The Scottish Government have proposed a new way of funding Scotland’s formal debt repayment plan, the Debt Arrangement Scheme.

One of the fundamental flaws with the plan, however, is it focuses purely on how to get more people signed up to the Debt Arrangement Scheme and ignores the issue of how to protect approximately 13,000 Debt Payment Plans currently in operation and generating £37 million per year to creditors.

The problem is the Scottish Government’s new fee model will only apply to new cases going forward and will not be applied to existing live cases.

New Funding Model

The new funding model proposed by the Scottish Government are contained in the Debt Arrangement Scheme (Scotland) (Amendment) Regulations 2019.

This model, as proposed in the Regulations has a number of flaws, some of which I have already discussed in a draft submission to the Economy, Energy and Fair Work Committee of the Scottish Parliament, who will be considering the Regulations in September (see here).

The background to the proposal is the declining number of consumers entering the Debt Arrangement Scheme, but also the current way people access the Scheme at present, which is either through a free sector provider or through a private sector provider.

The main difference between both routes is if you access the Scheme via the free sector (local authority advice services, Citizen Advice Bureau or Stepchange etc.) then your full payments go to repaying your debts.

If you access via the private sector, you will most likely pay a setup fee and a monthly management fee, in addition to paying your debts.

Not all the money you pay, therefore, goes to paying your debts.

The new funding model that the Scottish Government has proposed is that all private sector fees will be abolished and instead all the money consumers pay will go to paying their debts.

The cost of providing access to the Service will then be covered by creating a liability for the Creditors.

This is how the payment distribution service for the Debt Arrangement Scheme is currently funded. To do this the Scottish Government have said they will increase the total cost to creditors from a maximum of 10% to 22%.

The problem, however, is this will mean approximately 13,000 Debt Payment Programmes, that currently exist, and are generating funds for creditors, will continue to be funded by traditional means, which is from other sources of funding for free sector providers or consumer continuing to pay private management fees.

Unsustainable Model

The problem with this, however, is this model will face multiple challenges and may not be sustainable for large parts of the current Debt Arrangement Scheme caseload post the 2019 Regulations.

The reasons for this are multiple, but are summarised below.

Reducing Funding

First, in relation to Citizen Advice Bureaux and local authority money advice services, these services are heavily dependent on Local Authority funding, which between 2014-17 saw a 45% reduction.

Over the same period the number of people applying to the Debt Arrangement Scheme decreased by over 50%.   

With no additional funding being provided to core money advice services in Scotland, against a backdrop of rising demand, questions now have to be asked how sustainable these services will be in the future and what this will mean for 7,000 Debt Payment Programmes that are still active and being managed by such services.  These cases are believed to be generating between £15-20 million per year for creditors in debt repayments.

Second, in relation to Stepchange cases, it is believed that Stepchange currently have several thousand cases under management, most of which are only generating an 8% fee (some will be generating no fee).  According to Stepchange this means their DAS service is currently running at a loss and according to them, even if the fees are increased to 20%, their DAS service will only be washing its face.

Although there is no risk that Stepchange will not be able to continue managing their existing caseload, as overall, they are in a very healthy position (their debt management fees across the UK (not DAS) generated £43 million last year and they have over £21 million in reserves) any suggestion they could pick up 7,000 cases which won’t generate any fees, is clearly not a responsible strategy for dealing with this issue.  If Stepchange were to argue they could, then questions would need to be asked about whether they do need 20% to cover their costs.

However, that argument aside, we also  have to recognise that many clients will already have chosen not to use Stepchange’s services, being a telephone, call centre service and chosen to use a face to face service.

Private Sector Cases

Finally, there is an issue once the new Regulations are passed, that anyone who chooses to apply to the Debt Arrangement Scheme will no longer have to pay a private sector fee. Essentially, they will receive a free service.

That has to raise the questions about what happens to the 1,000s of live cases at present where people are having their DPPs managed by private sector providers and paying private sector fees. 

These fees will be slowing down how quickly they are repaying their debts and ensuring they don’t get the same benefit of the DAS as other consumers.

