The Debt Arrangement Scheme (Scotland) Amendment Regulations 2019 broadly propose to do four things:
- First, they will increase the fee’s that are charged to creditors from a maximum of 10% to 22%;
- Second, they will amend who can act as a Payment Distributor (PD) with a view to encouraging greater private sector involvement in delivering the Scheme and allow the Accountant in Bankruptcy to become a PD;
- Third they will make several changes to how Debt Payment Programmes (DPPs) under the Debt Arrangement Scheme (DAS) are administered, with a view to streamlining the process;
- Finally, they will ban any private sector fee being charged to the consumer for the provision of a DPP under DAS.
I propose to address only point 1, as I have no issues with the other three points.
My concerns with the increased fee and model for applying it are:
- The proposed fee structure is not transparent, fails to acknowledge the role of the money adviser in the process and places at a disadvantage money advice services, which are not payment distributors, such as Citizen Advice Bureaux, Local Authorities and small independent insolvency practitioner firms and their clients;
- The fee structure will likely result in a consolidation of the market into the hands of two or three high volume providers, reducing competition and choice for consumers not only in who they can access the service through, but how they access it;
- The proposed fee structure provides no benefits for anyone, other than the Accountant in Bankruptcy (AIB), raising the question why it was chosen when a more obvious structure would have allowed for a money adviser fee;
- The funding model proposed is one that incentivises providers to supply a specific solution and creates a risk provider’s will be rewarded for providing inappropriate solutions, increasing the risk of consumer harm.
I would ask that these Regulations are rejected, to allow the fee structure to be restructured to allow a “Money Adviser Fee” and that the Regulations specify what both the “Money Adviser” and “Payment Distribution” Fee should be.
The proposed fee structure is not transparent and hides within the Payment Distribution Fee the cost of providing money advice services. It is the fact the cost of providing money advice is being transferred to creditors that is justifying the increase in the cost to creditors from a maximum of 10% to 22%.
Such a fee structure will be detrimental for Citizen Advice Bureaux, local authorities and small insolvency practitioner firms who do not act as payment distributors and their clients. These providers, if not payment distributors, will have no legislative right to charge a fee and, therefore, have no legal way to recoup their costs, unlike large volume providers like Stepchange, who through the payment distribution fee will be able to recoup their advice costs.
It acknowledged the AIB have said they will redistribute funds back to public sector when their clients choose them as their PD. It is not, however, specified in the regulations, how much that will be or by what means it will be returned.
However, it should be noted that the decision as to what Payment Distributor is appointed is legally the consumers, as the PD works for the client and not the money adviser. Where the consumer chooses to appoint a PD other than the AIB, then the money advice agency has no statutory right to be paid by the PD.
A similar problem exists for small insolvency practitioner firms, who do not have the means of the capacity to provide a payment distribution service, in that they will be required to negotiate with other firms a share of the payment distribution fee when they appoint them their cases. By virtue of the fact Payment Distributors will be larger and likely the competitors of small firms, there is a strong danger the fee structure will distort the market and act as a barrier to small independent providers entering or remaining in the market.
If the purpose of these regulations is to increase greater take up of the Debt Arrangement Scheme, it is likely these changes will result in a decline in face to face services, which will have no benefit for the consumer or the creditors, as the volume producing, call centre providers will continue to charge 20% of all funds distributed.
The only beneficiary of this fee structure is the Accountant in Bankruptcy, as it pressurises public sector providers to “encourage” their clients to use the AIB payment distribution services for reasons of self-interest and will allow the AIB to acquire a significant market share of payment distribution services, which is currently being provided by the private sector.
It also means the AIB is entitled to the 20% and it is for the AIB to determine how much is returned to the free sector and by what means it is returned.
A more obvious, and transparent, fee structure would have been to have three components to the fee structure:
- A Payment Distributor Fee;
- A Money Adviser Fee; and
- An AIB Administration Fee
This is the model that the UK Government is proposing for the UK statutory repayment plan scheme. It is a more obvious fee structure, as it recognises the different roles in the Debt Arrangement Scheme.
If such a fee structure was adopted in Scotland, it could specify in the Regulations what the fee for each component should be.
Such a structure would have no detrimental effect on the creditors, as they would still pay a maximum of 22%; it would ensure consumers are truly free to choose the payment distributor of their choice; and it would cause no detriment for large volume providers like Stepchange and other private sector providers. They would still receive the full 20% as providers of both money advice and payment distribution services. In fact, they would arguably benefit from such a model, as consumers using other free sector providers could appoint them as their payment distributor and the free advice agency would have a statutory right to recover their costs from the case.
It would, however, impact on the Accountant in Bankruptcy, as they would only be able to charge the administration fee and the payment distribution fee, where they act as a payment distributor. They would also be forced to deliver their payment distribution services for a cost that would be capped in legislation, which is the position that every private sector payment distributor has been in since 2004. It would, however, be of huge benefit to local, face to face services as it would ensure they have a statutory right to recover some of their costs.
The Risks of a Product-Related Incentivisation Scheme
I fully accept there is a need to look at how the provision of free money is funded in Scotland, particularly in times of the reducing availability of public funding.
