Tag Archives: alan mcintosh

Payday Loans: The Scottish Parliament Must Act

10th September 2012

Pay day lending is a dangerous business. There are no doubts about it. It preys on the needs of the vulnerable that have been created by failure: the failure of our banking system; the failure of our consumer right laws; the failure of our benefit system; and most importantly our failure to protect the most vulnerable.

It less seduces it’s victims with the honeyed fragrance of easy money, than pedals quick fixes to them with all the subtlety and tact of drug dealers. It targets its victims by identifying their weaknesses. Can’t pay the rent: that’s okay we can help; can’t feed the children: here you go; electricity about to be cut: don’t worry.

The experience of many with pay day loans is one of helplessness and desperation. Helplessness as each month the loan rolls over and you know you are sinking deeper and deeper into a hole. Desperation as you realise the possibility of being able to replace the children’s shoes, clothes and uniforms is growing increasingly remote. The desperation that comes from the realisation that one day it may be your children who will be going to school with inappropriate shoes; jackets; lunches.

It causes depression; fear of answering the phone; avoidance of opening the door. Mail lies unopened. Strangers intrude on your doorstep and violate you and your family’s privacy seeking payment.

And Fergus Ewing, the Minister for Energy, Enterprise and Tourism calls this a “legal, fair and transparent”business.

I don’t blame the Scottish Government for the pay day loan industry. How could I? They don’t have legislative authority over consumer credit laws, they can’t cap the interest rates and they don’t have any control over the key economic levers they need to boost employment and growth in our economy.

I can be angry with them, however, for not going to war with them. I can be angry that they won’t do more to discourage the use of these loans, to promote alternatives such as credit unions and I can be angry that they won’t use the powers they have to send a message that they aren’t welcome here.

Fergus Ewing takes the view this would be “inappropriate”; but for reasons of public health it was not inappropriate to take action to discourage smoking; it was not inappropriate to use our existing powers to restrict the use of alcohol through minimum pricing and it wasn’t inappropriate for the Scottish Government to challenge the authority of the Supreme Court.

Pay day loans are a scourge on our society and have grown up and thrived in the cesspit of financial failure that we have been exposed to in the last few years.

But powers do exist which would allow the Scottish Government to act now.

Debt law is an area that has been devolved to the Scottish Parliament. It is possible for certain debts to be treated differently and for interest rates to be frozen or varied once someone is struggling to pay them. Already such a Scheme exists in the form of the Debt Arrangement Scheme, but although this allows pay day loans to be included and for all interest, fees and charges to be frozen, it takes too long to use and allows payday loan companies to benefit from dragging their feet.

It’s within the legislative authority of the Scottish Government to create a new scheme or amend the existing one to create a more streamlined approach with specific rules for pay day loans. The powers allowing for such a scheme exist in the Debt Arrangement and Attachment (Scotland) Act 2004 s7 and s7a.

This, however, requires political commitment: a commitment borne out of a belief that pay day loans are nothing but fair or transparent and the only thing that would be inappropriate is to do nothing. A commitment that is borne out of an understanding of how closely related these firms and their practices are to the issue of poverty; and a commitment that is driven by a belief that the powers of the Scottish Parliament exist if for no other reason, but to make the lives of Scots better and to protect the most vulnerable.

Why Scotland Needs 200,000 Bankrupts!

6th September 2010 0 comments

A couple of years ago I was speaking at a Credit Today Scotland conference in Edinburgh. The room was filled with creditors, debt collectors, debt management companies and insolvency practitioners. As the token money adviser I was just a tat out of my comfort zone.

I told the story of Donald Trump walking by Tiffany’s one day. He turned to a colleague as they passed a beggar and asked him if he knew the difference between himself and the beggar. The Colleague didn’t know, so Trump gave him the answer: about 900 million dollars. The irony was that whereas the beggar was probably solvent, trump wasn’t with his assets hugely outweighed by his liabilities. I was making the point to them they should be careful as many of their clients were effectively bankrupt.

It’s a sobering thought that if someone like Donald Trump could be effectively bankrupt, how many more of us could be as well. Last year in Scotland there was nearly 23,000 personal insolvencies in total, that’s approximately 0.5% of Scotland population over the age of 18.That means in the next two year, one in one hundred people in Scotland will be declared insolvent.

At another conference I was at last week, Citizen Advice Scotland, the Accountant in Bankruptcy office was there and said the figure was only about 0.3% of the population per year, which was an acceptable figure. However, the Accountant in Bankruptcy were not counting those who went into protected trust deeds, another type of personal insolvency in Scotland. Total personal insolvencies are 0.5% of the population. But should the laws be changed to allow that number to be doubled? Could it be in Scotland’s best economic interests if the number was double that?

The problem with bankruptcy is the University of Wales carried out research and believes there are over 2 million iceberg bankruptcies in the UK[1]. That is people who are paying only the minimum each month to their debts and cannot reduce their overall indebtness. People, that is, who could become bankrupt if they were to lose their jobs and if they don’t, will never repay all their liabilities. With some experts believing up to 30,000 jobs could be at risk in Scottish local authorities alone in the next couple of years[2], and assuming of those 2 million iceberg bankruptcies, up to 200,000 could be in Scotland, it’s not difficult to see we could see the numbers of personal insolvencies increase quickly over the next couple of years.

