This is a submission I have made to the Economy, Energy and Fair Work Committee in response to their call for evidence on Protected Trust Deeds.
I have extensive experience of Protected Trust Deeds (PTDs) as a Money Adviser and have previously been employed as a Senior Manager in the personal insolvency industry and was also employed in the Republic of Ireland in 2015 as Personal Insolvency Practitioner.
In 2016-17 I was also employed as a Project Manager with Govan Law Centre with their Personal Insolvency Law Unit, which involved taking on problematic cases where people were in Protected Trust Deeds and providing people with advice and assistance.
During my time in that role we highlighted the alarming failure rates of some Personal Insolvency Firms, with some Firm’s having failure rates as high as 88% for Protected Trust Deeds. Govan Law Centre also called for action by the Scottish Government and The Accountant in Bankruptcy (AIB). That call was ignored, and no action was taken.
The History of Protected Trust Deeds
Trust Deeds historically are a creation of Scottish solicitors and date back to the 19th century.
A common law solution, based on Trust Law, they were created as an alternative to sequestration, to allow people struggling with debt to voluntarily enter into arrangements with their creditors. Trust Deeds, however, required all creditors to agree to them and did not include any provisions for debt write off.
In 1985, PTDs were created to address some of the shortfalls of Trust Deeds, by introducing a statutory process that allowed them to become protected. This process involved the appointment of a licenced insolvency practitioner. There was also a voting procedure introduced where two-thirds of creditors had to agree before a Trust Deed could become protected.
In turn, where a Trust Deed was protected, the Trust would propose, after 3 years normally, the consumer would receive relief from their debts.
Between 1985 and 1993, there was almost 25,000 Protected Trust Deed proposed, but less than one percent became protected. This was due to non-engagement by creditors, which meant the requirement of obtaining creditor agreement was never achieved.
However, as failure to obtain protection constituted apparent insolvency (which was pre-requisite for a consumer to apply for their sequestration), failed Trust Deeds became an important route for consumers to enter bankruptcy, and over the same period, there were 24,861 Trustee petitions for sequestration.
In 1993, the Bankruptcy (Scotland) Act, changed the voting rules for PTDs, so creditors with one-third in value had to object before it failed.
Between 1993/94 and 2003/04, almost 24,566 Trust Deeds were protected. Numbers increased over the following decade with the numbers peaking in 2009 with 9,188.
Use of Trust Deeds by Free Sector
PTDs were widely used by the free money advice sector up until 2010.
Prior to then, free money advice agencies referred cases to private insolvency firms (as only private sector firms can do Trust Deeds).
The perceived advantage of a PTD was it was easy to access and did not require the client to prove apparent insolvency, which they had to if they wanted to petition for their own sequestration.
This was difficult to do and often relied on creditors taking legal action, meaning consumers were often unable to access bankruptcy and would have been left in debt limbo if it had not been for PTDs.
Trust deeds were also not viewed as having as damaging an effect on people’s credit rating.
Prior to the credit crunch, for example, it was common for people in PTDs to be able to re-mortgage and release equity, so they didn’t have to sell their home.
Also, prior to 2008, the general view was when a PTD failed, the only option available to a Trustee was to sequestrate the consumer (and usually where the failure had arisen from a genuine inability to make payments, to appoint the AIB as the Trustee).
The effect of this was failed Trust Deeds were not perceived to be the problem they are today, as the Trustee would use sequestration to address the consumers over-indebtedness.
Trust Deeds in the Post 2010 Landscape
In the post 2010 era Trust Deeds have been less used by the free sector, as the Homeowner and Debtor Protection (Scotland) Act 2010 introduced Certificates of Sequestration, which allows money advisers to certify a consumer should be allowed to apply for their sequestration (Certificates removed the legal obstacles that had existed with apparent insolvency being a pre-requisite for bankruptcy).
Also, after 2008, Trustees could refuse a consumer a discharge from their Trust Deed and to request their own discharge, therefore, removing the need to sequestrate the consumer to bring the Trust Deed to an end.
This over time has led to a dramatic increase in the number of consumers who have entered PTDs and had them failed, even after paying years of contributions and being given all their debt back with interest. Over time this has discredited Protected Trust Deeds in the eyes of many, as it is now viewed to be a product that often fails and does not produce the benefits that are used to sell it as a debt relief solution in the first instance.
This concern peaked in 2015, when the AIB reported in their annual report one firm had a failure rate of 88% for 392 cases that year. That equated to 344 cases where the consumer did not get their debt relief and the funds that were paid were kept by the Trustee firm. In none of those cases were a dividend paid to the creditors.
Despite this issue being flagged up to the AIB by Govan Law Centre’s Personal Insolvency Law Unit and the Herald newspaper giving it editorial attention, no action, that is known of, was taken by the AIB.
