Questions for the Minister

Scottish Government Minister for Business, Fair Work and Skills, Jamie Hepburn, is due to give evidence to the Economy, Energy and Fair Work Committee on Tuesday, 17th September.

The evidence session will be to help the Committee further consider the Debt Arrangement Scheme (Scotland) Amendment Regulations 2019 and follows previous evidence that has been given by the Money Advice sector , the insolvency industry, credit unions and the Accountant in Bankruptcy.

So what line of questioning and what questions may the Committee want to take up with the Minister?

The first question that Mr Hepburn will most likely answer when he begins to give evidence is whether he is willing to withdraw the Regulations, to allow them to be amended, as the Committee has asked, before re-tabling them?

This would  be to allow the 20% Payment Distribution Fee to be split into a Payment Distribution  Fee, a Money Adviser Fee and a Debt Arrangement Scheme Fee.

Money Adviser Fee

Concerns have been raised about the lack of transparency in the Fee Structure by Citizen Advice Scotland, Money Advice Scotland and UK Finance (who represent over 250 Creditor organisations).

In addition  to this, on the 12th September, at a Ministerial meeting with Jamie Hepburn and the money advice, insolvency and creditor industry, it was brought to the Minister’s attention that the two largest Payment Distributors and providers of the Debt Arrangement Scheme, Stepchange and Carrington Dean, would support a short withdrawal to allow the Regulations to be amended and re-tabled. Citizen Advice Scotland also supported the Regulations being withdrawn and amended.

However, at the Ministerial Meeting, the Minister said he was not sure if he could do what he was being asked.

However, there is no question that he can.

Section 7 (1) (b) of the Debt Arrangement and Attachment (Scotland) Act 2002 makes it clear the Scottish Minister’s can make Regulations concerning the operation of the Debt Arrangement Scheme, and in particular s7 (2) (ub) gives them the powers to make Regulations relating to the remuneration of Payment Distributors and Money Advisers.

Furthermore, Regulation under 7 (y) the Scottish Minister’s can make regulations in regards tos

(i) the consideration of applications for the approval, or the variation, of a debt payment programme;

So the Minister can create a three pillar fee structure, that includes a Money Adviser, Payment Distributor and Debt Arrangement Scheme Administrator Fee.

This would ensure Free Sector Money Advisers have a statutory right to be paid, where they are not Payment Distributors, for all their cases regardless  of who the Payment Distributor is.

Some have suggested, however, this is not what the Committee has asked the Minister to do. Instead, they have suggested that a Money Adviser fee be created which allows Free Sector Agencies to be paid in every case.

This is not what my understanding is of what the Committee intended, judging from the context of the submissions that have been made and the evidence that has been gave up to date. If such an alternative interpretation of the wording is even possible, the letter is not dictating how the amended legislation be drafted.

It has not been suggested by any of the Stakeholders such provisions be created. There have been proposals for a Scottish Debt Advice Levy, but this would be over all Formal Debt Solutions and would require further consultation and legislation to cover Protected Trust Deeds, Sequestration and the Debt Arrangement Scheme. It could clearly not be done by these Regulations which only address the Debt Arrangement Scheme.

What has been asked for is the creation of a three pillar fee structure for the Debt Arrangement Scheme, which is possible and has the support of UKfinance and Citizen Advice Scotland. I expanded on this fully in my submission to the Committee on the 11th September, which can be read here.

Even Stepchange and Carrington Dean, (the two largest Payment Distributors) and providers of the Debt Arrangement Scheme, have said they would also support a withdrawal to allow the Regulations to be amended.

One can only imagine that those arguing for such an interpretation of the Committee’s letter are trying to conflate two different proposals, to confuse the issue in front of the Committee.

eDen Software – Are the AIB Ready?

During the AIB’s evidence session with the Committee, Richard Lyle with his experience of working in the Debt Recovery industry, questioned whether the AIB were ready to launch the new Scheme on the 4th November.

Dr Richard Dennis gave assurances they were and revealed they had spent £50,000 acquiring new Payment Distribution software that would allow them to become Payment Distributors.

The problem is, apparently the implementation of the software is behind schedule and beleagured with problems.

