Breathing Space 2019
Q1. Do you agree with the eligibility criteria for entering breathing space, including the 12 month limit?
We support the proposed eligibility criteria, including the 12 month restriction. We particularly welcome the proposals that would require that advice be given by an FCA authorised adviser. We feel that the lack of FCA oversight of most Insolvency Practitioners is currently resulting in a number of concerning trends in that area, with increasing evidence that IVAs are being ‘mis-sold’ to individuals who have sought advice in good faith.
Q2: Do you think there should be a formal mechanism to allow creditors to object to a debtor’s entry into a breathing space, given the protections already outlined above? How could any such mechanism be best designed to minimise administrative burden?
Given the relatively short length of time, we do not feel it would be practical to enforce a creditor objection system. Credit unions would encourage individuals who are facing problem debt to seek advice in this manner, and there are already protections in place with regards to who can access Breathing Space. We feel the main requirement should be that creditors are proactively notified when a Breathing Space is in place, and due care is taken to ensure notifications are being received.
Q3: Do you agree with the outline of the alternative access mechanism for individuals in mental health crisis care?
Q4: Although it will be important for a professional assessment to be made of an individual’s condition, do you agree that other third parties (e.g. carers) should be permitted to use that professional assessment to make a referral to a debt advice agency on an individual’s behalf?
We support the measures suggested to support those experiencing a mental health crisis, and who are in need of a Breathing Space.
Q5: Do you agree with the proposed method of administering entrance into breathing space? Do you agree with the proposed role for the Insolvency Service? What kind of functionality should the Insolvency Service’s notification mechanism include?
Q6: Do you think there should be an oversight role to ensure creditor compliance with breathing space? If so, how should this oversight role operate?
Q7: Do you think the register holding details of debtors in breathing space should be fully public, accessible to relevant debt advice agencies and creditors or just accessible to the Insolvency Service?
We support the proposals on entrance to a Breathing Space, and the role of the Insolvency Service. We welcome the system of notifying creditors at the beginning and the end. We would emphasis that the adviser, when working with the client, needs to have established exactly who the creditors are, and that the contact details are accurate. For reasons that are not always clear to us, Insolvency Practitioners administering IVAs frequently fail to notify credit unions, despite them having a legal right to vote as creditors. This undermines the entire process.
In terms of creditor compliance, given that a Breathing Space window is relatively short – only 2 months – we feel that emphasis should be on ensuring that the system of notifying creditors is comprehensive. In our experience, creditors are likely to breach non-enforcement conditions because they were never made aware that a debt solution was in place, rather than because they are willfully ignoring it.
In terms of the register being made public, although we can appreciate the concerns about the possibility of the individual becoming a target of lead generators, on balance we would prefer that the register was public. Indeed, we feel that, if the Government recognises that the aggressive tactics of some firms in insolvency and related lead generation are detrimental to individuals, then it ought to take steps to better regulate them. In this regard, we would strongly support measures to bring those conducting only IVAs or Protected Trust Deeds under FCA supervision.
Q8: Do you agree with the proposed approach for excluding certain debts from the protections of breathing space?
Q9: Do you think there are other debts, such as those in regulated credit agreements, or certain types of benefits, that should be excluded?
We think that the current list of exclusions is reasonable. However, given the important role of credit unions in providing a source of affordable and responsible credit to those facing financial exclusion and faced with only very expensive forms of credit upon which to rely, we would like to raise the question of consideration for how the personal insolvency system might recognise this valuable work.
Currently, credit unions extend credit to excluded and vulnerable borrowers at uniquely-low, legally-capped rates of interest and at significant risk to their institutions with a view to generating social value by reducing these groups’ cost of credit. However, by definition, this precludes credit unions from shifting the credit risk of this lending on to the borrowers through exploitatively high interest rates as is done by the high cost credit industry.
ABCUL and our members recognise that to treat credit union loans as priority debts would not be appropriate given that the implications for non-payment of a personal loan are not of an order of significance equivalent to that of non-payment of rent, tax or utilities. But equally we do not believe a system of insolvency which pays no mind to the efforts of social lenders to extend credit at affordable rates and break a cycle of borrowing and over-indebtedess undermines these efforts. This is self-defeating and only drives more people towards insolvency.
