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Payday Loans: The Scottish Parliament Must Act

Payday Loans: The Scottish Parliament Must Act

First published in Bella Caledonia

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.

Six Ways For The Scottish Parliament To Now Tackle Poverty

As the Scottish Government take their turn to do the okey cokey and shuffle the cabinet, I suggest some ideas the Cabinet Secretaries and Ministers may wish to consider that could help reduce poverty and the worse effects of it in Scotland.

Margaret Burgess (Mininster for Housing)

We have already seen significant advances in housing law over the last few years, with Part One of the Home Owner and Debtor Protection (Scotland) Act 2010, the Housing (Scotland) Act 2010 and the Private Rented Housing (Scotland) Act 2011.

Here, however, is an interesting suggestion by Jon Kiddie, the Principal Solicitor of Renfrewshire Law Centre to end evictions during the coldest months of the year. Similar rules already exist in many EU countries. Why not have similar protections in Scotland, one of the coldest and wettest countries in Western Europe?

Fergus Ewing (Minister for Energy, Enterprise and Tourism)

Or what if we follow the example of Norway and use our legislative authority over debt laws to right down mortgages when people are facing repossession and have negative equity?

Often people get into arrears as they can no longer maintain their mortgage payments. This result in their homes being repossessed and sold at a loss as they have negative equity. If we acknowledge the lenders are going to suffer a loss anyway, why not allow for the debt to be reduced and allow the borrower to repay the loan at the reduced rate?

We will have a new Bankruptcy bill  introduced in this parliament. As I have already blogged we should be bold and recognise the role such laws can have in not only assisting economic recovery, but freeing people from the vicious cycle that is caused by debt, whilst providing a social safety net for the poorest.  We could draw on the laws of Canada and the United States and increase protection for homes in bankruptcy by protecting certain levels of equity. This would allow more to access the remedy where debts are no longer manageable, without placing homes at risk.

We could also introduce a new Debt Payment Programme for pay day loans as has been suggested by Mike Dailly, Principal Solicitor of Govan Law Centre which he has blogged about here and I have also covered.

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John Swinney (Cabinet Secretary for Finance)

We all know before the last election The Scottish Government had its efforts to reform local taxation (the council tax) blocked by Labour.

What’s now stopping us?

Council tax is recognised as an unprogressive form of taxation and even those on income support have to pay water and sewage charges.

Under the last Labour Government there was no guarantee also that if Scotland did replace local taxation with a Local Service Tax that the funds currently given in Council Tax Benefit would continue. The Coalition has now, however, devolved this benefit to the regions, including Scotland.

However after they made cuts, Scotland is now funding a benefit shortfall of £40 million per year on top of the current Council Tax freeze.

Why not reintroduce a bill to reform this tax and make local taxation fairer?

Mike Russell (Cabinet Secretary for Education and Life Long Learning)

More often than not, poverty is  the result of low income, illness and unemployment as well as an array of other issues. However, greater financial education can only help Scots.

Financial education should be taught in all primary and secondary schools. We must equip our children with the skills they need in a world where many by the age of 20  will already be sinking  into a sea of debt.

What has the Scottish Parliament ever done for us?

The day after Professor Bonnington claimed the Scottish Parliament was damaging Scots Law, I provide one example in relation to debt law, where this is not the case.

Scotlands Best Kept Secret: The Debt Arrangement Scheme

In 1985 when the Scottish Law Commission produced it’s report into diligence, the area of Scots Law that deals with the legal recovery of debts, it was proposing reform of an area which had not been kept up to date with changing values .

It was possible back then when you owed money for your creditors to instruct officers of the court to seize your possessions and have your neighbours funnel through your home with a view to buying them. You not only had to contend with the embarrassment of being publicly humiliated, but also the knowledge that the predatory behaviour of those attending would mean your property would in all likelihood be sold for peanuts.

Unfortunately, the Scottish Law Commission didn’t think this was too bad and just a few adjustments were required, so it didn’t recommend abolition. However, it did make a number of other recommendations, one of which was there should be a new scheme for people with multiple debts who needed time to pay them off.

When the Debtors (Scotland) Act 1987 was introduced, Poindings and Warrant Sales as they were known, were kept, but slightly reformed (your neighbours couldn’t come into your home anymore, but they could watch from their windows as the court officer carried away your goods). And the scheme to help people repay their debts? Well that was a nice idea, but really why bother?

By 1997, nearly and 18,980 poindings were being executed in Scotland. Good times.

Then in 1999, Tommy Sheridan with the assistance of Mike Dailly, the Principle Solicitor of Govan Law Centre brought forward one of the first member bills in the newly formed Scottish Parliament: The Abolition of Poinding and Warrant Sales Bill.

