Scottish Parliament: Economy, Energy & Tourism Committee - Debt Arrangement Scheme (Scotland) Regulations 2013
The Association of British Credit Unions Limited (ABCUL) welcomes the opportunity to submit evidence to the Scottish Parliament’s Economy, Energy and Tourism Committee on the Debt Arrangement Scheme (Scotland) Amendment Regulations 2013.
Scotland’s 108 credit unions serve around 280,000 people, holding savings of around £210 million and lending £180 million. Many credit unions are prepared to lend to consumers banks would not serve, but do not charge the high interest rates which so-called “sub-prime” lenders charge for their services. Therefore, as member-owned co-operatives focused not on profit but on service, it is vital to credit unions that members repay their loans.
We do of course recognise that sometimes people are genuinely unable to meet their debts, and credit unions have a proud track record of helping people who need more time or a bit of help with restructuring payments. Where an individual is struggling with a number of debts, we recognise the Debt Arrangement Scheme (DAS) as an appropriate debt repayment tool with statutory protection for the debtor from creditors, and given the losses credit unions suffer to Protected Trust Deeds (PTDs) and bankruptcies, we welcome its use in preference to debt relief products.
ABCUL broadly welcomes the proposed amendments to the DAS Regulations, and our thoughts on some of the specific proposals are below. However, we would urge the Accountant in Bankruptcy and the Scottish Parliament to keep a watchful eye on the development of DAS as we are seeing signs that DAS could increasingly be targeted as a profit-generating product by less scrupulous fee-charging money advisers and debt management companies.
Freezing debt as at the date of application
ABCUL supports the proposal to freeze the amount of an individual’s debt as at the date of application for a Debt Payment Programme (DPP) through DAS (assuming the DPP is ultimately approved), rather than at the date of approval as at present. While credit unions would naturally prefer to recover the full amount of the debt with the agreed interest in the agreed timescale, where an individual legitimately applies for DAS, we would rather see that DPP succeed (with the recovery of 90% of the outstanding debt) than see the DPP fail due to extra interest and charges and the debt substantially written off through a PTD or bankruptcy.
We are concerned, however, that those lenders that charge fees and interest upfront enjoy a significant advantage over other, more ethical lenders in terms of the proportion of debt recovered. For example, on a loan of £400 over 32 weeks, a doorstep lender may have in fact recovered the full capital if the borrower applies for a DPP after 20 weeks, but reports an outstanding debt of £240 because interest is charged upfront. A credit union making the same loan at 1% per month on a reducing balance would ultimately recover around £385 of the £400 loan from this DPP, while the high-interest doorstep lender would recover £616 – a very healthy profit, especially considering that they do not even need to pay for an agent to collect the final payments.
We regard this as an anomaly which needs to be addressed. Credit unions cannot by law – and do not want to – join the practice of charging interest and fees upfront, so we believe a fair solution would be to allow lenders only to claim for the difference between the capital amount loaned and the total amount recovered from the borrower to date so that we can end the deeply undesirable spectacle of DAS payments distributors collecting unethical lenders’ profits for them.
Allowing the DAS Administrator to correct accidental errors
ABCUL believes it is reasonable to allow the DAS Administrator to correct genuine accidental errors within 28 days. We would hope all efforts will be made to ensure there are very few occasions when this power needs to be exercised, but we support the proposal.
Introducing a review process
ABCUL believes it is important that there should be a review process by which creditors or debtors can dispute a decision of the DAS Administrator without requiring an expensive and potentially off-putting court process, so we support this proposal.
A number of credit unions have expressed concern about DPPs which appear to be stretched over the maximum repayment period even where the debtor appears able to repay more quickly, and it is greatly frustrating when the majority creditor(s) consent to a DPP despite such issues. Credit unions would welcome the opportunity to request a review of such cases, with particular regard to cases where it appears the adviser is prolonging the DPP to the detriment of both debtor and creditors in order to maximise their own fees.