We would welcome a conversation around how credit unions’ role as social lenders could be supported by some special treatment of credit union lending within the insolvency system.
Q10: Do you agree with the treatment of sole traders in breathing space? In particular: Do you agree with the proposed eligibility criteria and protections for sole traders in breathing space? What would be the most appropriate way of distinguishing between business and personal debts for these purposes?
The credit union sector does only limited business lending, so we don’t have an informed view on this.
Q11: Do you agree with the proposed treatment of interest, fees and charges in breathing space?
Firstly, in terms of the exclusion of ongoing liabilities, we do not feel that HP agreements should have an automatic exclusion. HP agreements include, for example, agreements made with Brighthouse and other high cost providers. Given that the Government’s support for alternative, low cost providers of finance for the payment of essential household items, we are concerned that high cost HP providers are being given priority status for those already in problem debt. This even further compounds the disadvantage that credit unions operate under in relation to extending cheap credit to high-risk borrowers in competition with high cost alternatives which push the cost of that risk on to the borrower through high interest rates.
Though we appreciate that some costs are essential – for example many individuals will be dependent on their car to get to their place of work – we oppose a blanket exclusion for HP providers.
In terms of the treatment of interest, given that the scheme is seeking to incentivise individuals to seek debt advice, it would be our preference that the breathing space period is a time when all recovery or enforcement action is stopped – to give individuals the time and space to seek advice – but that interest and charges are frozen only on the condition that a formal solution is found at the end of the period. In Scotland, where this model seems to work effectively, the moratorium acts more as a stopper on enforcement – if the individual makes no application for a debt solution then creditors resume their right to apply interest after the six weeks of the moratorium period. The proposals as they stand, in those cases where no application is made and the breathing space fails to result in a positive long term solution being put in place, are not only complicated for creditors enact, but do not give an incentive for individuals to find a solution. It is unlikely that, for those in problem debt, the removal of interest and charges for a stand alone two month window will result in much improvement in their overall financial situation.
For those cases that do result in an application for a formal debt solution being made, we support the breathing space acting as the beginning of a freeze on interest and charges.
Q12: Do you agree with the treatment of collections and recovery action during breathing space? Should any other forms of collections and recovery action be explicitly included in the protections? How can any practical issues arising from preventing these collection and recovery actions be best mitigated?
Q13: How should creditor compliance with the scheme be monitored?
We support the proposals in relation to collection and recovery. We would reiterate the importance of a proactive and accurate system of notification to creditors, to ensure full compliance with the system.
Q14: Do you agree with the proposed length of breathing space? Do you have any other comments on the operation of the check?
Q15: Do you consider that this protection is appropriate for individuals in mental health crisis? Should there be any further protections for individuals who have accessed breathing space in this way?
We support the proposals for the length of a Breathing Space, and the arrangements in place for those experiencing a mental health crisis.
Statutory Debt Repayment Plan
Q16: Do you agree with the eligibility criteria for entering a plan? In particular, do you agree that plans lasting for a maximum of ten years is an appropriate timeframe for debt repayment?
Q17: Do you agree with the proposed criteria for creditors to object to the plan? Are there any other criteria that you feel would be appropriate?
Q18: Do you agree with the proposed fair and reasonable test? In particular: Do you agree that 14 days is an appropriate timeframe for creditors to object to a proposed plan? Following an Insolvency Service decision that a plan is fair and reasonable, do you think that creditors and debtors should be able to make any further objection if they feel the Insolvency Service’s decision is incorrect? If so, how should an objection mechanism work to minimise disruption and administrative burden for parties involved in the plan?
Overall, we support the proposals at the moment. We note the lack of detail on how much of the overall need will be paid back, which will clearly be a key component for credit unions, and may very well dictate support for other parts of the scheme. We hope there will be further engagement on that.
Q19: Do you agree with the debts included within a plan? Should any other debts be excluded, or excludable on request?