This is likely to be aided with new bankruptcy laws due to be implemented in November 2010 as part of the Home Owner and Debtor Protection (Scotland) Act 2010. Certificated sequestrations (the formal name for what most people consider to be bankruptcy in Scotland) will allow anyone who can show they can’t pay their debts as they fall due to apply for sequestration. That of course doesn’t mean everyone who meets that criteria will, as sequestration can result in people losing their homes and other assets, but where people have negative equity and cars worth under £1,000 (soon to be £3,000) bankruptcy may become an option.

But the question needs to be asked is this a bad thing? Of those 200,000 iceberg bankruptcies in Scotland, the reality is many of these people cannot reduce their indebtness. That is their situation is unlikely to improve and in most cases, will only get worse. That is people who are being left without any disposable income to spend on consumer goods in their local economies for prolonged periods of time, can’t take their children even modest holidays and are so dependent on credit that their debts only get worse. This is also people who are constantly juggling their credit cards and loans, suffering from stress and the frustration of not being able to address their problems. The links between debt and mental health are clear and well established.

So could we help more people to go bankrupt? It may even help the Scottish economy, breathing life back into consumers who are effectively dead financially – up to 200,000. Could we increase the rules in bankruptcy to protect people who have modest amounts of equity in their homes, so they don’t need to sell their home if they go bankrupt, but get to keep it? Such ideas aren’t that fantastic. In the United States, federal homestead protection laws protect the first $15,000 of equity in the home in bankruptcy. Some states have their own laws, which allow higher amounts and in states like Florida, there is no cap on the amount of equity someone can have.

In the United States, there is credit rationing between states, unlike in the UK, which means is it is easier to obtain credit in some states as opposed to others. This is often used as a reason for Scotland not going radically on its own, even though under devolution it could, but, then why not? The availability of credit throughout the EU varies as does the cost, which is part and parcel of having your own legal system. Why should the Scottish Government not use a economic lever like bankruptcy laws to control the availability of credit and indebtedness in Scotland, considering the wider social problems it can have. In the United States the rate of self–employment and business start up is higher than it is here and one of the reasons for that is commonly believed to be the bankruptcy laws, which make people less risk averse. With thousands of jobs cut due in Scotland and a need to increase growth in the private sector, including business start ups, why should the Scottish Government not consider reforming our bankruptcy laws to encourage this?

But there lies a problem. Politically, even 30,000 insolvencies a year in Scotland is likely to be unacceptable, although very possible, soon. There could be repercussions if bankruptcy numbers begin increasing, like credit rationing and increased homelessness (especially under the current laws). We could, therefore, see obstacles being reintroduced into Scottish bankruptcy laws to artificially keep the numbers low. Artificially low that is because the number of people who will be able to go insolvent each year won't really reflect the numbers that are really bankrupt. So we end up with a bottle kneck, where we only allow so many through, not for economic reasons, but for political ones. This has happened before. Prior to 1985 in Scotland the number of bankruptcies in Scotland were less than 300, by 1993 after changes in the law, the numbers increased to over 11,000 and bankruptcy became a consumer remedy, instead of just a remedy for business people. This caused controversy as it saw huge costs for the public purse. The current situation, however, is completely different with the Accountant in Bankruptcy office soon to be full cost recovery – that is costing the public purse nothing. When the laws were changed again in 1993 the numbers went back down to 4,300 – but that didn’t mean the number of people needing to go bankrupt had fallen, just that there were thousands who were trapped in debt traps and weren’t being allowed to escape. Even by 2007/8 (14 years later) the number of insolvencies had only increased to 13,600. In 2008 the lid was again lifted with changes in the law and the numbers increased to approximately 22,000 in the space of a year.

Now many may complain that with bankruptcy increasing their will be more small businesses not getting paid and ending up bankrupt themselves, laying off employees and creating a death spiral. The truth, however is the, the top ten creditors in bankruptcies are huge high street or multinational creditors, not small local businesses – although many of these suffer when local consumers spend years with no disposable income because of debt repayments and cannot be fully economically active in their local communities. The reality is, many of these big international firms still make profits even with thousands of bankruptcies each year and there is other multi national finance companies that specialise in buying up and speculating in their bankruptcy debts to make profits.

We need to change the way we see bankruptcy. Traditionally, in Scotland and the UK we have seen it as a method of debt recovery (which it isn’t – less than 13% of all personal insolvencies are initiated by creditors), but as part of the social safety net we have in society that allows people debt relief and the ability to rehabilitate themselves, not because of recklessness or fecklessness, but usually because of bad luck and misfortune. We need also to see bankruptcy laws as economic levers in society that can be used to reduce indebtedness for future generations by forcing creditors to ration the availability of credit and also as tools that can help encourage people to start up their own businesses by sending out the message, just because you go broke, doesn’t mean you lose everything.

If other countries can use their bankruptcy laws intelligently like this, there is no reason we can’t in Scotland. One percent of the Scottish population going bankrupt in the coming years is not a scandal, but a necessity for our future economic health. 0.3-0.5% is not enough with up to 200,000 iceberg bankruptcies out there.

