Tag Archives: Fergus Ewing

The BADAS Bill

The BADAS Bill

(First Published in the January 2014 edition of SCOLAG).

There is a joke in the money advice industry that the Bankruptcy and Diligence Etc (Scotland)
Act 2007 was the BAD Act, but the Bankruptcy and Debt Advice (Scotland) Bill is the BADAS
Bill.

Is it living up to its name?

The Bankruptcy and Debt Advice Scotland Bill passed stage
one in its parliamentary journey on the 18th December with
thirty-three votes against and seventy-three votes in favour.
The objections were from the parliamentary Labour Party. How-
ever, it has not only been the Labour Party who has objected to
elements of the Bill. A wide range of Civic Scotland bodies have
also raised their concerns with aspects of it, particularly Clause
Four, which allows the Accountant in Bankruptcy (AIB) to
award Debtor Contribution Orders against debtors.
Debtor Contribution Orders unlike the current Income Pay-
ment Orders differ in a number of respects. First they are not
granted by the Court, but by the Accountant in Bankruptcy
and secondly, unlike Income Payment Orders, they last for 48
months instead of 36.
Power to Grant
The power to grant a Debtor’s Contribution Order is an
example of what is arguably the most controversial aspect of
the Bankruptcy and Debt Advice (Scotland) Bill: that is the pro-
posal to transfer large amounts of decision making powers from
the courts to the Accountant in Bankruptcy, an executive agency
of the Scottish Government.
The fact these currently judicial decisions will in future be
made by the executive has not gone unnoticed, with concerns
being raised by the Law Society of Scotland, the Insolvency
Practitioners Association and The Institute of Chartered Ac-
countants that where decisions do not relate to administrative
or non-contentious matters they should remain with the courts.
Even the Sheriff’s Association has called for caution, stating
that where decisions affect the rights and obligations of indi-
viduals these should be made by the courts, while accepting
purely administrative decisions can be safely transferred.
The danger of transferring potentially contentious issues
from the courts to the AIB can be seen in clause four, where if
debtors disagree with the decision of the AIB as to what they
can afford to pay towards their bankruptcy, it will fall upon
them to request an internal review of the decision by the AIB
and then appeal the decision to the sheriff court. This will trans-
fer the onus and cost of challenging decisions onto the debtor
where previously, with Income Payment Orders, if an Income
Payment Agreement could not be agreed it was for the Trustee
in Bankruptcy or the AIB to apply to the courts for the Order.
The fear is many debtors, where they disagree with the
decision of the AIB will not raise an appeal to the courts, de-
terred by the cost and a procedure they do not understand.
Instead non-cooperation with trustees will increase and there
will then be an increase in the number of deductions being made
directly from earnings.
Common Financial Tool
The Scottish Government have argued, however, such dis-
putes are less likely to occur with the adoption of a common
financial tool in the Bill, not just for Sequestration, but for all
formal statutory debt remedies in Scotland. This common fi-
nancial tool of choice, it has been agreed, will be the Common
Financial Statement (CFS) that is produced by the Money Ad-
vice Trust and the British Bankers Association and is already
widely used by the free and private sector money advice in-
dustry. The Scottish Government’s argument is that as the CFS
is generally accepted to be more generous than other financial
tools, such as the Stepchange debt charity figures which the
Scottish Government still currently use for sequestration, the
scope for disputes will be minimised. However, although there
is an element of truth in this, it must be said that even the CFS
still allows an element of discretion for trustees as to what is a
reasonable expense and will not remove the possibility of dis-
putes.
Forty-Eight-Month Contribution Periods
The Scottish Government have also seized on the use of the
CFS to justify the extension of the payment period in bank-
ruptcy from 36 months to 48 months, stating that as people
will now be allowed more generous living costs, they will be
able to continue making payments for longer. However, what
the Scottish Government has omitted to mention is that the CFS
has already widely been used within Scotland by the insol-
vency industry to determine what are reasonable living
expenses for debtors and their families. For these debtors, there-
fore, extending bankruptcy payment periods by 12 months will
not simply allow more time to pay to bankruptcy, but will mean
paying more and for longer: longer, in actual fact, than any-
where else in the UK for formal bankruptcy.
In defence of 48 month payment periods Fergus Ewing, the
Minister for Energy, Enterprise and Tourism, argued such ex-
tensions were necessary to harmonise the payment period for
bankruptcy with that for Protected Trust Deeds, which was
extended to 48 months on the 27th November 2013. If the pay-
ment period was not extended, he argued, debtors would just
choose bankruptcy as an easier option.
However, on the 11th of October 2013, whilst giving evi-
dence to the Energy, Enterprise and Tourism Committee in
support of the Protected Trust Deed (Scotland) Regulation 2013,
the Minister made a completely contradictory argument after
concerns were raised that extending the duration of Protected
Trust Deeds ahead of the commencement of the Bill would re-
sult in increased numbers of debtors applying for sequestration.
On that occasion the Minister argued, using the example of
England and Wales, that contribution periods for insolvency
arrangements could be different, such as those for formal bank-
ruptcy and Individual Voluntary Arrangements in England and
Wales without fear that debtors would use the easier option.
Debtor’s, he argued, preferred to try and pay what they could
back to their debts.
He also used the example of the Debt Arrangement Scheme
(DAS) to support his argument for longer payment periods,
citing the fact that use of the DAS was on the increase and that
average payment periods were 6.8 years. In response to those
who argued such extended payment periods led to increased
level of defaults, he drew attention to the fact only 3% of DAS
cases were revoked each quarter. What the Minister failed to
acknowledge was evidence from the debt charity Stepchange
which showed in their own Debt Management Plans the level
of defaults increased by 15% between 3 and 4 year repayment plan.