Is it not unreasonable to assume that many of these consumers may want to take advantage of the new fee structure and may be tempted to deliberately allow their DPPs to be revoked, so they can reapply, take advantage of the new fee structure.

They could then offer not only what they were previously paying to their DAS, but also add on what they were paying in management fees. It may result in them becoming debt free sooner.

The Advantages of Applying new Fee Model to Historic Cases

There are numerous advantages of applying the fee model to historic cases, if the new funding model is approved by Parliament.

First, for front line services, like local authority and Citizen Advice Bureaux services it is believed the cases could generate an additional £1.5-2 million per year in funding. This would start paying almost immediately.

This additional new funding would ensure that services can be maintained, not only to manage existing cases but sign up new ones.

Second, it would allow the 1,000s of consumers who are currently using the Debt Arrangement Scheme through private sector providers, to continue to use those services going forward and possibly even offer more towards their debts, raising the prospect of not only them being debt free sooner, but creditors getting  their debts repaid sooner.

Finally, it would ensure that the future of the 13,000 live DAS cases would be secured and that the creditors would continue to benefit from the repayments that are being made through them and last year amounted to over £37 million.

The Disadvantages of Applying new Fee Model to Historic Cases

There will be arguments against applying the new fee model to historic cases.

The first of these will be that legislation should not be retrospective, but this is a relatively weak argument, as the new fee structure would only be applied to cases going forward, not for work that has previously been carried out.

A second argument will be that it will be unfair for creditors, as they will have agreed to the Debt Payment Programmes on the basis they would get returns of over 90%, whereas if the new fees were applied to existing cases, they would get less.

However, again this is a weak argument.

First, not all DAS are approved with the consent of the creditors, but through a Fair and Reasonable Test being applied. 

Second, Creditors are used to proposals not fully realising what was proposed and fees increasing (this is very common in both Sequestrations and Protected Trust Deeds) and it is not unusual for DPPs to be revoked and for consumers to use other remedies, which pay less.

Third,  there is a precedent for varying the terms of existing DPP cases and a variation process already exists.

In 2007 when interest and charges were frozen in the Debt Arrangement Scheme, this feature was applied to all existing cases through a variation process (which gave the creditors the right to appeal to the Sheriff on a point of law).

Despite the fact this raised issues in relation to the property rights of creditors under Article One of Protocol One of the European Convention of Human Rights, it was clearly felt there was a legal basis for doing so by the Scottish Government.

The argument being, that although creditors have a right to have their property rights respected by public authorities, there are situations, for reasons of public interest, when such interference is possible, providing such interference is subject to a legal process and proportionate.

Such a public interest exists in relation to the Debt Arrangement Scheme, as it is in the public interest that consumers are able to access free assistance in relation to getting their problem debts dealt with. Society’s ability to do that is declining with public funding for money advice being cut and this is jeopardising the continued existence of at least 7,000 Debt Payment Programmes.

This poses a risk to the wider public interest, but also to those creditors who are benefitting from those Debt Payment Programmes

If the new fee structure was applied to their existing cases, they may pay more, but will also benefit as the Programmes will continue to exist and provide returns to them. The applying of the fees to historic cases, therefore, could be argued to be a balanced and proportionate measure.

Finally, the reason for using a variation process under the Debt Arrangement Scheme to apply these fees to existing cases, means that a legal process is being used and one that allows creditors to appeal to a Sheriff on a point of law should they feel their rights under Article One of Protocol One of the European Convention of Human Rights has been breached.

It should be noted in 2007, when the freezing of interest and charges to existing cases were carried out, no creditor appealed.

Conclusion

The failure of the proposals to address the issue of existing cases is another example of the shortcomings of the Debt Arrangement Scheme (Scotland) Amendment Regulations 2019 and the shortcoming of the strategic policy thinking at The Accountant in Bankruptcy’s office.

It is another reason the Regulations should be withdrawn and redrafted, before being resubmitted to the Scottish Parliament.