[1] http://www.aib.gov.uk/Resource/Doc/4/0000840.pdf

[2] http://www.heraldscotland.com/news/politics/2000-staff-facing-axe-in-latest-council-cuts-1.1052835

It’s Premature To Say Repossessions Risk Has Gone

24th July 2010 0 comments

The recent announcement by the Council of Mortgage Lenders that their prediction of 53,000 repossessions in 2010 is now pessimistic, should not be taken as a sign that the worst is over. This failure to get predictions correct could create a culture of complacency amongst politicians, especially, as it follows on another inaccurate prediction by the CML in 2008 that there would be 75,000 repossessions in 2009.

That last prediction led directly to the current Scottish Government facing attacks last year that they weren’t doing enough to prevent rising repossessions and even calls for new legislation to be brought forward and passed in a day. New legislation has since been brought forward in the form of the Home Owner and Debtor Protection (Scotland) Act 2010, which arguably will ensure Scotland, come October, will have the highest level of legal protection in the UK for home owners facing repossession.

Part of the problem is that many of the protections that were introduced for home owners at the height of the credit crunch were arguably a knee jerk reaction and too much too soon. First of these was the UK Government’s Home Owner Mortgage Support Scheme introduced in January 2009, which allowed home owners struggling to pay their mortgages to enter into agreements with their lender and avoid repossession, providing they could pay at lest 30% of the interest on their mortgages. Then in England and Wales the Home Owners Support Fund introduced variations of Scotland’s own mortgage to rent and mortgage to shared equity schemes. Even the Department of Works and Pensions Support for Mortgage Interest Scheme was extended to allow more people to apply quicker.

The problem is the Home Owner Mortgage Support Scheme was intended to operate only for two years and the length of time applicants would be able to benefit from the DWPs Support for Mortgage Interest Scheme was reduced to two years, as part of the changes extending access. It has now also been revealed in England and Wales the amount available to home owners applying for the Home Owner Support Fund will be cut, although the total budget will remain the same, with the LibCon coalition arguing that reducing the deficit and keeping interest rates low will do more good. The problem is, however, if you reduce the amount available to local authorities and housing associations to buy homes, so home owners can remain in them as tenants, less social landlords will participate.

There is also the problem that one of the reasons repossession levels have not materialised at the level predicted is with the bursting of the housing bubble, many homes were thrown into negative equity, meaning many lenders were happy to provide customers with more time to pay, as even if homes were repossessed, the full amounts owed to the banks would not be repaid.

The danger is now with the Home Owner Mortgage Support Scheme possibly due to end in 2011, cuts to to the English and Wales Home Owner Support Fund and many of those who claimed Support for Mortgage Interest nearly exhausting their two years of assistance, repossession levels could begin rising. Add into this the LibCon Coalition deficit cuts, the prospect of increased unemployment and rising housing prices (with lenders possibly being less willing to show forebearance to customers) and it is clear we are no where near out of the woods yet. There is also no guarantee at present that we will not see an early return to increases in interest rates (although increasingly unlikely).

Even in Scotland our own Mortgage to Rent and Shared Equity Schemes are not without their faults, with increasing number of advisers complaining it is harder to find landlords willing to purchase homes and that the valuation figures used to decide which home owners can participate are too low.

It is vital that with the worst predictions of the Council of Mortgage Lenders failing to materialise and increasing budget cuts, we do not become complacent and think there is no more that can be done. It is telling that although the number of repossession actions in Scottish courts fell last year by 20% , they are expected to increase by 11% this year.

Repossessions, like unemployment, as an effect of a recession generally lags behind other effects. Scotland may be out of recession, but the worse social effects could be with us for some time.

MSP John Wilson’s Draft Bill Proposal Before Its Time

22nd July 2010 0 comments

It is with disappointment today I discovered John Wilson (Central Scotland MSP) has decided not to submit a final proposal for his private member bill the Proposed Enforcement of Local Tax Arrears (Scotland) Bill. The proposal was ahead of its time as it now transpires many local authorities are dusting off old poll tax bills from over 19 years ago to raise cash for their cash strapped budgets.

The bill, which related to council tax arrears proposed:

that local authorities should only be able to pursue council tax debts for five years, as opposed to the 20 years they are currently able to; and
that the summary warrant procedure used to constitute council tax debts, denying debtors a right to be a fair hearing, should be abolished

The fact the bill will not be going forward in this session is a loss after being supported by Citizen Advice Scotland and Consumer Focus.

However, I would support its reintroduction in the next parliamentary session, but believe it should be strengthened to ensure

that no debts, even once constituted by decree or its equivalent, including summary warrant, should be automatically enforceable after five years, without the permission of the court; and
that the summary warrant procedure should not be abolished, but a right of recall introduced.

I am hoping to write a paper on these proposals in the coming week and will post them on here.

Scotland’s Debt Landscape Possibly Changing

21st July 2010 0 comments

The recent statistics producced by the Accountant in Bankruptcy has shown that the Scottish debt landscape has begun to change.

The number of sequestrations (formal bankruptcies) in the first quarter of this year remained the same with the number for the previous quarter (3,139), but showed a 16 % decrease on the numbers from the same quarter last year.

A similar story can be told for protected trust deeds, with only 2,239 becoming protected in the first quarter, which although up 10 % on the previous quarter was down 13% on the same quarter for last year.

The real story, however, is the 495 debt payment programmes entered into under the Debt Arrangement Scheme, showing a 19% increase on the previous quarter and a 60% increase on the same quarter last year.