He also demonstrated the same level of dexterity a payday
loan company does when it sets out to misrepresent its interest
rates by focusing on the daily, rather than the annual rates.
Revocation rates in the Debt Arrangement Scheme may well
just be 3% per quarter; however, research conducted by others
in the Scottish insolvency industry1
shows these figures could
be as high as 13.4% per annum and ultimately the cumulative
affect could mean less than 50% of average duration Debt Pay-
ment Programmes (DPPS) succeeding: meaning no long-term
solution for those debtors. An illustration of this can be found
by just looking at the last quarter statistics for the Debt Ar-
rangement Scheme where 1,170 Debt Payment Programmes
where approved but 347 were revoked. In the quarter before
that, 1,200 Debt Payment Programmes were approved with 438
being revoked.
Clearly significant numbers of debtors in the Debt Arrange-
ment Scheme are finding such longer payment periods are not
suitable or sustainable.
Payment Breaks
Another argument the Scottish Government have relied on
to defend the extension of bankruptcy payment periods to 48
months is the insertion of payment breaks, by clause four, into
the Bankruptcy (Scotland) Act 1985 (1985 Act). Previously no
formal payment break existed in the 1985 Act for bankruptcy.
Quite simply, if a debtor could not afford to make a payment
because a drop in income or a reasonable increase in expendi-
ture, they did not have to pay anything.
The new section 32F that is to be introduced into the 1985
Act, however, allows a debtor to apply for a payment break
where their disposable income falls by 50% and is caused by a
number of particular events. These events are unemployment,
a change in employment, a period of illness, the birth or adop-
tion of a child, the breakdown in a marriage or civil partnership
or the death of a partner who jointly cared for the dependant of
a debtor.
Why a debtor in those circumstances would apply for a
payment break is not readily easy to see. They are not com-
pelled to do so and under existing rules they would simply be
deemed to be unable to pay towards their bankruptcy. Why
would they then request a payment break and a possible 6-
month extension of their payment period in a bankruptcy?
The point has also been made that the introduction of a
formal payment period would also be more useful, not for those
debtors who experience a drop in disposable income, as they
are simply unable to pay anything, but for those debtors who
are able to make a payment but experience an emergency such
as a broken boiler or car and need to prioritise use of dispos-
able income for those purposes. They could arrange for the
repairs to be carried out, avoiding hardship and then catch up
on their payments to their bankruptcy.
The introduction of a payment break into sequestration
makes no sense and it is difficult to perceive how it will work.
For example, debtors who suffer an income drop because the
death of a spouse (where there are no dependants) or the break-
down of a relationship other than a marriage or civil partnership
will not be able to apply, but trustees will not be able to ignore
these factors when deciding whether a debtor is still able to
make a contribution.
Scotland’s New Financial Health Service
For many it will appear ironic that such regressive meas-
ures are being introduced into Scotland’s bankruptcy laws
under the guise of Scotland launching a new Financial Health
Service. The Minister, Fergus Ewing, even suggested in the
Stage One debate the new Service may be like a new Financial
National Health Service for Scotland.
If it is like a new National Health Service, it will not be one
underpinned by the type of principles that most Scots associ-
ate with that other post-war institution. It will not be free at the
point of service and arguably, unlike that other institution, is
not driven by the principle of doing no harm.
The fact that the Scottish Government are likely to drive
ahead with Clause Four in its present form, ignoring the con-
cerns raised by a wide range of organisations, including Money
Advice Scotland, Govan Law Centre, Citizen Advice Scotland,
Lloyds Banking Group, The Consumer Finance Association,
the Law Society of Scotland, The Church of Scotland, The STUC,
Stepchange and the Institute of Chartered Accountants speaks
volumes.
The BADAS Bill is indeed living up to its name.
*Alan McIntosh is the Legal and Social Policy Manager of The
Carrington Dean Group. He writes here in a personal capacity
and his opinions are his own.
1. www.trust-deed.co.uk/news/debtarrangementschemefailurerateincreases.php

