Scottish Government needs to act to Protect Homeowners

Scottish Government needs to act to Protect Homeowners

If the Scottish Government are considering extending the Protections that were introduced by the Coronavirus (Scotland) Act 2020 beyond the 30th of September 2021, they should do what they failed to do last time and increase protections for Scottish Homeowners.

Throughout the Coronavirus Crisis, the plight of tenants has attracted more attention than that of Homeowners, to the extent you would be forgiven for believing there is no risk to homeowners or a greater risk for tenants.

However, this is not the case, and arguably, the risk to homeowners is greater now than it is for tenants.

Homeowners lack a Safety Net

Like tenants, homeowners are at the same risk of experiencing income shocks and have been as likely to have been furloughed, or made unemployed.

Also contrary to popular perceptions, the vast majority have no more financial security or stability than many tenants do. In addition to that, the safety net that is the UK Welfare State, barely exists for them.

Homeowners, do not have the same level of protections as Tenants: they cannot claim Housing Benefit or their Housing Costs when they claim Universal Credit. Discretionary Housing Payments, a discretionary benefit paid by local authorities, to help with housing costs, is not available to them; and the Scottish Government’s Tenants Support Hardship Fund, is only, as the name suggests, for Tenants.

The only UK benefit that exists for them is the Support for Mortgage Interest Payments Scheme, which you would struggle to call a benefit anymore.

Support for Mortgage Interest (SMI)

Since the last crisis (the Credit Crunch) the benefits of SMI have now been eroded under 11 years of Conservative Government, with the waiting time before someone can claim now being 39, rather than 13, weeks; in addition to that, whereas the payments received were previously a benefit, they are now effectively a loan secured over your home.

In addition to that, SMI does not even pay all of someone’s mortgage, but only interest up to the first 2.09% on mortgages up to £200,000.

Now for those who are in a position to have been able to benefit from historically low interest rates, 2.09% may seem more than sufficient, but this fails to acknowledge that across the UK there are millions trapped in higher rate mortgages, where the finance company’s standard variable rate is sometimes as high as 4-5%.

For those with those higher-level mortgages, or higher interest rates, the Scheme will not even pay the interest on their loans.

Coronavirus (Scotland) Act 2020

Now during this Crisis, unlike the last one, homeowners do appear to have been overlooked.

Last time around, there were working groups set up, Pre-Action Requirements were introduced through the Homeowners and Debtor Protection (Scotland) Act 2010, the Scottish Government’s Homeowners Support Fund was refreshed, with a Shared Equity Scheme introduced to compliment the existing Mortgage to Rent Scheme.

However, this time around, homeowners, appear to have been overlooked by the Scottish Government when drafting the  emergency legislation that was laid before the Scottish Parliament. Like with tenants, no eviction or repossession ban was introduced until December 2020; but in April 2020, tenants got the additional protection of landlords (both social and private) being required to give them 6 months’ notice before they raised court action against them.

Homeowners got no such protection and still don’t have any similar protection, despite it being within the legislative authority of the Scottish Parliament to require Mortgage providers to serve a 6 months, rather than 2 months calling up notice on homeowners before raising legal action.

The piece of legislation that governs this area of law is the Conveyancing and Feudal Reform (Scotland) Act 1970 and it is wholly with the legislative powers of the Scottish Parliament to amend it.

We cannot just rely on Lender Forbearance.

The reasons why Homeowners were overlooked when this emergency legislation was introduced, is not exactly clear. Possibly the thought of Homeowners losing their home did not occur to the Scottish Government.

However, it is also true at the time when Lockdown began, the UK Financial Conduct Authority was quick to act and issued guidance to all UK banks that anyone affected by Covid 19 should be offered a 3-month payment break. Some were then offered additional payment breaks. 

However, as we now enter the 14 month of this crisis, lender’s forbearance is wearing thin and we must remember that although many  were offered payment breaks, lenders on the whole did not freeze interest and charges on their loans. Also when people do begin making payments again, many lenders want higher monthly payments to catch up on missed payments.

For those who are continuing to struggle and who may still be affected financially by Covid, the risks that a lender may issue a calling up notice and raise a repossession action within 2 months is now a real danger and will only grow.

This risk can only increase as we come out of this public health crisis and the support schemes that were put in place, such as the Furlough and Self-employed Income Support Schemes are withdrawn. We will not know what the medium to long term effects are of this until March 2023, at the earliest.