We largely agree with the proposals as they currently stand. We would perhaps seek some clarity on the issue of fraud. Currently our members have some difficulties with a minority who apply for a loan without being honest about their circumstances and which they consider to be fraudulent. Whilst it is rare that they would seek Police intervention in these circumstances, it would be beneficial to have clarity in the regulations as to when the fraud exemption might apply.
Q20: Do you agree with the proposed treatment of interest, fees and charges within the plan?
Whilst we have no objection to the proposals as they stand, we feel that this is something that should be fully explored when there are more detailed proposals on the repayment details.
Q21: Do you agree with the proposed protections within a plan? Are there any unintended consequences that could arise from providing these protections to debtors?
Q22: How do you think creditor compliance with the scheme’s protections can be best monitored? Should creditors who fail to comply face any additional sanction?
We have not objection to this element of the plans in their current form.
Q23: Do you agree that some debts should be prioritised for repayment in the plan? If so, do you agree with the debts that the government proposes to prioritise, and the method of prioritisation?
Firstly, for the reasons set out above, we do not agree that HP providers should have an automatic priority status. Under this system, a credit union which has provided an affordable loan to the individual to help them buy a household good will be treated as secondary to a high cost firm providing the same service, but on a different sort of agreement. We do not support a blanket exclusion, or priority position, and would prefer that this was dropped.
Secondly, although we can understand the desire to have a system in place for debt prioritisation, we are not clear as to the need for in this instance. Whilst we could support the exclusion of housing debt, as we do in Scotland, we feel that the priorisation of utility bills is covered by conditions set out else where in this consultation (mainly that the individual could not be cut off as long as they met the terms of the scheme).
We note the current challenges in the debt advice sector in relation to funding, and the decreasing funding at a local authority level for this. We are concerned that this system of priorisation is overly complex, unrealistic, and largely unnecessary.
We would also like to reiterate points made above in relation to the case for consideration of social lenders in the scheme of prioritisation. We believe that there is a clear argument for credit debts to be prioritised over other commercial lending, and in particular high-cost lending.
Q 24: Do you agree with the two key plan flexibilities outlined above? Should the plan offer any other flexibility that would help to make it sustainable over time?
Q25: Do you have any specific comments about how these flexibilities should work? In particular, how do you think a severe, temporary, financial shock should be defined?
Q26: Do you agree with the requirements for continued eligibility for the plan?
Overall, we have no objections to this set of proposals. However, we would appreciate it if there was a mechanism in place to enable creditors to initiate a warning about non-compliance. The suggestion here is that advisors will be responsible for monitoring each client’s monthly payments. This may not be realistic, depending on their workload.
Q 27: Should the plan’s funding mechanism system be based on taking a share of creditors’ monthly repayments?
Q28: How should payment distribution be done? Should it be offered by an individual’s debt advice agency, if they have appropriate handling client money permissions, or by the Insolvency Service, or is there any other model that the government should consider for payment distribution in the plan?
We have no objection to a percentage of the payments being taken to fund the administration of the scheme, and 10% would be acceptable. However, we are aware that the Scottish Government is currently consulting on increasing that sum, given concerns that the scheme is not sustainable for many providers. From our experience of dealing with this in Scotland, there is a danger that, if not funded properly, it will simply not be offered to clients. We understand that there are parts of Scotland that there is effectively no access to DAS. We appreciate that this may need to be explored further, but it would seem that there would need to be a good balance between maximising creditor returns, and ensuring access to the scheme. As long as IVAs, which have very little restriction on fees, continue to be extremely lucrative for insolvency firms, there is a real danger they will continue to dominate the market. Given the lack of meaningful regulation for many of the large scale operators in the IVA marker, this is not a good outcome for either creditors or those in need of assistance.
Q29: Do you have views on how breathing space and plan should be reflected on a debtor’s credit file?
As is suggested in the paper, whilst credit files should be accurate, it would be beneficial to ensure that those who enter this scheme are not categorised alongside those who have had large sums of debt written off. As well as being unfair on the individuals who have made a substantial effort to repay their debts, we think it is important that there are clear incentives to choose a repayment scheme over an insolvency solution. Although we appreciate that this is not handled by the Government, we would urge that steps are taken to either engage, or force, the credit references agencies to