The Debt Arrangement Scheme is a statutory alternative to personal insolvency and allows debtor to repay their debts in full, whilst providing them with protection from their creditors. Importantly, it also avoids debtors having to realise assets and allows interest and charges on debts to be frozen and eventually written off if the programme is succesfully completed.

Launched in October 2004, the scheme has had a troubled beginning with a poor uptake and problems with debtors unable to access it. This has largely been because access is exclusively through an approved money adviser and there has been a shortage of approved money advisers. This has now been partly solved with increased private sector involvement and it is now believe up to 10% of all applications may now be originating in the private sector. Concerns have, however, been raised in relation to private sector involvement with some private sector providers charging debtors up to £1,800 to access the scheme.

However, the increase in the number of the debt payment programmes may not just be a sign that debtors are keen to repay their debts, but that they have no other remedy available to them.

Those who enter the Debt Arrangement Scheme have to have disposable income to make payments and, therefore, it may be that increasing numbers of white collar debtors may be using the Scheme where there has been a drop in the household income and they are unable to use personal insolvency as a remedy. This may be as in personal insolvency debtors are required to realise the value of assets, such as homes and cars for the benefit of creditors. One of the advantages of the Debt Arrangement Scheme is that debtors do not normally have to realise their assets for the benefit of their creditors.

This creates a problem, however, for those debtors with assets, if they are unable to realise those assets (it may make them homeless or leave them unable to get back and forth to work), resulting in them having to enter repayment plans with their creditors that could take 10 years or more.

The Scottish Government will be introducing a new route into seqeustration also in October, which will allow debtors who cannot repay their debts as they fall due to apply for bankruptcy. This may result in an increase in the number of bankruptcies each year, but may equally result in a reduction in the number of protected trust deeds. In addition to this, the Government, as part of the new Act, will also be introducing new forms of protected trust deeds that will allow debtors to exclude their home from it, allowing them to keep it even though they are personally insolvent. This, however, is likely only to be in cases where there are small amounts of equity in the home.

It is clear that Scotland’s debt remedy landscape is now beginning to shift with one debt payment programme being entered into for every four protected trust deeds being signed. It could be tomorrows debtor landscape is one where there is more debt payment programmes and less personal insolvencies. It could also be with the decreasing number of personal insolvencies and increasing numbers of debt payment programmes, Scotland’s personal insolvency industry will now begin diversifying to offer the Debt Arrangement Scheme as one of the services they can offer.

Debt Arrangement Scheme

Accountant in Bankruptcy

Bank Charges Case is appealed to the ECHR

18th July 2010 0 comments

Walls v Santanders UK PLC

A recent decision by Sheriff Cubie at Glasgow has destroyed any hope that Scottish bank customers will be able to use the small claims procedure to reclaim bank charges.

The fatal blow which prevents litigants using the procedure arose after the Sheriff agreed the case should be remitted to ordinary cause procedure due to it complexity.

Mrs Walls had raised an action using the small claims procedure to reclaim £3,000 of bank charges. Small claims procedure in Scotland allows litigants to claim up to £3,000 in the sheriff court, but importantly protects them should they be unsuccessful. Where the claim is for under £200, the fee for raising the action is £15. Where it is for more it is only £60. Even if the consumer is unsuccessful and expenses are awarded against them, where the claim is for more than £200, expenses are limited to £150 where the claim was for £1,500 or less and 10% of anything above that. This means normally a consumer risks only incurring expenses of £300.

However, by allowing the case to be remitted to ordinary cause, expenses can be unlimited meaning a consumer who raises an action for £3,000 could be faced with expenses of £10,000 or more where unsuccessful, particularly as the banks tend to be using senior counsel in such cases.

For many the risks in such cases will clearly be too high for consumers to risk raising such actions unless they have access to legal aid.

What is more worrying about this development is the banks are claiming the revised arguments used in such cases by Mike Daily, the principal solicitor of Govan Law Centre, which concerns amongst others the unfair relationship test, are too complex to be heard using the small claims procedure. This argument has been deployed after obiter comments by judges in the recent Supreme Court test case on bank charges. It was suggested although charges cannot be challenged on the basis of the level of the charges, they may still be challengeable by reference to the relationship between the lenders and borrowers.

The unfair relationship test was a new legal test introduced into the Consumer Credit Act 1974 by the Consumer Credit Act 2006. Its introduction was specifically to replace the extortionate credit test which had over 30 years prove to ineffective as a remedy to protect consumers.

There is now a suggestion, however, by Sheriff Cubie that it may not be appropriate to use small claims procedure when using the unfair relationship test due to its complexity. This could effectively deny Scottish consumers from not only raising actions to reclaim bank charges unless they can access legal aid, but also may eventually prevent them from being able to use the important unfair relationship test under the small claims procedure.

The implications of this decision to remit the case to ordinary cause, which Mike Daily had challenged on the grounds that it was a breach of Article 6(1) of the European Convention of Human Rights (right to a fair hearing), is that any wealthy defender may by forwarding spurious, but complex legal arguments deny consumers access to a fair hearing by remitting the case to the ordinary cause procedure. Although, it could be argued litigants will still have access to a fair hearing, if the risks of the costs heavily outweigh the amounts being claimed, most litigants will not raise actions. Some would argue banks are cynically betting on this. The result is the merits of the banks defence has still to be decided and are unlikely to be in this case as Mrs Walls has already indicated she will unlikely continue with the claim.