Unemployment may increase and people may be forced to accept reduced hours of work or lower rates of pay as businesses look to recover. Against that background those that are struggling to get by will have pretty much no benefit system available to support them with their housing costs. 

It, therefore, seems inevitable that the Scottish Government will have to consider extending many of the protections in the Coronavirus (Scotland) Act 2020 for tenants and consumers to the beginning of 2023 or even longer. If they do, then they need to also think about placing homeowners on an equal footing with tenants and requiring any calling up notice to give 6, rather than 2 months notice of any intended legal action. 

 

Debt Advice Route Map Takes Wrong Turn

Debt Advice Route Map Takes Wrong Turn

The release of the Scottish Government’s much anticipated, and two months’ overdue, Debt Advice Route Map, is one of those moments, if you were driving your car, you would re-examine your Sat Nat and wonder why you ended up in a boggy field.

It wouldn’t have been so bad, if this Route Map had been published two years ago, like when it became clear local authority money advice services had suffered 45% cuts in the three pre-ceding years.

However, after two years of preparation, and five meetings of the Tackling Problem Debt Working Group, the only thing remarkable about the process and the Group’s final recommendations, was how unremarkable and uninspiring they were.

The reality is, despite the abundance of press coverage of this Route Map, the only thing certain at present is Scotland’s free, face-to-face money advice services will face more debilitating funding cuts over the next 12 months.

Minister, Jamie Hepburn, in this report, offers nothing that will prevent that.

The Tackling Problem Debt Working Group

The report described the meetings of the Tackling Problem Debt Working Group as:

 “…lively, challenging discussions, revealing the complexity of the debt advice landscape, and its clear links with wider advice provision”.

This may as well read: the meetings were consumed by discussions and arguments by the participants about what was in it for them and there was a serious lack of any strategic vision or thought as to the future of free money advice in Scotland.

Hence why the resultant Route Map was two months’ late and hence why it has already had a lacklustre and disappointing reception by front line advice workers.

What is lacking from the Route Map?

Well other than having no strategy as to how to increase capacity in the free, face-to-face money advice sector, when demand is on the increase and 14.2% of the Scottish population are struggling with problem debt, it offers no extra funding for free debt advice services.

The Financial Conduct Authority Debt Advice Levy, which it deals with, was devolved in January 2019, and is not new funding, and is already funding the already under funded money advice sector in Scotland.

So, any suggestions this Route Map contains proposals that will see more Scots offered more face-to-face, free debt advice, is nonsense.

In addition, the proposal commits to funding National Debt Helplines that are already funded by the banks or under-utilised and begs the the question why, when funding for front-line, face-to-face services are so underfunded, the Scottish Government are proposing to use public funds to fund services already self-funded through arrangements they have with the banks (Where Has the Scottish Debt Advice Levy Gone?)

The problem is the Tackling Problem Debt Working Group failed to contribute meaningfully to the debate on what is the future of free money advice in Scotland.

It had no new ideas and the debate, judging from the minutes and papers that came out the meetings were poor, and much of its reasoning was based on the flawed and now discredited Peter Wyman Report into the Funding of Free Debt Advice in the UK.

This Debt Advice Route Map is not one of those golden moments in Money Advice in Scotland, such as the one that followed the Striking the Balance Report produced in the early years of the Scottish Parliament that led to a significant increase in funding for free money advice; or even that which followed on from the Debt Action Forum in the aftermath of the Credit Crunch.

No this is more a speed bump on the road that is leading to the decline of free, face-to-face money advice services in Scotland.

With Brexit now approaching fast on the horizon, the truth is the Scottish Government have no strategy, no Road Map, and they don’t even have control of the brakes on the run-away car crash that is awaiting those Scots who will soon be seeking help with problem debts.

 

 

 

 

Where Has The Scottish Debt Advice Levy Gone?

Where Has The Scottish Debt Advice Levy Gone?

It is now believed that up to a quarter of a fund that has been set up to help Scottish Debt Advice Services has already been earmarked for UK-wide debt charities, by the Scottish Government, giving them priority over locally-based, face to face money advice services.

The Scottish Debt Advice Levy, believed to be worth £3.96 million per year, is intended to help free debt advice services that help people struggling with their debts like credit cards, personal loans and other consumer credit borrowing.

However, despite there being very little Scottish demand on the UK National Debtlines and charities like Stepchange having self-funding business-like models, the Scottish Government, it is understood, has already allocated them up to a quarter of the entire Scottish Debt Advice Levy, leaving less for local face to face money advice services.

