The Credit Services Association (CSA), a trade body that represents debt recovery and purchase organisations, has raised its concerns that new guidelines for the Standard Financial Statement (SFS) may exacerbate the position many consumers find themselves in when struggling with problem debts.

The Standard Financial Statement, which the Accountant in Bankruptcy (AIB) have recommended be adopted as the new financial statement for formal debt solutions in Scotland, is produced by the Money Advice Service and is intended to be a common financial tool for all creditors and debt advisers to use in determining how much consumers can afford to pay towards their debts.

The CSA, which is part of the governing body for the SFS, is concerned that new trigger figures, which are used to create a rebuttable presumption that someone’s expenditure may be excessive, are concerned that new guidelines for the figures may be excessive after being updated by as much as 30% in some category areas.

Their fears are that by indicating some consumers have less to spend on their debts, consumers may enter repayment plans that may last longer and, therefore, keep the debtor in debt longer, whilst others may feel a type of insolvency may be a better solution for them, when it isn’t.

However, in Scotland, fears amongst money advisers and the AIB are that the figures are already too austere for consumers, who are in repayment plans, and the SFS’s predecessor, the Common Financial Statement (CFS) which adopts a similar methodology to the SFS, has been instrumental in large numbers of Debt Payment Programmes under the Debt Arrangement Scheme failing.

Scottish Government Minister Paul Wheelhouse has recently announced plans to introduce new rules that even if the SFS is used for the DAS in future, it will not be necessary for consumers to propose paying all their disposable income to their debts each month.

Comparative Studies

The problem with the Standard Financial Statement, like the Common Financial Statement is both seek to determine what is a “reasonable” level of expenditure by looking at the average expenditure of the lowest 20% in the Office of National Statistics Living Costs and Food Survey. This survey looks at what people are actually spending, rather than what they require to be spending to maintain a reasonable standard of living.

The consequences of this can be seen in the guidance notes for the Common Financial Statement 2018, which actually saw “trigger figures” for categories of expenditure reduced, despite inflation running at 3%.

However, as both the CFS and the SFS both look at what people are spending, rather than what is needed for a reasonable standard of living, the methodology used can result in expenditure amounts being downgraded at a time of rising living costs. This is for the simple reason that with stagnating income levels, rising living costs and much expenditure in recent years being driven by consumer borrowing, which is now becoming harder for lower income groups to access, people are now being forced to spend less.

This has led to some uprating of figures in the SFS, by removing for example, some of the lower income groups in the Living Costs and Food Survey sample group. This has included those in receipt of Universal Credit and has contributed to the uprating of the average expenditure overall within the study group.

Scotland’s Dilemma

The problem for Scotland is whether now to adopt the SFS, which the Accountant in Bankruptcy have recommended or whether to seek an alternative to the Common Financial Statement 2018 when it expires in 2019?

The problem is the SFS has proven volatile in the first year of it’s existence, with initial concerns in Scotland that the trigger figures for the SFS 2017 were too low and would have led to more consumers being presumed, albeit the presumption is rebuttable, as having unreasonable expenditure amounts.

There was also a concern many consumers who were wishing to utilise the Minimum Asset Route into bankruptcy may be found to have disposable income and, therefore, be deemed ineligible to apply, forcing them to use full administration bankruptcy procedures instead. This in turn leads to complicated debates as to what types of income can consumers legally be expected to pay their debts from. There is no question, for example, that consumers cannot be forced to pay towards bankruptcy from benefit only income, although the AIB do hold that contributions can be taken from child maintenance money (for a fuller debate on this issue, see here). The consequence is that people whose only income is benefits and child maintenance, may be forced to use full administration bankruptcy simply because the AIB believes it is legitimate to take a contribution from income that is paid to a child via their parent and the CFS or SFS help determine that the consumer can afford a contribution.

In support of adoption of the SFS 2018 guidelines, however, the AiB have released a comparative study of financial statements which they believe shows the SFS 18 guidelines are more favourable than the CFS 18 guidelines (although a smaller study by Money Advice Scotland suggests this may not be the case). What the AIB have not released, however, is a comparative study between SFS 18 and CFS 17, which still applied in Scotland until a few weeks ago, or any response to the recent downgrading of expenditure items in CFS 18 that resulted from the methodology that can see average expenditure amounts fall at times of increasing living costs.

In addition to this, no explanation has been provided as to why the CFS 18, in the guidance notes, was not given the same corrective treatment that SFS 18 received by removing lower income groups from the sample group.

