Scottish Parliament

Social Justice Committee says Devolved Powers should be used to combat Cost of Living Crisis

Social Justice Committee says Devolved Powers should be used to combat Cost of Living Crisis

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The Scottish Social Justice and Security Committee have timeously published their final report into the problem of Low Income and Debt in Scotland (Robbing Peter to pay Paul: Low
income and the debt trap).

The Committee, which launched its enquiry in November 2021, and has been taking evidence from stakeholders and other interested parties over the last 8 months, has now published it’s recommendations.

These include:

  • A call for the Scottish Government to use all of Scotland’s devolved powers to help tackle the cost of living crisis, particularly for disabled adults and children
  • For the UK Government to accelerate its plans to bring forward secondary legislation to control the emergence of Buy Now Pay Later credit as a growing area of debt.
  • For the UK Government to reflect on how Universal Credit is exacerbating the finances of those on low income and contributing to a rise in debt.
  • For the Scottish Government to undertake a full review of the Scottish Welfare Fund and ensure it is adequately funded.
  • For new national guidance to be developed to cover the collection of publicly owned debt and for clear guidance and processes to be created for disputing liability for public owned debt, including council tax.
  • A tightening up of pre-action requirements for evictions in the private and registered social landlord sectors, with greater emphasis on promoting money advice.
  • For COSLA to work with local authorities to develop a national policy in relation to the collection of school meal debts, that has regards to human rights and removes stigma.
  • For the Scottish Government to work with Local Authorities to agree 3-year funding plans for Money Advice, that does not detract from the need for core funding of services.
  • For increased funding to be made available for money advice services.
  • For the Scottish Government and Local Government to ensure that everyone has access to face to face, online and telephone advice.
  • For there to be increased access to free Wi-Fi and computers through libraries.
  • For more training to be provided to health care professionals to raise awareness of debt issues and the importance of advice.
  • For the Scottish Government to bring forward a mental health moratorium for people struggling with debt and to ensure that people will not be charged by mental health professionals for completing a Debt and Mental Health Evidence form. This would bring Scotland into line with the rest of the UK.
  • For bankruptcy fees to be removed for anyone who is found to have no disposable income.
  • For the minimum debt threshold for Bankruptcies to be removed and for the time a party must wait before they can use the Minimum Asset Procedure again to be reduced to five years from ten years.
  • For the Protected Minimum Balance for Bank Account Arrestments to be increased to £1,000 from £566.51 (this measure has already been implemented and will now commence from November 2022).
  • For Creditors to be allowed the flexibility to reduce, with the agreement of employees, the level that Earning Arrestments are taken from wages.

The full report can be downloaded here.

Proposed Reforms to Trust Deeds

Proposed Reforms to Trust Deeds

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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.
Lenders need to Pay Fair Share for Debt Advice

Lenders need to Pay Fair Share for Debt Advice

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*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.

Is Minister receiving good Information on Common Financial Tool?

Is Minister receiving good Information on Common Financial Tool?

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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

Parliamentary Committee Recommends against Standard Financial Statement

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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

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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

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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.

Do No Harm: Scotland’s New Financial Health Service

Do No Harm: Scotland’s New Financial Health Service

As the Scottish Government announces plans to launch their new Financial Health Service with the introduction of the Bankruptcy and Debt Advice (Scotland) Bill 2013, there is a real opportunity in Scotland to create a new system of debt management and relief.

The idea that should underpin such a service is that our legal system should contain provisions that allow for financially distressed debtors to be nursed back to health and no more than we would expect a doctor to amputate a broken leg, should we expect this new service to leave distressed consumers permanently disabled or disadvantaged.

On the face of it the Scottish Government appears to recognise this and in introducing the bill have identified three broad principles they want to underpin the new legislation, these are that:

• the people of Scotland should have access to fair and just processes of debt advice, debt management and debt relief; that
• those that can pay their debts, do pay their debts; and that
• the best returns for creditors are secured by balancing the rights of debtors with those of creditors and businesses.

At first glance, who could disagree?

However, the new bill does give rise for concern. The first problem is the Scottish Government views it as their response to not only the credit crunch, but the economic and social changes that Scotland has undergone over the last 28 years: from being a society where there was more social housing than in cold war Poland, to one where now over two thirds of homes are privately owned; and from a society where once credit was difficult to access, it is now widely available.

But the problem with this analysis is it is behind the times. We no longer live in a society where an abundance of credit causes problems, but one where the suffering caused by austerity and falling living standards makes it a harder for more and more consumers to maintain their financial commitments.

So the question needs to be asked, is the Scottish Government on the right page in their approach to bankruptcy and debt advice?
Well one of the major changes that will be introduced with the new bill will be the extension of the duration people in sequestration and protected trust deeds have to pay, from a three year minimum to four years. They will also introduce new provisions which will abolish the current low income, low asset route into bankruptcy and replace it with a more restrictive remedy known as a No Income, No Asset bankruptcy, only accessible to those with less than £10,000 of debt and who are in receipt of social security benefits.
Other measures that will be introduced will be a new Common Financial Tool that will aim to ensure people pay more to their debts than they currently do.

There will also be a significant transference in power from the courts to the Accountant in Bankruptcy (AIB), meaning in future more decisions will be executive decisions rather than judicial ones and not just in relation to non-controversial matters. This will include the right to award Bankruptcy Restriction Orders and make Debtor Contribution Orders and will reverse the current position where the Accountant in Bankruptcy has to apply to the courts for such powers. In future, if debtors disagree, they will have to incur the cost and trouble of appealing.

Other changes will include an end to automatic discharges for debtors in sequestration, introduced in 1985, ironically to deal with the numbers of debtors that were left lingering in bankruptcy for lengthy period of times without a discharge.

So is this a Financial Health Service that will nurse more debtors back to health? I don’t think so.

Personally I feel like there is an element of mis-representation taking place.

Why? Well I suspect the real purpose of the bill is to help the Scottish Government to realise its goal of making the Accountant in Bankruptcy’s office fully self-funding and I suspect it’s also because policy development has been left to the AIB’s office, which see it as an opportunity to implement self-serving reforms.

If I was to summarise the new Bankruptcy and Debt Advice (Scotland) Bill 2013, I would not call it a Financial Health Service. I would describe it as a drifting out of the tide of progressive debt reform in Scotland and a return to a system which debtors will view as being overly coercive and hostile.

The Scottish Government are correct, Scotland has changed, its economy has also changed – many times over since 1985 – but when other legal systems are looking to liberalise their bankruptcy laws, it appears bizarre Scotland is heading in a different direction.
I am reminded of the comments of Kenneth Galbraith in his book the Great Crash of 1929, that the best form of protection is memory, with the problem being once people forget they repeat their mistakes. I suspect we are displaying those signs just now and are in danger of forgetting many of the lessons that led to the Bankruptcy (Scotland) Act 1985.

Just don’t break your financial leg.