What is the Scottish Debt Advice Levy?

The fund that was previously managed by the Money Advice Service (now the Money and Pensions Service) is raised by the UK Financial Conduct Authority by applying a levy to UK Clearing banks and consumer credit businesses.

The fund was devolved to the Scottish Government in January 2019 under the Financial Claims and Guidance Act 2018.

To help with the transitioning of the fund into the hands of the Scottish Government, it was decided in 2019-20, the previous allocations of funding should continue, with a view to producing by September 2019, a new Debt Advice Route Map that would outline how funding would be spent in years to come in Scotland.

However, to-date the Scottish Government have failed to produce its Debt Advice Route Map and appears ready to honour pre-devolution arrangements of giving up to half a million of the funding to UK National Debt Lines and another half a million to the UK Debt Charity Stepchange. 

No other organisation, such as a local authority or Citizen Advice Bureau is understood to have been given any commitment of funding next year.

UK National Debt Lines

The UK National Debt Lines are understood to be the Birmingham based National Debt Line and Business Debt Line, both of which are owned by the Money Advice Trust. It is also believed to include the national debt charity, Stepchange.

However, it is understood that neither the Money Advice Trust’s National Debtline or the Business Debt Line received many calls from Scotland, with the National Debtline reporting only 4,732 calls in 2017 and the Business Debtline only receiving 1,010.

To put that in context, many local authority money advice services or locally based Citizen Advice Bureaux will receive similar number of calls in a year.

In addition to this, neither the National Debtline or the Business Debtline actually provide face to face appointments to consumers, and often after giving initial advice, have to refer them back to locally based front line services.

Stepchange

Stepchange, also operates a national debtline, as do many large private sector debt advice firms.

Like these firms, Stepchange’s primary funding model is to raise funds from the cases of the clients they deal with.

So, in relation to Debt Management Plans, through a special arrangement they have with the Banks, known as the Fair Share Scheme, it is believed they collect between 11-12% of everything that is paid by a consumer in such a plan.

Across the UK this is believed to have raised them about £43 million in 2018.

They are also believed to have raised a further £3.7 million from insolvency services and a further £1.08 million from equity release services, (helping people release equity from their homes to pay their debts).

In addition to that it is also also believed in 2018 they raised a further £323,000 in commission from mortgage advisers and insolvency practitioners.

In Scotland, it is known they do generate fees from several insolvency practitioners, who they refer bankruptcy and protected trust deed clients onto.

It is also believed their Chief Executive, earned £167,675 in total remunerations in 2018 (more than the First Minister of Scotland)

Who Are The Winners?

Stepchange, it is believed, will also be one of the big “winners” from the Scottish Government’s Debt Arrangement Scheme (Scotland) Amendment Regulations 2019, which will see them increasing their fees on Scotland’s equivalent of a Debt Management Plan from 8% to 20% per case.

Despite this, Stepchange do not offer the same services to people struggling with debts, that other local money advice services do.

For example, those that are self-employed, it is understood, are told to go back to their local money advice service if they want to enter the Debt Arrangement Scheme, as it is believed they find their cases too difficult.

Also, if people don’t have enough money to allow them to be slotted into one of the solutions that Stepchange generate fees from, they are sent copies of letters that they can copy and send to their creditors themselves.

So self-help, if you are poor.

Local Authority Funded Money Advice Services

In contrast, it is understood local authority-funded money advice services, which include services such a law centres, Citizen Advice Bureaux and services provided by local authorities themselves, have seen cuts to their funding of over 45% since 2014.

These services are still the primary providers of both formal and informal debt solutions in Scotland, including solutions like Bankruptcies and Debt Payment Programmes under the Debt Arrangement Scheme.

These services also provide solutions to all clients, including those that don’t fit into traditional formal or informal solutions, or are self-employed or whose outgoings exceed their incomes (believed to be more than 40% of all their clients).

Scotland Needs a Debt Advice Route Map

If it is correct that the Scottish Government has decided to continue with pre-devolution funding arrangements, then this is disappointing.

It shows a complete lack of analysis and understanding and with the Debt Advice Route Map still not having been published, a lack of strategy by the Scottish Government to fund free money advice services in Scotland.

Prior to the funding being devolved, it was not known how much of the funding was being given to the Money Advice Trust and Stepchange, as the Money Advice Service was not subject to Freedom of Information requests, unlike the Scottish Government is.

However, now it is known, questions need to be asked.