Furthermore, such tactics could also be used by banks whenever they raise actions against debtors for payment of money and the debtor intends to defend the action. The result: to frustrate debtor attempts to deny their liability for such debts.

Mike Daily has called for changes in the court rules so that when any action is raised in small claims, the rules relating to expenses should follow the action even if remitted to ordinary cause. Importantly, however, if there is an attempt to exclude the use of the unfair relationship test in small claim actions, then arguably the summary and ordinary cause rules should be altered to ensure regardless of what procedure is used to raise an action, the level of expenses even in these actions should be restricted by the amount the action is for.

Anything less will leave scottish consumers exposed and vulnerable to spurious claims for money by wealthy creditors.

Mike Daily has now applied to appeal the decision of Walls v Santander UK PLC to the European Court of Human Rights.

However, despite the rejoicing of many creditors and recovery lawyers, Mike Daily has another bank charges case still in the courts. In the case of Sharp v Bank of Scotland, the consumer raising the action is entitled to legal aid and its likely the cases will be heard later this year and the merits of the banks defences will be considered.

The tragedy, however, will be even if Sharp is successful in reclaiming her bank charges, unless the court rules are changed, many consumers not entitled to legal aid, will be denied access to justice.

For more info see Govan Law Centre.

Money Advice Update – April 2009

4th April 2009

First published in the April 2009 edition of SCOLAG.

The first quarter of this year, unsurprisingly, has been one of rumours and speculation for the money advice community. Advisers have been eager to discover what changes the Scottish Government would introduce to help normal, hard working families with the credit crunch.

As the picture begins to crystallise, the wait is almost over.

DEBT ACTION FORUM

Fergus Ewing, the Minister for Community Safety, began by announcing on the 13th of January that he was launching a Debt Action Forum to ensure the Scottish Government was doing everything within its powers to assist debtor’s struggling with the current financial downturn. There would also be a special housing sub-group to look at the issue of what else the Government could do to prevent repossessions[1].

The Forum has now met four times and is due to submit its proposals by the end of May.

Already a number of proposals have been considered, such as voluntary protocols for collections agencies and contribution only trust deeds, which may exempt debtors’ homes, with the consent of creditors.

It has also been mooted the possibility of the AIB expanding its functions, to provide an online and telephone advice service[2]. This is the reoccurrence of an earlier debate that took place during the passing of Bankruptcy (Scotland) Act 1993.

Then it was dismissed as a possible conflict of interest and it is believed many of the arguments which were valid then, are still valid today. It has also been expressed that it will be a duplication of existing services, provided by the National Debtline. A service already funded by the Scottish Government.

DEBT ARRANGEMENT SCHEME

The Accountant in Bankruptcy has also announced she will be taking over the full administration of the Debt Arrangement Scheme, including the management of cases. It is hoped this will free up the time of local Money Advisers, in order that they can devote more time to providing face to face advice to clients.

Other proposed changes to the Debt Arrangement Scheme, will be:[3]

Debtors being able to apply directly to the Scheme, through an online application process or an Approved Adviser
There no longer being a requirement for debtors to have two or more debts, allowing debtors with single debts to apply
The abolition of deemed consent, which allowed a creditor’s consent to be implied, when they fail to respond to notifications
The extending of the DAS Administrator’s power to apply a fair and reasonable test, in deciding if a payment programme should be approved, unless creditors’ with more than 50% of the total debt, actively express their consent.
A requirement for debtors to be able to make a minimum payment of £100 per month, or 1% of their total debt, whatever is the highest, towards their programmes and complete it within 10 years at most

It is hoped these changes will provide one point of contact for all debtors and creditors and increase the legitimacy of the scheme, as a result of it being operated by a Scottish Government agency.

It is also intended, despite the expansion of the gateway into the Scheme, debtors will still be encouraged to seek the advice of money advisers first. Although this will remove the requirement for Approved Money Advisers, it is likely money advice services will continue to play a pivotal role in the Scheme, particularly if the low Income, Low Asset Bankruptcies are an indication of the needs of debtors, where up to 90% of all applications are being made via advisers.

The other change, that debtors with single debts will be able to apply, will address some of the concerns that too much court time is taken up with Time to Pay Directions and Orders under the Debtors (Scotland) Act 1987. However, it is unlikely this provision will not be as successful as it could be, if debtors with single debts are still required to make a minimum payment of £100 per month. In the case of multiple debts, the minimum payment criteria is unlikely to be too great an obstacle, as the average payment in a Debt Payment Programme is already well in excess of this.

The removal of deemed consent will address the AIB’s concerns with lengthy repayment programmes being approved as a result of creditor’s failing to respond (over 90% of DPPs are currently approved as a result of deemed consent)[4].

It is, however, unlikely to do anything to address the lack of participation by creditors, and is likely only to encourage their continued lack of involvement.

BANKRUPTCY AND DILIGENCE ETC (SCOTLAND) ACT 2007

The new statutory Action of Arrestment and Furthcoming appear set to come in to force from April 22nd 2009, as are the further changes to inhibitions (see SCOLAG 375).

Earning Arrestments

From the 6th of April, new Earning Arrestment Schedules will be implemented.