Currently, existing Payment Distributors are complaining the new system is causing them multiple problems and Sharon Bell of Stepchange, referenced this in her evidence to the Committee and how it is costing them money.

Apparently, eDen has no letters uploaded on it, some debts are missing, balances are wrong and it’s API connection, which allows it to speak to the software of other Payment Distributors, is not working.

Unsurprisingly, Dr Dennis didn’t mention these issues to the Committee.

Possibly he isn’t aware of them or the extent of the problem, otherwise you would have hoped he would have raised them with the Committee members when asked if the AIB were ready.

However, during his evidence session,  Dr Dennis also on numerous occasions misinformed the Committee that the average payment in the Debt Arrangement Scheme was £400 per month, when it is actually £170 per month.

Neither the Head of Policy or the Head of Trust Deeds and the Debt Arrangement Scheme corrected him during the evidence session, despite the fact they would surely have known he was mistaken, as it was in their consultation  document on returning fees to the free sector.

The real problem is they may not know how their Payment Distribution software is going to work when launched to deliver their own Payment Distribution Service.

Both Stepchange and Carrington Dean use their own software for doing payment distribution, but must also upload their information onto the eDen system, so although the fact the AIB’s system is not working will be an inconvenience for them, they will be still operating.

However, as eDen will be the Payment Distribution  system the AIB will use and they have never operated as a Payment Distributor before, questions must be raised in light of the concerns being raised.

This is a further cause for concern, as it is only by using the AIB as a Payment Distributor under these Regulations that the Free Debt Advice Sector has a right to be paid, but with that it appears may come a period of unnecessary disruption and potential reputational damage for those Agencies that use their services.

These problems also make it likely Stepchange and Carrington Dean will not immediately increase their take up of Debt Arrangement Scheme cases until these problems are solved.  This is probably another reason why they are happy if the Regulations are withdrawn for a brief period and then re-submitted.

Conflicts of Interest

Colin Beattie has also pursued a line of questioning with the AIB over the potential conflicts of interest with the AIB acting acting as both a Regulator and a Payment Distributor.

Possibly, in light of the above problems with the AIBs own eDen system, this brings this issue into sharper focus.

Dr Richard Dennis made the point in the evidence session, it is the Financial Conduct Authority that licences Payment Distributors.

However, as was explained by Kelly Donohue,  Head of The Debt Arrangement Scheme at the AIB, although it is the FCA who licences the Payment Distributors, it is the AIB who authorise them to work in the Debt Arrangement Scheme market and ultimately is they who police them.

You may be a FCA licenced Payment Distributor, but if you don’t have AIB approval, you cannot work in the DAS market.

So, how will AIB police Payment Distributors, if their own service and software is experiencing problems and costing the other Payment Distributors money?

It sounds like a conflict that could be a problem soon after the commencement of these Regulations and a few extra months delay to amend the Regulations may not be the worse thing in the world, as it will give the AIB a few more months to get their systems in order.

Existing Cases – Private Sector

Another issue that was raised at the Ministerial Meeting was the issue of existing private sector cases in the Debt Arrangement Scheme, where consumers are paying a private Debt Management Fee.

The new Regulations will mean in all new private sector cases it will no longer be possible for private firms to charge a fee.

However, for those existing cases, consumers will be tied into their existing fee contracts, many of which will see consumers pay £1,000’s more than they would if they had used a free sector provider.  For many this will mean paying for years more than if their scheme was under the new Regulations.

The problem is the new proposals will not apply to existing cases and the current law does not provide them with any mechanism for transitioning over  to the new fee structure.

This then creates the problem, that with 3-4,000 cases under the old Regulations, 1,000’s may want to stop paying their current Debt Payment Programmes to  get them revoked, so they can apply under the new Scheme.

Dr Richard Dennis even admitted in his evidence in nearly every case this would be in their best interests.

He also admitted the AIB had taken legal advice and that came back to say  applying the new fee structure to existing cases would be legal.

In light of that, would it not be wiser to have a slight delay to explore whether a further amendment should be made?