The National Debtlines owned by the Money Advice Trust are not services high in demand in Scotland, and calls to many local advice services each year easily compete with the numbers they are doing.

Equally, Stepchange has a business model that is modeled in many ways on that of private sector firms, despite them being a charity and should easily be self-funded, with no requirement for them to have access to public funds.

They are also believed to have £21 million in reserves, whilst many local authorities are eating into theirs.

There financial position has also been strengthened in Scotland with the introduction of the Debt Arrangement Scheme (Scotland) Amendment Regulations 2019, as they can now more than double their fees from Debt Payment Programmes.

The Scottish Government, now have to decide how they will fund free money advice services in Scotland and how the Scottish Debt Advice Levy should be spent.

They must bring forward and publish their Debt Advice Route Map and ensure it will support Scotland’s varied and rich advice landscape of both statutory and third sector organisations , who have suffered most from austerity and remain in the greatest demand: face to face, local, money advice services.

 

 

Lenders need to Pay Fair Share for Debt Advice

Lenders need to Pay Fair Share for Debt Advice

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

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

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

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

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

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

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

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

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

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

The emphasis must be on ensuring consumers receive best advice.

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

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

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

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

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

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

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

Blue Sky Thinking Scotland’s Debt Law

Blue Sky Thinking Scotland’s Debt Law

On the 19th April the Scottish Government’s consultation into Protected Trust Deeds closed. For many the process will have felt like being trapped in a spinning hamster wheel.

The expression Groundhog Day doesn’t do the experience justice.

Another consultation on debt, more forewords littered with un-insightful arguments, and soundbites. 

I don’t believe Minister write these forewords, so hopefully without the risk of offending them, I will say I do think they speak volumes as to the lacklustre mindset that exists within the whole process of developing policy in relation to debt.

I recognise many of the arguments, I may even originally have made some of them in articles ten years ago, but re-reading them now, a decade later, still echoing around policy documents, is despairing.                                                                                 

Scotland’s debt laws are exceptional; the most progressive in Europe; we are the only part of the UK with a statutory repayment plan; we were the first to introduce a statutory moratorium; we need to strike the balance between the debtor and the creditor; those that can pay, should pay…ad infinitum.

The UK Government is playing catch up with Breathing Space, Statutory Repayment Plans, and tougher regulations for bailiffs, but at least their policy development has oomph and is responding to the needs of our time.

I have seen this before, in other countries, such as Ireland, where they may come late to the party, but the process can bring together new people, fresh ideas and perspectives and an enthusiasm to learn from other systems.

For those systems that don’t change, the risk is their complacency finds them stuck on the same track and the gloss fades quickly.

This is Scotland, caught in a post BADAS Act regulatory loop.

And I hesitate to say this, because inevitably the conclusion will be that even the most hardened in the industry are suffering consultation fatigue and this will be an argument for future inaction.

I am, however, suffering consultation fatigue. Fatigue from the same old lacklustre and tired ideas being reheated. Fatigue from the same over-used soundbites.

In 2011, I enthusiastically argued that Scotland’s debt laws were the most progressive in Europe. That was a long time ago and we have been eating out on that accolade for too long.

Debt law and policy began going wrong in 2013, underpinned by the completely unevidenced argument that the pendulum had swung too far in favour of the consumer and only creditors were allowed to make money from debt. The rest of the industry were only there to have their costs driven down by the AIB and to pay rising fees.

I honestly don’t understand why the Trust Deed consultation was run. If it was to ask whether Trust Deeds should be abolished, I could have understood that (although it’s not something I support), but we all know that the AIB are not about to slaughter the goose that lays the golden egg for their fees.

If it was to ask were failure rates too high, I could understand, but the AIB don’t discuss failure rates about any of their products, DAS or Protected Trust Deeds.

If it was to pick up the discussion on protecting equity in personal insolvency, which was shelved in 2010 and has never been revisited, I would have enthusiastically welcomed it.

Instead it’s about making Trust Deeds less accessible and driving down IP fees and forcing more consumers into paying longer in Debt Payment Programmes.  How is that progressive?

In their defence, the AIB argued this is what Creditors and the advice sector want. For Creditors, this means credit unions; and for the advice sector, I would challenge the AIB to evidence this assertion. I thought we were more concerned about consumer welfare, not maxing out creditor returns or minimising what they may pay in fees. Silly me.

In terms of Credit Unions, lets have a consultation on how personal insolvency should affect their debts. Surely this would be a worthwhile discussion. Better than the tiresome process of personal insolvency bashing and driving policy for minority creditors whose total debt makes up less than half of one percent of all debt in personal insolvency solutions.

