowed is only to make oral submissions, whereas lay representatives previously were permitted, on the whole, to do for clients whatever they could do for themselves.

Prior to the new rules being implemented, the existing rules allowing lay representation related to actions under the Heritable Securities (Scotland) Act 1894, the Conveyancing and Feudal Reform (Scotland) Act 1970, the Consumer Credit Act 1974, the Bankruptcy (Scotland) Act 1985, the Debtors (Scotland) Act 1987, the Children (Scotland) Act 1995, the Debt Arrangement and Attachment (Scotland) Act 2002, the Bankruptcy and Diligence Etc (Scotland) Act 2007, and summary cause and small claim actions.

The new provisions now run parallel with these rules and also the rules for lay supports, which means that lay persons now have a choice between the rules they wish to use. What rules they choose will have a material effect on what they can and cannot do. For example, if someone asks the court to allow them to act as a lay support, this does not allow them to make oral submissions; whereas if someone applies to be a lay representative under the new provisions, they are not allowed to question witnesses, but they can do this if they apply to represent under existing small claim rules.

In addition to this, the tests that apply for sheriffs to decide whether someone should be allowed to act as a lay person vary depending on the type of representation or support that is applied for. Under the new rules, lay representatives are only allowed where this would assist the sheriff with their consideration of the case, whereas under older rules, such as in relation to small claims, the sheriff can only refuse where they believe the person is not suitable or indeed is not authorised to act as a representative. In relation to lay support, an individual can only act if the sheriff considers it would be in the interests of the efficient administration of justice to allow it.

Under the new rules, there are also specific provisions which stipulate that a condition of the representation is that the representative does not receive any direct or indirect financial remuneration from the case, whereas under the older and co-existing rules for lay representation, the provisions are silent on this.

Likewise, under the new rules the representative must make a written application to appear, but under other lay representation or support rules, no such requirement exists in relation to the sheriff court.

Rethink needed

Clearly, in such a situation only experienced in-court advisers will understand what their rights to act are as lay representatives; only the most experienced will understand what provisions they may wish to apply under.

On reviewing the rules we now have, it is hard not to think that the spirit of allowing lay persons into court has been lost. The idea was to increase access and assist the court in their consideration of the case when qualified legal representation was not available. The rules however are inaccessible, confusing and exist in parallel with existing provisions. They create obstacles by applying different tests and designating different functions to different roles, even though those roles go by the same name.

Without being overly critical about what was undoubtedly a genuine attempt to improve the ability of litigants to obtain representation and support in court, it has to be asked, is it not time that a rethink of this whole area of law was undertaken?

It must be possible simply to have two different types of lay persons: lay supports,with the right to make oral submissions and act in any category of civil action; and lay representatives, who can do for the litigant what they can do for themselves. This latter role could be performed by specialist advisers provided through advice agencies and trade unions, with a prerequisite that they must have sufficient professional indemnity insurance.

Scotland has been slow to warm to allowing lay persons into our courts: it took us nearly 40 years to introduce our own McKenzie Friends. Our rules have been developed in an ad hoc manner by both the UK and Scottish Parliaments, arguably because the courts have been slow to do it themselves using existing powers. It is now time to create a system that is genuinely accessible to all lay persons.

Bankruptcy Consultation Cancelled

Bankruptcy Consultation Cancelled

A consultation on the reform of bankruptcy law appears to have broken down as reforms opposed by consultees appear to be proceeding regardless. Alan Mcintosh untangles the mess.

Anger has broken out amongst money advisers over the Scottish Governments Bankruptcy Law Reform. Within a day of the first of a number of industry consultations, many advisers have been left furious and angry at what appears to be the contempt the Accountant in Bankruptcy (AIB) is treating the process and those participating in it.

One of the key issues is should the AIB be able to provide advice.

The day after a consultation event organised by Money Advice Scotland, where the proposal was unanimously rejected by the members present, the Accountant in Bankruptcy advertised it was seeking two advisers to be seconded to a pilot project beginning next year.

The Accountant in Bankruptcy has no legal powers to deliver such a service and no bill is presently in front of parliament proposing they have such powers. Even the consultation proposing they should have such power is not complete. Yet despite it being expected that opposition to it will be overwhelming, the AIB appear to have decided the proposal will go ahead.

The issue is an old one and first arose with the passage of the Bankruptcy (Scotland) Act 1993. The then conservative government rejected the idea as there was a conflict of interest. Since then the idea has repeatedly re emerged and has lead to accusations of empire building by the AIB. More recently in the current consultation, the proposal was made with the assurance that the project will be ring fenced in acknowledgement of the conflict of interest.

The AIB claim they regularly receive calls from debtors asking for help or arriving at their office and need to be able to assist them by delivering advice. The Scottish Government, however, already funds the National Debt Line and either North Ayrshire Council or Irvine Citizen Advice Bureau could easily, with funding, serve the AIBs office.

Why then the need for a duplicate service?

In launching the Bankruptcy Law Reform consultation, Rosemary Winter Scott, the Accountant in Bankruptcy called for “vision and ambition” in redrafting Scotland’s bankruptcy laws, but also worryingly indicated this was a good time for the reforms with the majority government. It’s clear now what she meant with such comments: legislation will be driven through parliament and Government dominated committees will be expected to rubber stamp provisions.

Many like me fear the AIB’s vision of rebalancing Scotland’s bankruptcy law is gradually about eroding independent debt advice and replacing it with more pro-creditor advice. This is an erosion of the principles that advice should be non-judgemental and always in the best interest of the client.

What is shocking in relation to the Accountant in Bankruptcy actions, however, is the cynicism of what they have done. No mention was made of the pilot project at the Money Advice Scotland consultation the day before, despite the attendance of a senior AIB staff member. Instead it was only after the extent of feeling became clear it was announced, possibly to instil a sense of defeatism in people or to entice others fearing job cuts.

Equally disturbing is that the announcement was made through Money Advice Scotland, who knowing the strength of its own member’s feelings, circulated the advertisement seeking advisers to apply. This raises questions about the influence the AIB now have, now they control significant portions of their funding and The Chief Executive is a non executive member of the AIB’s Board.

The decision to announce this project is in bad taste and signals contempt towards the consultation process and those involved in it. If this matter is already decided, what others are?

Rosemary Winter Scott said she wanted vision and ambition during this reform, but already it appears cynicism and distrust is creeping in.

You have to wonder if there is any point continuing with the consultation.