The Good, the Bad and the Ugly

The Scottish Government have released their response to the consultation they held earlier this year on bankruptcy law reform. Alan McIntosh takes a look at the implications.

After 10 years of progressive modernisation of Scotland’s debt laws and increased debtor protections being introduced by the Scottish Parliament, the current Government have now set out a number of proposals that can best be described as the good, the bad and the ugly. Considered as a whole, the proposed reforms can only be viewed as a backward step and instead of reforming our current system to ensure its fit for an era of austerity, will only likely exacerbate the effects of that austerity on many Scottish consumers and creditors.

The Good is the length of payment holidays in debt payment programmes under the Debt Arrangement Scheme will be increased as will the accessibility of the scheme for joint applications to be made; a new 6 week moratorium period will be introduced for all of Scottish formal debt remedies that will see interest , fees and charges on debts being frozen at an earlier stage and debtors will be provided with protection from enforcement action; there will be earlier discharges for those debtors who qualify for a new “no income” route into bankruptcy; and there will be a common financial tool introduced to harmonise how much debtors pay, regardless of the remedy they use.

The Bad is there are the proposals for a new route into bankruptcy, which will be known as a “no Income product” and be far less accessible than the current Low Income, Low Asset route; there will be an increase in the length of time that debtors will have to pay contributions in Protected Trust Deeds and Sequestrations, from three to four years; there will also be no automatic discharge after one year and debtors will have to apply for this, which will be linked to financial education and co-operation with trustees, increasing uncertainty; the power to make income payment orders will be taken off sheriffs and transferred to the Accountant in Bankruptcy’s office, creating Article 6 issues under the ECHR in relation to the right to a fair hearing as the Accountant in Bankruptcy will also be the trustee in most cases.

The ugly will be the exclusion of debts accrued within 120 days of the debtor entering a protected trust deed or bankruptcy, which will benefit the payday loan companies and others who prey on distressed debtors and only force debtors to delay in seeking protection; there will also be the introduction of a statutory minimum dividend for Protected Trust Deeds, which will limit accessibility to a wealthy few and force thousands more each year to become bankrupt.

