The Economy, Energy and Fair Work Committee of the Scottish Parliament has written to the Minister for Business , Fair Work and Skills, Jamie Hepburn to express their reservations about the Debt Arrangement Scheme Amendment (Scotland) Regulations 2019 (see letter here).

In the letter, which follow on from the Committee taking evidence from Money Advisers, Insolvency Practitioners and Credit Unions, the Committee has expressed concerns that the Regulations were laid too early.

They also express their concerns that the Regulations do not outline how fees generated from the free advice sector will be returned to them.

The Committee’s concerns come despite both the representatives of the Institute of Chartered Accountants of Scotland and Money Advice Scotland, David Menzies and Yvonne MacDiarmid, confirming to the Committee that the Regulations should be allowed to pass, whilst expressing their concerns in their Organisation’s written submissions.

Stepchange, who described themselves as “Winners”, also believed they should be allowed to pass, despite the concerns raised that the Free Advice Sector, like Citizen Advice Bureaus and Local Authority Money Advice Services would be losers.

All those who gave evidence in the first panel session expressed their concern with Regulation 4 and Mike Holmyard, from Citizen Advice Scotland, myself and Angela Kazmierczak called for the Minister to amend them first.

I believe that position is the one shared by the vast majority of face to face, front line money advisers, Creditors and Insolvency Practitioners, despite the views expressed by those who supported them being passed.

So what are the Debt Arrangement Scheme Scotland (Amendment) Regulations 2019?

The Regulations amend Scotland’s formal debt repayment scheme, the Debt Arrangement Scheme. They contain a number of provisions, widely welcomed across the debt advice, personal insolvency and creditor industry that will make it easier for people to apply to the Scheme.

They will also make it easier for people in the Debt Arrangement Scheme to miss payments when they suffer unexpected financial difficulties and allow them to be able to miss up to two payments a year for such reasons, without defaulting on their programme.

What the Regulations also do, however, is increase the costs of the Scheme to Creditors by over 100% from a maximum of 10% to 22%.

These increased costs are to ensure:

• No one has to pay a private sector fee for entering the Scheme; and
• The full costs of the Scheme, including the costs of being given money advice, are borne by the Creditors, rather than just the cost of payment distribution which was the previous position

Concerns about new Fee Structure?

Despite the positive nature of the Regulations, serious concerns have been raised in relation to:

• The fact they were brought forward too early before a consultation on returning fees to the free advice sector was concluded;
• How the new fee structure introduced gives 20% of the 22% fee to the Payment distributor and does not include any express provision in the Regulations for any funds to be refunded to the money advice agency;
• How money advice agencies will be paid, if at all, and how much.

Speaking about the Fee Structure the Economy, Energy and Fair Work Committee, in its letter to the Minister, has expressed its concerns that the result of the consultation on returning fees to the free sector should have been released before the Regulations were laid in front of Parliament.

The Committee has also called on the Minister to consider creating statutory provision on funding such free advice agencies.

Finally, the Committee has expressed its concern that a new system of consumers having to choose their own payment distributor has no merit and will create unnecessary work for advice agencies and present consumers with impossible decisions for them to make. Instead they have suggested the Minister considers continuing with the “Taxi Rank” system where cases are allocated on a rotational basis from a panel.

The Committee has also asked the Minister to indicate whether the Scottish Government will give an undertaking to carry out a review of all debt options in Scotland.

What can the Minister do?

The Minister, Jamie Hepburn has a number of options.

He can do nothing, and wait and see if the Regulations will be approved despite the Committee’s concerns. This is a risky option, as two previous Regulations, drafted by the Accountant in Bankruptcy, have in recent years been withdrawn (The Bankruptcy Fees (Scotland) Regulations 2016 and The Common Financial Tool (Scotland) Regulations).

If the Committee chooses to write a Report recommending the full Parliament rejects the proposals, this would be extremely damaging and display an unwillingness to listen to the wider advice, personal insolvency and credit industry, including also the concerns of the Economy, Energy and Fair Work Committee.

Alternatively, he could withdraw the Regulations, amend Regulation 4 and re-table them, which is likely to satisfy the Committee and also ensure they would pass after 40 days with wide approval of the Sector.

Thirdly, he could withdraw them, not amend them and not re-table them and say they will be redrafted at a later date, after possibly a wider review of all debt solutions and the introduction of Breathing Space and the UK’s equivalent Statutory Repayment Scheme, which is not likely to commence until 2021.

The danger with this strategy, is first it in effect is a third Regulatory failure by the Accountant in Bankruptcy and must lead to questions about the suitability of some of those in senior positions to continue in their current roles.

It also leaves organisations like Stepchange with no viable funding model for continuing to provide the Debt Arrangement Scheme, as they claim the current 8% they receive is not sufficient to cover their costs.

It also leaves a free advice sector facing a funding crisis with no further sources of much needed revenue.

It also means, in all likelihood the Scottish Scheme, the First in the UK, and the model the UK model is based on will end up becoming an imitation of the UK Breathing Space and Statutory Repayment Scheme.

Ultimately, it would also seem like the Accountant in Bankruptcy are throwing the baby out with the bath water, and is unlikely to restore any goodwill in the relationship between them and their stakeholders, something that is in short supply at the moment.

A final option for the Minister is to ask that the Regulations be passed and promise to bring further regulations forward quickly to explain how free advice agencies will be funded.

However, the problem with this, is it would be a further set of Regulations, commencing at a later date, in a Debt Arrangement Scheme landscape littered with Regulations amending the Debt Arrangement Scheme (Regulations) 2011.

That would be an administrative nightmare for qualified solicitors, never mind money advisers. It would be quicker and cleaner to amend Regulation 4 now.

What should the Minister do?

What the Minister should do is bite the bullet, accept that there is a broad consensus on the Regulations across the Sector (something rarely achieved) and that by withdrawing them and retabling them with Regulation 4 amended, they would likely pass without contest in 40 days.

Those amendments should include:

• Reintroducing the system of allocating free sector cases using the “taxi rank” system and a panel;
• Allowing the fees to be applied to all current cases using the variation process to increase funding to free sector advice agencies;
• Introducing a fee structure of:
  • Payment Distributors – 5%
  • Money Advisers – 15%
  • Debt Arrangement Scheme Administrator – 2%

He should then give an undertaking to carry out a full review of all Scotland’s Debt Advice solutions.

It would put Jamie Hepburn in a strong position, strengthening Scotland’s debt laws at a time when problem debt is on the rise and everyone across Scotland is facing a financially uncertain time. What is there not to like?

It would also provide an immediate injection of new funding into Scotland’s free advice agencies at a time of when funding is at crisis levels and would be a positive compliment to the launching by the Scottish Government of its Debt Advice Route Map, later this month.