I have in the past been described as a blue-sky thinker, which I believe in some circles is a derogatory term.

However, if ever Scotland required some blue sky thinking, it is now. We cannot go back to 2011, but if I could, I would hit the reset button tomorrow, so we could return to a time when it could be said Scotland had the most progressive system of debt laws in Europe.

My only consolation is I know the cracks and failings in the Scottish system cannot be bandaged up forever with AIB tinkering and soon it will become apparent to politicians that the arguments and soundbites are out-dated, plagiarised and from another time and no longer apply.

Then the narrative will have to change.

In the meantime, I suspect the Scottish Government will not be submitting any controversial regulations to the Economy, Energy and Fair Work Committee of the Scottish Parliament without two or three parts of the sector supporting them.

I don’t see that support being there for anything covered in the Trust Deed consultation. Certainly not anything that will stand up to robust scrutiny. It will certainly take more than a survey monkey style poll to conclude otherwise.

Is Minister receiving good Information on Common Financial Tool?

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.

Parents Clubs Scotland

Parents Clubs Scotland

The Scottish Government have launched their new Parents Club Scotland website, to help support families raising young children in Scotland and to promote child and parental welfare.

Designed to take a holistic approach to family well-being, Parents Club Scotland aims to provide information on new Scottish Government benefits, including the Baby Box Scheme and the newly launched Pregnancy and Baby Payment Grants.

It also contains information on how to ensure your children are receiving a healthy diet and offers, day to day, practical tips on how to entertain your children and how to help get them to sleep.

Financial Health Checks

However, the site is not all about children, it is also about parents and recognising they need information, advice and support.

To that end, Parents Club Scotland is also seeking to promote uptake of the new Scottish Financial Health Check, which the Scottish Government has launched with Citizen Advice Scotland.

The new Financial Health Checks will support parents by providing them with benefit and budgeting advice and showing them how to access their credit reports, whilst also providing them with holistic advice on all their options when dealing with problem debts, including providing information on

For more information on Parents Club Scotland, visit the site here, or to get a Financial Health Check call 0800 085 7145.  Alternatively, browse Advice Scotland for more information.

Parliamentary Committee Recommends against Standard Financial Statement

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.

New Bankruptcy Fee Regulations Laid

The Accountant in Bankruptcy have laid new Bankruptcy Fee Regulations.

The Regulations, which are subject to the Negative Procedure of the Scottish Parliament are due to come into force on the 1st of June 2018.

They follow a consultation that was carried out by the Accountant in Bankruptcy, and unlike earlier Regulations that were withdrawn in 2017 (see here), are not expected to have any negative effects on debtors.

The Regulations can be found here.

Prescription (Scotland) Bill

Prescription (Scotland) Bill

The Prescription (Scotland) Bill 2018 should be welcomed, but the Scottish Parliament needs to ensure all obligations to pay debts arising from personal contracts and statute should be covered by short term negative prescription, with few exceptions.

Scotland’s law of prescription governs when an obligation to pay a debt is extinguished and no longer owed. This includes debts owed for credit cards and personal loans, but also debts such as council tax arrears, benefit overpayments and outstanding tax debts owed to the crown.

At present the framework for this area of law is provided for by the Prescription and Limitations (Scotland) Act 1973 (1973 Act), which the Scottish government aims to amend and clarify with the Prescription (Scotland) Bill 2018 (2018 Bill), currently at stage one in the Scottish parliamentary process.

Prescription Framework

The current framework under the 1973 Act provides that if a debt is specified in paragraph one of Schedule One of the Act, it is covered by short term negative prescription, which means the obligation to pay the debt expires after five years, unless the person owed the debt takes certain steps to protect their claim (or the debtor makes a relevant acknowledgement of it). Paragraph Two of the Schedule, then specifies which obligations are not covered by the five-year rule, whilst Schedule Three lists obligations which are never extinguished.

Where an obligation is neither covered by short-term negative prescription, or exempt from being extinguished, it is covered by long-term prescription, which means the obligation can be recovered for up to 20 years, with, as the law currently stands, that period being restarted if a creditors makes a relevant claim for the debt within that twenty year period or the debtor makes a relevant acknowledgement of it.

It was the operation of this long-term prescription rule that meant that even in 2014 some Scots still owed poll tax debts, which dated back as far as 1989, and led to the passing of the Community Charge Debt (Scotland) Act 2015 to write off the remaining debts owed.