The minimum amounts protected from arrestment, will change to:

Daily: exceeding £13.50
Weekly: exceeding £94
Monthly: exceeding £410

There will now be a clear flat rate of arrestment of 20% from any amount above those figures, up to:

Daily: £88
Weekly: £617
Monthly: £2,680

After which 50% of the earnings will be deducted.

Land Attachments and Adjudication for Debt

Alex Salmond’s announcement in August 2007, at the Citizen Advice Scotland conference, that he will not allow the new diligence of Land Attachment to be used against the principal home, continues to delay its implementation.

Gillian Thompson, the AIB, has also expressed concerns that there may need to be further changes to the BAD Act 2007, as the legislation may no longer hang together. There is now likely to be a three month consultation on the future implementation of the changes in diligence, beginning in March 2009[5].

What is of more concern, however, is the continued delay in abolishing Adjudication of Debt, which should have been abolished with the implementation of Land Attachments.

The delay allows creditors to increasingly use this diligence, interest in which has been revived, with the number of adjudications being registered in 2007/2008 being in their hundreds, whereas a few years ago, the number registered could have been counted on one hand.

This situation is clearly contrary to the policy of the current Government, that is unsecured creditors should not be able to attach the principal home of debtors.

Money and Residual Attachments

It is now intended the new diligence of Money Attachments, will be implemented in July 2009. This will allow Sheriff Officers to attach the money of debtors, when it is in their possession, but not when it is kept in a dwellinghouse.

Residual Attachments, which, it is expected, will be used to arrest intellectual property, will be implemented from autumn 2009 onwards.

BANK CHARGES

The bank charges test case continues to work its way through the English legal system.

After the banks involved in the case decided to appeal the decision of the High Court, the Court of Appeal has now decided the charges can be subject to the fairness test contained in the Unfair Terms in Consumer Contract Regulations.

Although the Court refused the right to appeal, it is likely the banks will appeal directly to the House of Lords.

All cases, challenging the legality of the charges are likely to remain on hold, until the case is decided definitively.

MORTGAGE TO RENT AND SHARED EQUITY

Mortgage to Rent

The Scottish Government has now released details of their new Mortgage to Rent Scheme, which was launched in March 2009.

The Scheme aims to allow social landlords to take over the ownership of the homes of homeowners who are at risk of losing their property, either as a result of arrears with secured lenders or through insolvency and allow them to remain in possession as tenants.

The eligibility criteria for the Scheme will largely remain the same as before, although a list of average prices for homes throughout Scotland will be published and, other than in exceptional circumstances, it will not be possible to apply should the homeowners’ property be above the average value. The value of the property will be the value of the home, with all necessary repairs carried out to make it habitable.

A £6,000 grant will be available to the Social Landlord to carry out all necessary repairs.

If repairs, costing more than £6,000 are required, the application will only go through if the excess can be found from other sources.

Where there is equity, the debtor will be able to retain £8,000 of it, when under 60 years of age and £12,000m, when over 60 years of age. This source can be used to pay for repairs in excess of £6,000.

It will also not be possible to apply should the homeowner have more than 25% equity, unless the debtor is in a Trust Deed or has an interest only mortgage.

One important change will be that it will no longer be necessary for the home to be in imminent danger of being repossessed or for the lender to have initiated legal proceedings. Now, providing the owner has not made 3 months full payments and there are one month arrears, it will be possible to apply, providing all other UK home rescue schemes have first been exhausted.

Mortgage to Shared Equity

The Government Mortgage to Shared Equity Scheme will be similar to the Mortgage to Rent Scheme, in its’ intentions: that is to keep families in their homes. However, unlike the Mortgage to Rent Scheme, this entirely new remedy aims to allow debtors to retain some ownership of their property.

It will not be open to anyone with less than 25% equity and again debtors will need to exhaust all other UK home rescue remedies first. It will also not be available to any debtor who is insolvent, either as a result of signing a Trust Deed or applying for Sequestration.

Debtors applying for this Scheme will also need to have a capital and interest repayment mortgage.

It is intended a Government adviser will assess what level of share of the debtor’s home the Government will need to purchase, in order to reduce their monthly mortgage payments to an affordable level.

The debtor will not be required to pay rent to the Government for their share of the home.

In order to apply for both Schemes, debtors will first need to seek advice from an agency that is a Citizen Advice Scotland or Money Advice Scotland member.

[1] http://www.aib.gov.uk/News/releases/2009/01/13215620

[2] http://www.aib.gov.uk/News/releases/2009/03/13163726

[3] http://www.aib.gov.uk/News/releases/2009/03/13114653

[4] http://www.aib.gov.uk/Resource/Doc/4/0000669.pdf

[5] Reaching for Reform, Credit in Scotland Supplement, Credit Today, issue March 2009

The Debt Arrangement Scheme – Is it working the way it was intended?

8th September 2008

The Debt Arrangement Scheme (DAS) is now approaching its fourth anniversary, but before it reaches that it will go through its second review, which is expected to run between July and December this year. The first review, which was implemented at the end of June 2007, allowed, inter alia, for the automatic waiving of interest and charges on debts included in debt payment programmes, providing they were successfully completed. It also extended the role of the DAS Administrator[1] in the scheme, reducing the role of the Sheriff, and allowing the Administrator, whenever a creditor refused consent, to apply a fair and reasonable test, before approving or refusing a Programme under the Scheme.

