In the first year of implementation of the Bankruptcy and Debt Advice (Scotland) Act 2014 (BADAS), the number of sequestrations in Scotland dropped by 44%; Debt Payment Programmes dropped by 50%; and although protected trust deeds fell only by 6%, they had dropped the previous year by 33%, with the implementation of trust deed regulations.
Two years on, those numbers have barely improved, with sequestrations still down 32%, trust deeds down 23% and debt payment programmes down 46%.
There is plenty of evidence to suggest this decline is substantially linked to changes introduced by the BADAS Act and not to falling levels of personal debt, which again are reaching pre-credit crunch levels.
There is also reason to believe,if changes are not made, the consequence of the current regime will be a build-up of personal debt over the next few years, as happened between the abolition of poinding and warrant sales in 2003 and 2008, before the introduction of low income, low asset bankruptcies led to a 140% increase in the number of sequestrations.
This time, however, it’s the introduction of the Common Financial Tool in Scotland and a proposed change from the Common Financial Statement (CFS) to the Standard Financial Statement (SFS) that threatens another blockage in the system.
What is the CFS and the SFS?
The CFS is a financial statement, which since being incorporated into Scots Law has been used to determine how much a debtor can pay in a bankruptcy, whether a trust deed should be protected or what debtors pay in debt payment programmes.
It adopts a similar approach to the Standard Financial Statement, which is now produced by the Money Advice Service and is what the Scottish Government are proposing should replace the Common Financial Statement.
Neither are tools for public use and although spending guideline are available to advisers, creditors, and the Accountant in Bankruptcy, they are not available to debtors. A bizarre situation and one where the legality of incorporating them into law must be questioned? Where else do we have secret rules in legislation? The situation is so bad, many advisers who are currently being consulted on the figures by the Accountant in Bankruptcy, have not yet seen them.
Both utilise trigger figures for certain categories of expenditure, such as food and housekeeping and stipulate these trigger figures must be used as spending limits. These limits can be exceeded, but where they are, additional evidence must be produced, showing good reason for any breaches.
Methodology for reaching trigger figures?
The methodology for determining the trigger figures takes the Living Costs and Food Survey produced by the Office for National Statistics, and looks at what is being spent by the group in the lowest 20%. It takes an average of what is spent by this group and these are how the trigger figures are arrived at. The fact this group is made up of many people dependant on mean tested benefits and whose spending levels are determined by their low level of income, rather than their needs, apparently has been overlooked. The survey only shows what people are spending, not what they need to maintain a reasonable standard of living.
A standard of living which, David Hilferty of Money Advice Scotland has said, if you use the methodology of the Standard Financial Statement, is not socially acceptable.
Consumer harm will rise
Money Advice Scotland has already voiced its concerns and research it has carried out shows the level of trigger figure breaches rise under the Standard Financial Statement,from one in nine under the Common Financial Statement, to one in four under the SFS.
The Scottish Government’s own research shows in thirteen percent of cases, people pay more under the SFS than they do under the CFS.
We are walking into a cycle of interest rate hikes, likely to begin in the next few weeks, and levels of inflation, likely to remain at 3% for the near future, still higher than anticipated wage level increases. There is evidence that a switch from the Common Financial Tool to the Standard Financial Statement will only further tighten access for consumers to debt solutions.
When the BADAS Bill was first announced, the policy objective behind it was to rebalance the law between debtors and creditors, the implication being the law had previously weighed more heavily in favour of debtors than creditors.
If the results of the implementation of the Act are to be judged, then they can only be considered a success if it was agreed too many debtors had in the past been accessing solutions; if this is not the case, then it can only be considered a failure, as substantially less consumers are now accessing remedies. People with no disposable income, people fearing for the future and people who live with the stress and pressure of unmanageable debts.
This cannot be correct. The Scottish Government has laid out the fundamental principles for their new social security system as being dignity and respect. These are admirable aims. Where is the dignity and respect, however, for debtors who are being forced to live at a standard, which for many people, is only possible if they are in receipt of income based benefits.
Instead there are other ways. There are consensual, open, and transparent budgeting tools, such as the Minimum Income Standard, produced by the Joseph Rowntree foundation and recently endorsed by the Supreme Court in the landmark decision on Employment Tribunal Fees. There is also the Reasonable Living Expenses model, created by the Insolvency Service of Ireland and based on a model created by the Vincentian Partnership for Social Justice.
It is time for the Economy, Jobs, and Fair Wok Committee, of the Scottish Parliament, to pull in the Common Financial Tool for review, before any further decisions are taken which may result in harm. A considered, evidence led review by the Committee could avoid months of preparatory work being undertaken to draft new regulations, which may then have to be rejected. Evidence should be taken from consumers who live under these budgeting limits and should be taken from advisers working with the common financial tool and from The Joseph Rowntree Foundation on Minimum Income Standards.
Scotland should adopt a Common Financial Tool model, which is open and transparent and like the Irish Reasonable Living Expenses, does not set a maximum spending limit, but a minimum standard of living which must be protected.
A reasonable standard of living which the Irish Reasonable Living Expenses states:
“…is one which meets a person’s physical, psychological and social needs…it does not mean a person should live at…luxury level, but neither does it mean…a person should…live at subsistence level. A debtor should be able to participate in the life of the community, as other citizens do…to eat nutritious food, to have clothes for different weather and situations, to keep the home clean and tidy [and] to have furniture and equipment at home for rest and recreation”
The Scottish Government’s consultation on the Future of Scotland’s Common Financial Tool is open to the 27th October and can be accessed here.