While ABCUL’s preference has been for reviews to be considered by an independent panel, we are satisfied that the current proposal should go ahead, with the option of an appeal to a sheriff if it is felt the DAS Administrator has wrongly upheld an unfair decision or a flawed DPP.
Re-introducing a composition element
ABCUL accepts the case for allowing an option of composition for individuals in DPPs, provided the programme has successfully run without missed payments or complications for the recommended 12 years, and 70% of the debt has been repaid.
However, we believe it is important any such discharge of outstanding debt occurs only with the consent of creditors. Given that a creditor will be deemed to consent to the offer of composition if they do not respond within 21 days of the offer being issued, we would seek reassurance that all efforts will be made to ensure receipt of the offer by creditors and a robust review/appeals process where a creditor feels they were not given an appropriate opportunity to respond.
It is important that DAS remains a debt repayment tool rather than a debt relief product like PTDs and bankruptcies, so we feel composition should be a privilege creditors may grant a conscientious and co-operative debtor and not a routine early write-off.
Flexibility for payment breaks
ABCUL is in favour of allowing a payment break where a debtor genuinely requires this and it will help sustain the DPP rather than see them pursue a debt relief product. We support the proposal to allow some flexibility in this up to a maximum period of 6 months, provided the period of the break is added to the total period of the DPP.
Exclusion of continuing money adviser’s fee
ABCUL supports the exclusion of a continuing money adviser’s fee from the DPP as this is clearly not a debt which has caused the debtor to turn to DAS, and it is wrong for this to be treated as a debt alongside those owed to existing creditors.
While welcoming the considerable widening of access to DAS in the last few years and understanding the reasons for authorising more private sector advisers to offer DAS to achieve this, we continue to have concerns about the behaviour of some fee-charging advisers and the morality of charging a person in financial distress a considerable upfront fee and/or an ongoing fee for a process which is in fact largely managed through DASH and the payments distributors.
Credit unions are happy to see DAS used more widely where a debtor may previously have entered a PTD, and we welcome the proposals in the new PTD Regulations which will require advisers/insolvency practitioners to demonstrate that a PTD is truly the most appropriate solution. However, we would urge vigilance to ensure that just as some of the abuses of PTDs by unscrupulous insolvency practitioners are being addressed, DAS is not left open to abuse as a new lucrative income stream for those same businesses.
ABCUL does not object to removing the requirement that two individuals must be jointly and severally liable for a debt in order to apply for a joint DPP. We recognise that many couples in fact treat individual debts jointly in their budgeting, and this measure could see individuals who might otherwise pursue debt relief better able to repay the bulk of their debts through a joint DPP.
However, we would be concerned about a scenario where an individual with a good credit record is given a loan by a credit union, only for that loan to then be included in a joint DPP because their partner could not meet their own individual debts. This could have the unintended consequence of making credit unions more reluctant to lend.
Notification when debt has been sold on
ABCUL agrees that where a creditor has sold on a debt that is incorporated in the DPP, they must immediately notify the DAS Administrator and provide details of the assignee.
ABCUL broadly supports the Debt Arrangement Scheme (Scotland) Amendment Regulations 2013 and we hope they will achieve the goal of a fairer and more accessible scheme through which people struggling with debt can repay what they owe and avoid turning to debt relief products and the damage that brings to both the debtor and creditors.
We would however urge the Scottish Parliament and the Accountant in Bankruptcy to closely monitor developments with DAS in practice, with particular regard to the significantly increased number of fee-charging advisers who have been authorised to offer DAS and may be tempted to use it to generate undue profits from people’s financial distress.
We would be happy to provide any further information or answer any questions the Committee may have, and ABCUL will remain engaged with the AiB to keep these regulations under review.
For more information, please contact:
ABCUL Policy & Relations Manager (Scotland)
A PDF version of the response is available to download on the right-hand side.