Although, there will be a process of consultation in the review, allowing for all stakeholders to participate, it is clear that what is being asked is whether the Scheme is working the way it was intended. The DAS Administrator has indicated she will be looking at a number of factors in relation to the Scheme, primarily the quality of applications being made by Approved Money Advisers^{^[2]} and the use of the Scheme by debtors.

The Application Process for Debt Payment Programmes

The Administrator has clearly indicated, through her staff, she is concerned with the proposed duration of some of the programmes being applied for. When the Scheme was originally implemented, there were two principles in the legislation which underpinned when a programme should be approved. The fist of these was contractual freedom, that is “the client and the creditors can reach whatever agreement suits them.”^{^[3]} The second was where a creditor did actively refuse consent that a fair and reasonable test should be applied.

The DAS Administrator’s concern that the Scheme is being used in a way that was not intended appears to be directed to the first of these routes for a payment programme being approved: that is through the agreement of the debtor and the creditors. This is partly because, at present, where a creditor fails to reply to a notification that a Debt Payment Programme is being applied for, they are deemed to have implied consent. A programme can, therefore, be automatically approved despite the fact no creditor has actively agreed to it, even if it will take twenty years or more to complete. These cases are being automatically approved as a result of the creditor’s active and implied consent. It is true many creditors are prepared to wait lengthy periods for their debts to be repaid, knowing they will in all likelihood recover far less if the debtor chooses another route, such as personal insolvency. It is also true, however, that another significant reason for these programmes being approved is poor creditor participation, resulting in them being deemed to have consented when they fail to reply within the statutory time limits.

Does this constitute misuse of the Scheme? In the situation where all creditors actively consent it would be hard to argue there is any abuse and, therefore, little justification for limiting the principle of contractual freedom, as surely the parties involved must be presumed to know what is in their best interests. When the programme is approved as a result of deemed consent, the question is more complex. There is a strong public interest in the DAS: it provides a remedy for those in debt and restricts the right of creditors, by implying they have consented, when they have not. Where those creditor rights are lost as a result of a legal fiction, there is a duty for the DAS Administrator to ensure any infringement is limited and proportionate.

However, removing the concept of deemed consent is unlikely to be the solution. For a start, the concept is hardly an alien one, already existing in Scots Law in relation to Protected Trust Deeds and was recently reaffirmed with The Protected Trust Deeds (Scotland) Regulations 2008. In the case of trust deeds, the creditor who fails to respond loses far more rights, than the creditor who fails to respond to a notification of an application for a Debt Payment Programme (DPPs pay 90p in the pound in comparison to Protected Trust Deeds, which on average pay only 10-20p in the pound). Also if the concept of deemed consent was removed from the DAS, it would not necessarily increase creditor participation and, arguably, would remove one of the incentives that currently exist for creditors to participate in the scheme: that is, they ignore it at their peril. In terms of restricting the rights of creditors, the approval of a programme still allows creditors to apply for a variation or appeal, on a point of law, and although the DAS does currently include an element of debt relief for debtors from interest, fee and charges, this is only realised if the DPP is successfully completed. The creditor, therefore, retains the right to pursue the debtor for these sums should the plan fail. The creditor whose debts are included in a Debt Payment Programme, therefore, is in a significantly stronger position in regard to his rights, than the creditor with debts included in a Protected Trust Deed or Sequestration. Arguably, therefore, the rights of the creditor who fails to respond to notification are outweighed by the public interest of ensuring creditors act responsibly and meet their obligations to assist debtors facing financial difficulties. It cannot be argued, for example, that the creditor is obstructed from participating in the procedure or is having his rights infringed upon without due process.

In light of this, it is difficult to argue that those programmes currently being applied for, which may have proposed durations of twenty or more years are in actual fact abuses of the scheme. Firstly, the DAS Administrator has said, in the guidance provided, that where it is felt a case is fair and reasonable, an application should be submitted.[4] What is fair and reasonable will always depend on the particular facts of a case and also the views of those involved. It is not possible for an Approved Money Adviser to know in advance whether a creditor will respond or what his view will be.

The possible reason why it is felt such applications may be a misuse of the scheme appears to derive from the second way a DPP can be approved. That is, when a creditor actively refuses consent. As mentioned above, in such situations the DAS Administrator has to apply a ‘fair and reasonable’ test. There is nothing in the legislation that stipulates such a test should apply to a programme when creditors don‘t refuse consent. It would appear, however, the fair and reasonable test is being used as a benchmark against which cases where creditors either do consent, or are deemed to have consented, are being measured. If this is the case, the question needs to be: should the fair and reasonable test be used as a benchmark in all cases?

Possibly the first question that needs to be asked, is how is the fair and reasonable test being applied? At present there is nothing in the primary or secondary legislation stipulating how long a DPP should last, although, The DAS Guidance for Approved Money Advisers does state “…the DAS Administrator is likely to approve anything under 5 years in duration and refuse to approve anything over 10 years. Between these periods will be a matter of individual assessment”.[5]

Although, such guidelines can be helpful, they are arbitrary. They appear to be more for convenience than because they have any basis in fact or in law in determining when a case is fair and reasonable. The regulations do, however, provide a list of other factors that the administrator should consider, such as the total amount of debt, the level of equity a debtor has in his home, the extent to which creditors have consented and any other factors considered appropriate.[6]

At present there is little information what weight is being given, on a case to case basis, to these factors and what other factors are considered relevant. For example, there is no indication whether relevant factors would include the length of time the original debt was for, or whether a client risks losing their home.