The problem is now likely to be exacerbated as the Scottish Government have announced that even if SFS 18 is adopted in Scotland, new changes will not require applicants to the Debt Arrangement Scheme to propose 100% of their disposable income to repayment programmes. The fact the Credit Services Association already believes the SFS 18 is overly generous, it’s likely their members would not accept DAS proposals that only offer say 75% of a Debtor’s disposable income as payment, although the AIB will be able to force acceptance using their fair and reasonable test under the Scheme.

The Way Forward

The problem for the Scottish Government is there is no clear way forward.

It was only in 2016/17, for example, that for the first time more debt payment programmes were successfully completed than were revoked. One of the main reasons believed to be behind this being that consumers have been finding that they are being told to pay more than they can afford.

The AIB, however, are reluctant to see contribution levels in any formal solution reduce, as they themselves realise much of their operating costs from fees charged against cases where contributions are made and are expecting, because of a reduced number of cases, a shortfall of approximately £4.2 million in their funding.

The problem is, however, section 89 of the Bankruptcy (Scotland) Act 2016 (2016 Act) requires Scottish Ministers to establish a Common Financial Tool (CFT) to determine contribution levels, that allows for reasonable levels of expenditure by debtors. Whether that has been achieved by CFS 18 that has seen trigger figures reduced for certain categories at a time of rising living costs is questionable.

Whether designating the SFS as the new CFT will achieve this is also debateable, considering it’s volatility and the fact key stakeholders are already questioning the recent uprating of figures and calling for a further review as soon as possible.

The question now must be asked, as the CSA, is part of the governing body for the SFS and accepted the 2018 figures, whether other governing body members also have concerns?

The question also has to be asked if a further review of the SFS or even the CFS were to see a further downgrading of the figures at a time of rising living costs, whether Scottish Ministers would be fulfilling they obligations in creating a tool that allowed for reasonable expenditure by consumers?

The danger being that in designating either the CFS or the SFS as the Common Financial Tool, Scottish Ministers are delegating this legal responsibility that they have under section 89 of the 2016 Act, to a third party that does not have such a legal responsibility, is not accountable to Ministers or Parliament and does not publicly release it’s trigger figures for public scrutiny or comment.

Mis-Use of Trigger Figures

One argument is that much of the problem arises from a misunderstanding of how trigger figures should be used.

Creditor and AiB concerns are they are used as an allowance by money advisers for their clients, whereas money advisers complain they are used as a cap by the AIB and creditors to drive down the reasonable living expenditure of consumers, which if you wish to exceed places an increased administrative burden on the money adviser and evidential burden on the consumer.

You then get anecdotal stories from money advisers of clients having to provide evidential proof of purchasing incontinence pads, or having to explain how the Disability Living Allowance of their children is spent or of having to fight to ensure contributions are not taken from the child maintenance money of children to pay towards their parent’s debts.

The problem is there is a lack of understanding by the Money Advice Service as to how trigger figures are in practice used. They are clearly a key battle ground for the AIB, money advisers and creditors alike, as recently evidenced by the concerns raised by the Credit Services Association and their calls for them to be downgraded.

A Scottish Solution?

There is now a clear and comprehensive case for Scotland to devise it’s own Common Financial Tool.

There is no overwhelming case for a UK wide solution, albeit it is clear it would be preferable from the perspective of UK wide financial service organisations and also debt advice bodies.

However, there is no UK wide system of laws for dealing with debts; debt law historically always being different under Scotland’s legal system and being devolved to the Scottish Parliament.
Also, unlike the rest of the UK, the Common Financial Tool was placed on a statutory footing in Scotland in 2015 and carried with it particular legal responsibilities for Scottish Ministers that the Money Advice Service, who own the SFS and the Money Advice Trust, who own the CFS, don’t have either in Scotland or elsewhere in the UK.

In addition to that, it is clear that Scotland, with the recent proposals by Scottish Ministers as to how contributions in the Debt Arrangement Scheme are determined, has already begun to diverge further from what is likely to be considered good practice across the UK and by the SFS governing body.

Clearly it would now be more advisable for the Scottish Government to look to establish it’s own Common Financial Tool, that is best suited to the peculiarities of the Scottish system of debt laws, with 48 month payment periods in Bankruptcy and a Debt Arrangement Scheme, where not all a debtor’s disposable income has to be offered as a contribution in a payment plan.