Despite Scottish Executive resistance there was a back bench revolt (interestingly, primarily by woman) and this archaic practice was abolished. The Scottish Executive then brought forward their own legislation, the Debt Arrangement and Attachment (Scotland) Act 2002 which confirmed the abolition of poinding and warrant sales, albeit replacing them with a new type of attachment that distinguished between good kept in the home and outside the home. They also dusted off the old Scottish Law Commission recommendation of a new repayment scheme and called it the Debt Arrangement Scheme.

It was introduced in 2004 and allowed people to enter into formal repayment schemes with their creditors, letting them pay their debts, but with the full protection of the law. Once in a scheme, creditors could not do earning arrestment, bank arrestments, attach people’s property or make them bankrupt. And if the creditors objected? Well the new government officer, the Debt Arrangement Scheme Administrator could say tough, you’re in, providing she thought it was reasonable.

As a result of a painfully slow start, however, in 2007 the Scottish Government then introduced reforms so that once a  programme was approved, all interest, charges, fees and penalties on debts were frozen and if the plan successfully completed, written off.

Then in 2011, to give it another kick it was reformed again, this time to widen the type of money advisers who could apply for a programme on behalf of their clients. They also introduced payment breaks, so if your income dropped more than 50%, you could qualify for six month’s grace to get back on your feet again. And if you had ten different creditors to pay each month, well that was okay as everyone in the scheme has to pay their debts through a payment distributor who collects the money then distributes it to the creditors. And the cost of that service? The creditors have to pay for it.

The Scheme is still the little brother of Scotland’s two other formal debt remedies: 9,194 people signed Protected Trust Deeds last year; 11,056 people were declared bankrupt; and only 3,319 had Debt Payment Programmes approved.

However, as the graph below shows, if the first 8 years of the Debt Arrangement Scheme is compared with the first 8 years of Protected Trust Deeds, its growth pattern matches that of Protected Trust Deeds and in the last year has begun to grow even more steadily. In all likelihood in a few years time it will become Scotland’s main debtor remedy.

And it’s good for creditors also. The average dividend paid to a creditor in a Protected Trust Deed is less than 16p in the £ and less for bankruptcy: in a Debt Payment Programme, as the longest they normally last is 10 years, creditors get at least 30p in the £ back over the same period, but also with the hope of more in future years as it is not a form of personal insolvency.

The Scottish Government is also now looking to extend the Scheme so it can be used more easily by sole traders and partnerships to let them repay debts and avoid bankruptcy: creating a culture of recovery rather than one of liquidation.

And as for the replacement of poindings and warrant sales: in 2011/12 there were only 2,758 attachments, which is for property outside the home, such as cars and commercial property, and only 51 exceptional attachments carried out in the home (compared with the 18,980 poindings in 1998).

Now that’s not bad and as for the rest of the UK: they are still waiting for their reforms.

Enforcement of Debt (Scotland) Bill Required

By Alan McIntosh

John Wilson, MSP, Enforcement of Local Tax Arrears Bill proposal has opened up an important issue in Scotland regarding the enforcement and extinguishing of the obligations of debtors to repay their debts.

Scottish Debtors are currently at a disadvantage to debtors in other parts of the UK, in that debts can be pursued in Scotland for longer than they can in England, up to twenty years or more, once a court order or its equivalent has been obtained. In England, there is no automatic right to enforce a debt using legal enforcement (or distress) after 6 years. This encourages bad practice in Scotland, meaning bad debts can be held over people for an extraordinary long period of time. This encourages debt purchasers who buy debts, sometimes for pennies in the pound to then use the full force of the law to harass and persecute debtors who have reasonably assumed the original creditor has abandoned their right to pursue the debt.

John Wilson’s draft proposal concerned only local tax arrears and the pursuit of them using the summary warrant procedure, which only local authorities and Her Majesty’s Revenue and Customs can use. The debate, however, should be wider and look at the enforcement and extinguishing of a debtor’s obligations to repay all debts.

I would call for:

  • The prescriptive period for enforcing local tax arrears being reduced to five years;
  • Debtors having a statutory right of recall when served by a summary warrant by local authorities or Her Majesty’s Revenue and Customs Department;
  • That no court decree for payment of money, or summary warrant, should automatically be enforceable after five years, unless the creditor can show exceptional circumstances for not enforcing the debt earlier; and
  • That local authorities and HMRC,  who use summary warrant procedure, being allowed to enforce debts constituted by summary warrant  by executing and registering inhibitions on the property of debtors.

My full paper, The Enforcement and Extinguishing of Debtor Obligations in Scotland can be read here.

MSP John Wilson’s Draft Bill Proposal Before Its Time

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.