To understand the thinking behind these policies, the temptation may be to think it’s the fear of creating a moral hazard that the Government is guarding against, which may lead to people believing it’s too easy to just not pay their debts; but this is unlikely considering it was this Government in 2010 which made it easier for debtors to go bankrupt; and where is the need to guard against such a hazard in a system where the numbers going bankrupt each year has been in decline for the last three years?

More plausibly, at the heart of the Scottish Government programme for reform is the need for the Accountant in Bankruptcy to be fully self funding. Already their level of public funding is at a 20 year low and saw 40% of cuts this year on top of the 37% of cuts the year previous to that.

In actual fact, it’s only when you place the events that surrounded the announcement of this consultation and its execution in this context, does any of it make sense.

In August last year, the Scottish Law Commission at the behest of the Accountant in Bankruptcy began a consultation on consolidation of bankruptcy law. All the indications were the Scottish Government were getting ready to let this much reformed area of law bed in. Then in December, unexpectedly it was announced there would be a root and branch reform of Scots law on bankruptcy to make it fit for the 21st century. No-one had anticipated such a move, especially as the implementation of the Bankruptcy and Diligence Etc (Scotland) Act 2007 and Part 2 of the Home Owner and Debtor Protection (Scotland) Act 2010 had only been implemented; but then it was probably around such times the decisions were made to further slash their public funding.

Then the consultation was hurried. It ran only between February and May this year. There was no underlying, unifying theme underpinning the consultation and when the eventual 124 page consultation document was released, it was made up of what some described as a ragbag of ideas that you wouldn’t expect to appear in the same strain of thought. There was no clear analysis of what was wrong or what the challenges were for the future.

Then there was the bizarre events during the consultation when the AIB announced they were developing a triage advice tool, with funding from the Money Advice Service, despite the fact this was an issue still being consulted on; then an advertisement was sent out to money advisers asking them to apply to be seconded to the AIB to provide an in house advice service, despite the fact they was no statutory role for them to perform such functions.

Then with little notice, it was announced the bankruptcy application fee was to be increased by 100% across the board for debtors, which resulted in a 36% increase in debtor applications as debtors hurried to beat the fee hike and was followed by a 50% decrease in the latest quarterly insolvency statistics.

We now have a non cohesive programme of reform. The good are to be welcomed, but none are that urgent to justify the bill that is being proposed or the hurried consultation process. The bad clearly appears driven to help the AIB meet the financial needs of their service, largely caused by the funding cuts, and the ugly are just that, policies with no evidence underpinning them and almost definitely will have consequences that will harm the vast majority of creditors and debtors.

There was a hope, albeit a tentative one at the beginning of this process, that the Scottish Government was going to rise to the challenge of the economic crisis and use imagination and innovation to develop a system that would help Scottish consumers and creditors tackle the problems facing both.

That hope, I believe, was dashed yesterday with the Government’s response to the consultation on bankruptcy law reform. It’s not all ugly, some of it is good, but on the whole its bad and arguably we’d be better off with what we have.

 

1,000s could go bankrupt as a result of law reform

1,000s could go bankrupt as a result of law reform

First published in Scottish Legal News

Alan McIntosh explains how the Scottish Government’s response to its Bankruptcy Law Reform Consultation will lead to thousands more debtors unnecessarily becoming bankrupt.

When the Scottish Government announced late in 2011 that it intended to consult on bankruptcy law reform, it came as a surprise to most who worked in the industry. The Bankruptcy and Diligence Etc (Scotland) Act 2007 had only been passed a few years earlier and part two of the Home Owner and Debtor Protection (Scotland) Act 2010 had only commenced in November 2010.

There had also been an announcement in August 2011 that the Scottish Law Commission had been asked by the Scottish Government to consult on consolidating Scottish Bankruptcy law, suggesting the intention at that time was to allow this much reformed area of law to bed in for the foreseeable future.