The current practice is that when an application is rejected, the Administrator states the application failed the fair and reasonable test. This lack of specificity creates two problems: first it is near on impossible to decide if there are any grounds for appeal by the debtor (albeit it would need to be on a point of law). And, secondly, without any understanding as to the reasoning behind decisions, money advisers are not able to improve the quality of the applications they make.

If the DAS Administrator is determined to restrict the duration of payment programmes under the scheme, possible solutions could be sought from examining English Administration Orders. Although these orders have no statutory limit on their duration, it is generally accepted debts included in such schemes should be repaid within a reasonable time. Where repayment plans are likely to exceed such a reasonable time, a Composition Order can be imposed, only requiring the debtor to repay a percentage of the debt. The DAS could be reformed along the lines of such a model. This would help resolve some of the issues concerning the duration of programmes, although it would involve a greater infringement on the rights of creditors.

Another option used in Administration Orders would be to impose limits on the level of debt that can be included in DPPs, although caution needs to be exercised here as the scheme could become too restrictive. It should also be noted such limits are believed to be the reason behind the declining use of this remedy in England and Wales.

It would still need to be decided, however, how programmes get approved. That is whether the fair and reasonable test should be applied in all cases or whether the principle of contractual freedom should still apply, with or without deemed consent. Also, arguably the grounds of appeal should be widened to include appeals not only on points of law but also on the merits of the case. This would not only improve decision making and accountability, but considering the gravity of the decisions on both creditors and debtors alike and the fact composition of debts could be included, would be in the interests of justice. This would also be in line with the Administration Order model.

Freezing of Interest

The other issue the DAS Administrator has raised through her staff, concerns the reforms that arose after the first review of the scheme. Currently, when a debtor’s programme becomes approved, all interest, fees and charges on their debts are frozen and ultimately waived, should the programme be successfully completed.

Concerns have been raised that some debtors are opting for the Scheme as a less expensive alternative to consolidation loans and as a way of evading their contractual obligations to pay interest. This is without doubt a possibility. However, two points are being ignored: firstly, under the present climate many debtors are not able to access consolidation loans; secondly, even when debtors are able to obtain consolidation loans, they usually face adverse interest rates. This often exacerbates the debtor’s financial situation and can eventually be the precursor to the debtor becoming insolvent.

The same concerns could also be raised with regards sequestration and protected trust deeds, but there is no suggestion that access to these remedies should be restricted because debtors have not yet borrowed enough. The purpose of debtors using these remedies is that they are acting responsibly to manage their financial difficulties and not acting irresponsibly, posing a hazard to other lenders.

Recognising there is the potential for abuse, the qualifying criteria should be that the debtor should be able to demonstrate with their financial statement that they cannot meet their contractual obligations and are, to that extent, practically insolvent. The alternative to this, that the debtor either must first have defaulted on their debts or that a creditor has obtained a court order, would mean that a debtor would need to wait much later before they can act. It was never intended the DAS would work like this, as the idea was to reduce litigation and encourage debtors to act sooner rather than later.

The Future of the Debt Arrangement Scheme

On average, at present, the number of Approved Money Advisers fluctuates between 90 -100 and in some local authority regions in Scotland there are still no Approved Money Advisers being employed by the public and voluntary sector. Part of the problem has been stretched public and voluntary sector services.

As Approved Money Advisers are the gateway which debtors must pass through to enter a Programme, this creates a significant problem. The Debt Arrangement Scheme is a legal remedy and like other remedies, in the interest of justice people must be able to access it. The equivalent would be to say to people you are able to go bankrupt, but only if you live in certain parts of the country and not others.

In the coming review, therefore, attention should be focused on increasing access to the Scheme, either by providing further resources or countenancing greater private sector involvement.

If the private sector is to be encouraged to increase their involvement, the current standards must be maintained, for the sake of both the creditors and the debtors. One of the driving principles behind the DAS, however, was that it should be a free service. This, however, will have to be squared with the fact any private sector involvement will need to be commercially viable.

This isn’t an impossible task. One option would be to expand the statutory fees that creditors are liable for when their debts are included in a Programme. Currently, they pay 10% to the Payment Distributor. If they also had to pay 10% to the Money Advice Service Provider, this could act as an incentive for increased private sector involvement in providing access to the Scheme. Increased take up of the Scheme may also encourage greater creditor involvement.

Creditors, even with an additional charge, would still receive greater dividends than they do when debtors becoming insolvent and would benefit from no longer having to pursue customers for payment.

Whatever reforms come out of the review, what is important, is not only that some of the above problems are resolved, but that the Scheme continues to provide relief to debtors and an organized method for them to manage their complex multiple debt problems.

[1] The DAS Administrator is the Accountant in Bankruptcy.

^{^[2]} All applications for a Debt Payment Programme under the Debt Arrangement Scheme, currently have to be made through an Approved Money Adviser.

^{^[3]} Pg 2, Foreword, DAS Guidance for Approved Money Advisers (version 4)

[4] A3.3 DAS Guidance for Approved Money Advisers (version 4)

[5] A3.3 DAS Guidance for Approved Money Advisers (version 4

[6] Regulation 26 (2)