However, as was entirely predictable, attempts by the 2018 Bill to simplify the law in this area have already been derailed, with certain statutory creditors arguing their debts are different and in need of special treatment. So, in section three of the 2018 Act, a new provision that aims to include all statutory obligations to pay a debt into the five-year rules, unless provided for elsewhere, has now led to several provisions which provide otherwise elsewhere.

This includes debts owed for council tax, non-domestic rates, benefit overpayments (under UK legislation) and tax debts owed to the crown.

Few Exceptions

The Scottish Parliament should resist these attempts to protect the “special interests” of certain statutory creditors, with a view to preserving the overall principle that all debts, with few exceptions, that arise from personal contracts or statute should be covered by the five year rule and creditors, who wish to protect their claim, should be required to take certain steps to do so.

This could easily be achieved in relation to debts for council tax, non-domestic rates, and crown tax debts by extending sub-paragraph (a) of paragraph two of Schedule One of the 1973 Act to include debts legally constituted by decrees or documents of debt. This provision currently states the five-year rule does not cover obligations if they relate to an obligation to comply with a decree of court, an arbitration award or an order of a tribunal or authority exercising jurisdiction under any enactment. By extending it to include decrees and documents of debts, this would mean debts that are constituted by summary warrants, which all local authorities and HMRC have the power to issue for the above debts, and regularly do so, would be covered by long-term negative prescription. It would also mean in future, where new statutory obligations are created, and there is a wish to allow the statutory creditors to protect their claim easily, it would not be necessary to further amend the 1973 Act, but instead to allow for a means of recovery that allows the summary warrant procedure to be utilised.

In relation to benefit overpayments, however, that are owed to HMRC and the Department of Works and Pensions, the Scottish government should bring forward rules to provide that UK benefit overpayments, owed under the Social Security Administration Act 1992 and the Tax Credits Act 2002, are expressly included into the five-year rule. This would ensure all UK benefit debts are treated the same as Scottish benefit overpayments, which because of section 38 of the Social Security (Scotland) Bill 2017, will be covered by short-term negative prescription. It makes no sense that debts which are essentially the same in nature, should be covered by different prescription rules, simply because the source of the debt is UK legislation, rather than Scottish legislation.

Equally, however, if the purpose of section 38 the Social Security (Scotland) Bill 2017 is to provide a short recovery period for benefit overpayments, it may be necessary to further restrict sub-paragraph (a), of paragraph two of Schedule one of the 1973 Act. The reason being is that it makes clear that debts that are constituted by a tribunal or authority exercising jurisdiction under any enactment are not covered by the five-year rule: this could include both benefit UK and Scottish benefit overpayments. Also, it may wish to consider whether the running of short-term negative prescription for these types of debt can be interrupted by claimants making relevant acknowledgements of the debt, such as in making payments towards them. The reason being most benefit overpayments are recovered by direct deductions from existing awards of benefits, meaning every payment constitutes a relevant acknowledgement of the debt and the five-year prescription period begins running again. Most people will, therefore, clearly still be paying back benefit overpayments, long after the expiry of five years.

Bill to be Welcomed

However, the new Prescription (Scotland) Billis to be welcomed. For many years, because of the omissions in the 1973 Act, it was not even clear if HMRC tax debts could be extinguished.

Also, section 6 in the 2018 Bill makes it clear it will no longer be possible for long-term prescription to be interrupted by a creditor making a relevant claim or the debtor making a relevant acknowledgment, meaning a repeat of the problems that arose with poll tax should no longer arise, with debts still be being owed long after the expiry of twenty years.

Also, section 14 of the 2018 Bill also introduces into the 1973 Act a new burden of proof on creditors who are pursuing a debt through the courts, to show, where a question arises, whether that debt is prescribed or not. With the increasing use of litigation by debt purchasers to protect claims for distressed debts, this will hopefully help stamp out the practice of them obtaining decrees for extinguished obligations.

Long term Prescription – Is it too Long?

However, the question does need to be asked, with the similar law in other parts of the UK being governed by the Limitations Act 1980and the prescriptive periods being six and 12 years, is the long-term negative prescription period in Scotland too long? There appears little reason it should be possible for debtors in Scotland to be pursued for the same types of debts, owed to the same organisations, for almost double the duration of debtors elsewhere in the UK. Arguably, a shorter period of long-term negative prescription of 10 or 15 years should now be adopted.