Then there was the announcement by the Scottish Government that it intended to consult on further reform to create a system suitable for the 21st century.

In its response to that consultation yesterday, however, it became clear although there a number of admirable reforms being proposed, at the heart of the reform agenda are changes that will not benefit debtors or creditors, but instead result in thousands of debtors each year being forced into sequestration in an attempt to address the funding crisis that the Accountant in Bankruptcy’s office is facing due to the Scottish Government’s policy of full cost recovery.

Public funding of the Accountant in Bankruptcy’s office is now at a 20-year low, with 40 per cent of cuts this year following on from 37 per cent of cuts last year. To address its current funding crisis, other than making cuts themselves, the AIB, has to find other sources of revenue. This is only possible in two ways: one is by increasing the fees it charges; and the other is by increasing its market share of the personal insolvency work it undertakes.

In relation to increasing its fees the AIB has already done this in relation to debtor application fees, where it raised the fee in June 2012 by 100 per cent from £100 to £200. This resulted in a 50 per cent decrease in the last quarter in the number of debtor’s applications being made. Fee increases, therefore, carry problems: the more they increase the more that is added to the cost of the remedy and the less people will use that remedy, resulting in falling fees and increasing costs per unit of work you undertake. It’s a vicious circle.

Increasing market share, however, provides more potential, although to do that you must compete with the private sector, except in relation to Low Income, Low Assets bankruptcies, where only the Accountant in Bankruptcy’s office is allowed to be appointed. In relation to other types of sequestrations, the AIBs office is the default trustee, meaning where a debtor chooses or cannot appoint a Licensed Insolvency Practitioner, the AIB acts. Previously the AIB had attempted to increase its market share of bankruptcies when part 2 of the Home Owner and Debtor Protection (Scotland) Bill was announced by proposing only they could act as trustee when the new route of certificate of sequestration was used. However, that proposal was controversial and a breach of competition rules and had to be dropped.

Since then, there has been increasing debtor and money adviser dissatisfaction with how the AIB treats debtors when they are the trustee and this has resulted increasingly in debtors appointing their own licensed insolvency practitioner. The main source of this dissatisfaction has surrounded the level of contribution the AIB agents are seeking from debtors once they are in place, whereas private insolvency practitioners can normally advise on this before being appointed.

In response to this, the Scottish Government have now proposed they will create a common financial tool which will harmonise the amount debtors will pay regardless of the remedy they use. This will allow debtors to know beforehand how much they will pay prior to signing up to any remedy and to that extent is a commendable proposal, although as the AIB will be deciding on the details of any financial tool, much of what is contained in the detail will be crucial.

Of more concern, however, is the proposal that a new statutory minimum dividend of between 35-50p in the pound be introduced for protected trust deeds. Protected Trust Deeds are voluntary, less formal type of personal insolvency in Scotland and over 9,000 people entered into them last year. They generally provide better returns for creditors than sequestrations and, although the majority only last 3 years, significant numbers do run for four to five years to allow debtors to buy out equity in their properties and pay additional amounts to satisfy creditor criteria for the deeds to be protected.

Legally, all Protected Trust Deeds in Scotland, therefore, are agreed to by creditors as they do get an opportunity to object. The effect of protection being legally all creditors are deemed to have acquiesced in the agreement.

Currently, the average dividend payable in a protected trust deed is approximately 16 pence in the pound. If the level of dividend is statutorily fixed at 35-50 pence in the pound, as opposed to it being agreed freely between the parties involved, the simple reality will be thousands of debtors each year will not be able to afford to such remedies and instead will have to enter more severe and damaging sequestrations. The alternative to this will be to enter into a Debt Payment Programme under the Debt Arrangement Scheme, which could see many debtors being trapped in repayments plans lasting up to 12 years.