I believe an important part of how money advice is funded going forward, should contain an element that is based on a “polluters pay” or “fair share” model. That is creditors should be asked to contribute to the funding of free money advice services in Scotland.
My preference is for a Scottish Debt Advice Levy, that could be applied fairly across all creditors in all formal debt solutions and distributed to all free sector providers of advice, regardless of what solutions their clients use and what the demographics of an advice agency’s client group is. I expand on this idea at the end of my submission.
However, there is an inherent risk for consumers and creditors in adopting a funding model that incentivises organisations to provide one solution over others. It creates a risk of mis-selling and that vulnerable people become commodities to be traded for commission.
These regulations include no measures to mitigate against that risk and there was little or no discussion of the risk in the DAS Regulatory Working Group.
The AIB, as a regulator, has not shown itself to be an effective regulator in relation to other markets and has displayed what I would argue is a high level of tolerance when it comes to consumer harm.
Funding of Free Sector Advice
The current funding of free money advice in Scotland can be categorised as coming from three main sources. These are:
- Local Authority Funding;
- FCA Debt Advice Levy Funding;
- Fair Share Scheme Funding;
Local Authority Funding
Local authorities are significant creditors because of council tax arrears, but also the largest funder of free money advice services in Scotland, primarily through local authority services and Citizen Advice Bureaux.
However, as has been reported by the Improvement Service this funding has fell by 45%, between 2014 and 2017 (2014-15 £21m; 2015-16 £13.3 m; 2016-17 £11.72 m) This trend is continuing at a time when Council Tax bills are again on the rise and arguably has contributed to the fall in the take up of the Debt Arrangement Scheme over the same period.
FCA Debt Advice Levy Funding
This funding is raised across the UK by the FCA from consumer credit lenders. However, no funds are raised from utility firm providers, HMRC or telecommunication firms, who are all significant creditors, but contribute little to the cost of providing free money advice. The Scottish share of this Levy has now been devolved to the Scottish Government since January 2019.
Fair Share Funding
This is operated by the central clearing banks, for Debt Management Plans, which involves two providers being allowed to retain a percentage of any funds ingathered from repayment plans (believe to be around 10-11%)
The only providers who benefit from this are the debt charity Stepchange (who raised £42.8 million in 2017 from DMP fees); and Totemic (Payplan), a private company (which raised £12.3 million in 2017 through DMP fees). No other free sector provider benefited from this source. This Scheme is often criticised as some believe it incentivises the delivery of only one solution and leads to criticism that solution is preferred over others for clients for reasons of self-interest.
Scottish Debt Advice Levy
In 2017-18, £74.1 million was the net amount distributed to creditors through Scottish formal debt advice solutions, after the AIB, private Insolvency Practitioners and Payment Distributors took their outlays, expenses and fees.
Of that £14.2 million was from sequestrations; £22.3 million was from Protected Trust Deeds; and £37.6 million was from Debt Payment Programmes.
I don’t have the complete figures for what was taken in fees, outlays and expenses, but have gathered what I can from the AIBs Annual Report.
The AIB paid insolvency practitioners through their agency scheme £5.1 million for sequestrations; they also ingathered £12.3 million in fees for themselves (although not all from cases). As Payment Distributors charge anything from 4-8% for their services, they would have taken anything from £1.5 million to £3 million.
In addition to that of the £60.4 million that was ingathered in Protected Trust Deeds in 2016-17, only 37% was paid to creditors in the form of dividends (£22.3 million) meaning £38.65 million was taken in fees, outlays and expenses (some of which was payable to the AIB).
As of the end of the 2017-18, however, there were 12,924 live DPPs. Currently there is approximately 7,000 public sector active cases in DAS (roughly 54% of all cases). As a percentage of the total sums distributed in 2017-18 this equates to public sector cases generating roughly £20.3 million for creditors.
These are cases, still actively being managed and worked on by largely local authority funded services (including CABx), but which have saw a 45% cut in their funding between 2014-18
The amount returned to those agencies from these cases in 2017-18 was £0.00.
The current DAS Regulations do not propose the new fee structure would be applied to these historic, but live cases, but advice agencies will continue to work on them.
If the new fee structure proposed for DAS was applied it would generate an extra £3 million per year in fees and with no payment distributor currently charging more than 8%, would mean roughly half of that could be distributed to the agencies managing the cases.
However, an alternative funding model would be to augment existing funding sources of the free sector by creating a Scottish Debt Advice Levy that could be applied to all funds ingathered into formal Scottish Debt Advice Solutions.
Even a levy of 10% applied to just the net amount distributed to creditors could generate an extra £7.4 million for free advice providers.
Such a levy would have the advantage that it would also be applied to all creditors, including local authorities, utility firms, telecommunication firms, HMRC, and consumer credit firms. It would also acknowledge the vital role that local authority money advice services, law centres and Citizen Advice Bureaux play in providing the vital infrastructure that supports Scotland’s formal debt solution framework.
It is also likely to increase returns for creditors, as it is widely acknowledged that at time of under capacity, which is the current situation for free money advice services, investing in money advice services has a multiplier effect of returning between £4-9 to creditors for every £1 invested. This is evidenced by the fact DPPs alone, administered by publicly funded advice agencies, are already generating more for creditors than the agencies themselves are receiving in funding.