A quick consultation could run for creditors on this point, whilst the new free structure is amended and as Jamie Hepburn said himself at  the Ministerial Meeting, although consensus was important, it was what was best for  the Scottish people that was paramount.

  • Surely, no-one in Scotland having to pay a fee for the Debt Arrangement Scheme was in the public interest?
  • Surely, 3-4,000 people not having to make the impossible decisions as to whether they should keep paying their Debt Arrangement Scheme was in the public interest?
  • Surely, not having rogues targeting existing private sector cases, to encourage people not to pay their Programmes, so they can steal the cases and generate fees of 20% was in the public interest?

However, the simple fact is because of FCA Regulations, these private sector providers may have to give their own clients that advice, to stop paying their Debt Payment Programmes, as they are required to review cases annually, and at that point advise the client, where a solution is no longer the best one for them, what is the best solution.

Paying £1,000’s more than you need to, for years more than you have to, is hardly best advice, regardless of what the AIB say.

As I have already said, The AIB have a high level of tolerance when it comes to consumer harm. The FCA call deciding what is best advice, the “Granny Question”. What would you advise your Granny?

Few would advise them to keep paying £1,000s more than they need to for years more than is necessary.

Surely, generating and extra £1.5-2 million in revenue for the Free Debt Advice Sector, at a time of reduced funding and lack of capacity, so that 7,000 cases, that generate £15 million per year for creditors, are continued to be supported is in the public interest?

Jamie Hepburn conceded at his Ministerial Meeting with the Sector that the existing private sector cases were a problem and he would have to  take advice. He also said the purpose of these Regulations was not to provide anything other than a token amount of funding for the free advice sector.

However, clearly charities like Stepchange and private firms are not going to operate the DAS for a token payment, so clearly the Regulations are about funding someone, as no-one will access the Debt Arrangement Scheme unless services are paid for.

Why would the Scottish Government want to create a scheme of “winners” and “losers” in the advice sector where the Free Debt Advice Sector are losers?

Dr Richard Dennis also said although amending the fee structure for existing cases was legal, applying it would be problematic.

First there is the issue of current Payment Distributors having to accept a new fee structure.

For two of the largest, however, 5% would be an increase on their current fees.

For Stepchange, for those cases they act as Payment Distributors for other Money Advisers, they would see their PD fee fall from 8% to 5%, but for their existing 3,500 cases, they would see their current 8% fee increase to 20%. They would be net winners overall.

Another huge benefit for all these providers administratively, is all cases would be on the same fee structure. Having some cases on one fee structure and others on another is a problem in itself.

For those creditors that would see their returns being varied, such variations are normal in Protected Trust Deeds and Sequestrations. Also they would be helping to support Free Debt Advice, which they nearly are all on record stating they support and accept they need to pay more for.

There is a further point. Most of these big lenders, who will be impacted, have for years operated a Fair Share Scheme for providers like Stepchange and Payplan and have been paying for Debt Management Plans for years. That Scheme was never extended to the Debt Arrangement Scheme or beyond those two providers, so despite the FCA taking the view that the DAS was the superior product, many have discriminated against Scottish consumers and benefited as a result.

It is only fair that discrimination ends for all existing cases going forward and I cannot think of a more noble reason for the Scottish Government to act in the public interest.

In Summary

The Debt Arrangement Scheme (Scotland) Amendment Regulations are widely supported Regulations, but Regulation 4 is flawed and that is widely recognised across the Sector.

It has many much desired  features , from emergency payment breaks and automatic approval of plans and variations, but we have to ensure these apply to existing cases, as well as new cases; and if they do, why not the fee structure? Effectively all cases need to have their terms varied.

The Fee Structure can be amended by Jamie Hepburn and calls to do so are fully supported by the largest Payment Distributors and providers of the Debt Arrangement Scheme in Scotland.

A short delay is not only supported by the Sector generally, but with the problems with the eDen software, probably wise, and until those problems are ironed out, any delay is unlikely to have a significant impact. We won’t see any dramatic increase in the uptake of the Debt Arrangement Scheme until the software issues are sorted.

It is for Jamie Hepburn to decide what course of action he takes on Tuesday, but if he accepts the Committee’s suggestion, it will be welcomed and supported across the Sector.

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