This is only one feature of the current proposals being made by the Scottish Government and not all should be condemned, but it must be asked, as the AIB cannot act as trustee in Protected Trust Deeds, whether it is being proposed such criteria should apply to Protected Trust Deeds in the knowledge that it will kill off that remedy or restrict its use. The resultant effect being more will have to use sequestration and with the common financial tool, it must be in the AIB’s calculations that this will increase their market share of sequestrations and, therefore, their income from such work.

If this is the case and part of the strategy of the AIB becoming fully self-funding, the proposals must be condemned. A bankruptcy system that we all know will increase damage to the interests of debtors and creditors cannot be a system that is fit for the 21st century, nor can it be in the interest of the country as a whole to force more people into such a drastic remedy. If it’s not, then the question must be asked, why introduce statutory criteria into what is already currently a very popular remedy?

Bankruptcy Consultation Cancelled

Bankruptcy Consultation Cancelled

A consultation on the reform of bankruptcy law appears to have broken down as reforms opposed by consultees appear to be proceeding regardless. Alan Mcintosh untangles the mess.

Anger has broken out amongst money advisers over the Scottish Governments Bankruptcy Law Reform. Within a day of the first of a number of industry consultations, many advisers have been left furious and angry at what appears to be the contempt the Accountant in Bankruptcy (AIB) is treating the process and those participating in it.

One of the key issues is should the AIB be able to provide advice.

The day after a consultation event organised by Money Advice Scotland, where the proposal was unanimously rejected by the members present, the Accountant in Bankruptcy advertised it was seeking two advisers to be seconded to a pilot project beginning next year.

The Accountant in Bankruptcy has no legal powers to deliver such a service and no bill is presently in front of parliament proposing they have such powers. Even the consultation proposing they should have such power is not complete. Yet despite it being expected that opposition to it will be overwhelming, the AIB appear to have decided the proposal will go ahead.

The issue is an old one and first arose with the passage of the Bankruptcy (Scotland) Act 1993. The then conservative government rejected the idea as there was a conflict of interest. Since then the idea has repeatedly re emerged and has lead to accusations of empire building by the AIB. More recently in the current consultation, the proposal was made with the assurance that the project will be ring fenced in acknowledgement of the conflict of interest.

The AIB claim they regularly receive calls from debtors asking for help or arriving at their office and need to be able to assist them by delivering advice. The Scottish Government, however, already funds the National Debt Line and either North Ayrshire Council or Irvine Citizen Advice Bureau could easily, with funding, serve the AIBs office.

Why then the need for a duplicate service?

In launching the Bankruptcy Law Reform consultation, Rosemary Winter Scott, the Accountant in Bankruptcy called for “vision and ambition” in redrafting Scotland’s bankruptcy laws, but also worryingly indicated this was a good time for the reforms with the majority government. It’s clear now what she meant with such comments: legislation will be driven through parliament and Government dominated committees will be expected to rubber stamp provisions.

Many like me fear the AIB’s vision of rebalancing Scotland’s bankruptcy law is gradually about eroding independent debt advice and replacing it with more pro-creditor advice. This is an erosion of the principles that advice should be non-judgemental and always in the best interest of the client.

What is shocking in relation to the Accountant in Bankruptcy actions, however, is the cynicism of what they have done. No mention was made of the pilot project at the Money Advice Scotland consultation the day before, despite the attendance of a senior AIB staff member. Instead it was only after the extent of feeling became clear it was announced, possibly to instil a sense of defeatism in people or to entice others fearing job cuts.

Equally disturbing is that the announcement was made through Money Advice Scotland, who knowing the strength of its own member’s feelings, circulated the advertisement seeking advisers to apply. This raises questions about the influence the AIB now have, now they control significant portions of their funding and The Chief Executive is a non executive member of the AIB’s Board.

The decision to announce this project is in bad taste and signals contempt towards the consultation process and those involved in it. If this matter is already decided, what others are?

Rosemary Winter Scott said she wanted vision and ambition during this reform, but already it appears cynicism and distrust is creeping in.

You have to wonder if there is any point continuing with the consultation.

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

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

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)