It is generally accepted this situation has now improved, but it has left PTDs widely discredited across the advice sector and the AIB discredited as an effective Regulator in protecting consumer interests.
It is also worth noting, the AIB has never consulted on the failure rates in PTDs or proposed any remedying action.
In this regard, it must be asked whether the failure to act has been motivated by the AIB’s dependency on Trust Deed fees?
In 2018-19, for example, of the £10.7 million the AIB had in operating income, £3.2 million came from PTDs.
Certainly, I have found the AIB have demonstrated a reluctance to give “directions” to Trustees in PTDs, which is a power they were given in 2013, suggesting a unwillingness to become involved, even where there is evidence that a consumer is not refusing to co-operate.
The Benefits of Protected Trust Deeds
However, there is without a doubt a benefit to Protected Trust Deeds.
In 2018-19, for example, 7,485 PTDs came to an end. Of those 1,540 failed (20%), but 5,945 people did become debt free.
Trust Deeds also retain benefits in that they allow assets to be dealt with more flexibly than sequestration does, particularly in relation to the principal home.
A consumer with equity in their home has fewer options for keeping their home in a bankruptcy, than they do in a PTD.
Lenders have also shown they are willing to let people keep their home, even where there is equity, in exchange for a couple of more year’s contributions.
Although this practice has been frowned upon by the AIB, it has been allowed by large commercial consumer creditors, who take a similar approach in Individual Voluntary Arrangements across the UK.
This home-friendly approach has been necessary as the Scottish Government have not looked at the treatment of the home in personal insolvency since 2010 (when they gave an undertaking they would).
Also a type of PTD that was introduced by the Scottish Government in 2010 to exclude the home has been an abject failure, and this policy failure has never been addressed.
Also, the average dividend in Protected Trust Deeds in 2018-19 was not the 16p in the pound that had been anticipated, but 20p in the pound, suggesting they outperformed what creditors had hoped for when they agree to them.
Smaller Creditors – Credit Unions
It is no secret, however, that some of the biggest critics of Protected Trust Deeds in recent years has been Credit Unions. This is understandable from their perspective as personal insolvency can have a disproportionate effect on them.
However, Government legislation cannot make bad loans good.
If people cannot pay their debts within a reasonable time, they will seek other solutions, and if it is not Protected Trust Deeds, it will be sequestration, or just non-payment.
Credit Unions are also already in a far stronger position than most other creditors are, being able to use Summary Diligence, but still are suffering from increasing levels of bad debts that are nothing to do with personal insolvency.
The question must be asked how sustainable many small credit unions can be in a highly commercialised consumer credit market?
One must ask whether the process of consolidation, which is already happening amongst credit unions, needs to be accelerated, so they can be more sustainable in a landscape when their customers are not just borrowing from them, but also from guarantor loan firms, credit card firms, pay day lenders and car finance companies. The risk to credit unions in the lending market has increased and it is nothing to do with personal insolvency.
As to suggestions that it is credit union members savings that are being put at risk through rising insolvencies, it must be noted that all savings are protected by the UK’s Financial Compensation Scheme
Is there a future for Protected Trust Deeds?
I believe there is a future for Protected Trust Deeds, however, there must be significant changes.
The AIB has failed as a Regulator and as a result of this, what we have seen in the last ten years can only be described, to varying degrees, as a dysfunctional market.
The worse of that may be over; however, free sector money advisers do come across significant number of cases where consumers have been refused discharges, through no fault of their own, and as result have seen years of contributions go nowhere to reducing their debts.
However, when we consider failure rate, we need to place these in context.
In the Debt Arrangement Scheme, the failure rate is believed to be as high as 40% in the first five years (contrast that with a 20% failure rate for PTDs over a similar period). Forcing people to pay longer, rather than giving them realistic debt relief is not a realistic solution.
Debt management does not work for everyone and restricting access to debt relief is not the answer.
With Trust Deeds more must be done to protect consumers who genuinely cannot afford to maintain their contributions. Refusing a discharge should only be allowed in those minority of cases where people can pay but refuse to pay.
The AIB as a Regulator must be more involved in approving the refusal of a discharge, with a stronger obligation on them to issue directions where necessary, including a direction to set a “nil contribution” order where appropriate.
We also need to examine how equity in the principal home is dealt with in personal insolvency and to that end the Scottish Government should make good on their promise to consult on how the home is dealt with.
Finally, we need to accept that personal insolvency is about the failure of someone’s ability to meet their financial obligations and about managing the conflicting claims of their creditors.
Unfortunately, this means all parties are losers, including the consumer.
Denying access to debt relief, however, doesn’t transform that situation and make any Party a winner, nor should it.
