12th Report, 2013 (Session 4): Report on the Protected Trust Deeds (Scotland) Regulations 2013 (draft)

SP Paper 404

EET/S4/13/R12 (Web Only)

12th Report, 2013 (Session 4)

Report on the Protected Trust Deeds (Scotland) Regulations 2013 (draft)

CONTENTS

Remit and membership

Report

Background to Protected trust deeds
Related legislative initiatives
Background to the draft Regulations
Proposals in the Regulations
Delegated Powers and Law Reform Committee report
Consideration by the Economy, Energy and Tourism Committee
Recommendation

Remit and membership

Remit:

The remit of the Committee is to consider and report on the Scottish economy, enterprise, energy, tourism and renewables and all other matters within the responsibility of the Cabinet Secretary for Finance, Employment and Sustainable Growth apart from those covered by the remit of the Local Government and Regeneration Committee and matters relating to the Cities Strategy falling within the responsibility of the Cabinet Secretary for Health, Wellbeing and Cities Strategy.

Membership:

Marco Biagi
Chic Brodie
Murdo Fraser (Convener)
Alison Johnstone
Mike MacKenzie
Hanzala Malik
Mark McDonald
Margaret McDougall
Dennis Robertson (Deputy Convener)

Committee Clerking Team: 

Clerk to the Committee
Stephen Imrie

Senior Assistant Clerk
Fergus Cochrane

Assistant Clerk
Diane Barr

Committee Assistant
Jonas Rae

Report on the Protected Trust Deeds (Scotland) Regulations 2013 (draft)

The Committee reports to the Parliament as follows—

Background to Protected trust deeds

1. A trust deed is an arrangement between a debtor and their creditors whereby their estate (including any income and assets) is managed by an insolvency practitioner for the benefit of creditors. A protected trust deed (PTD) is a less formal form of insolvency and – as in bankruptcy – the insolvency practitioner dealing with the estate is known as a trustee.

2. If a trust deed becomes protected, creditors are no longer able to take action to enforce their debts (such as arresting money in a bank account). A trust deed becomes protected if a majority of creditors in number, or one-third in terms of value of the debt, do not object in writing to protected status. Creditors are sometimes deemed to have consented to a trust deed becoming protected because they do not respond within the statutory timescale.

3. A trustee will usually sell any non-essential assets owned by a debtor to raise money to repay creditors. This can include the debtor’s family home, although it is possible to exempt a house from a protected trust deed. It is also possible for the trustee to deal flexibly with any equity in a home, such as by allowing a third party (often the debtor’s partner) to buy out their interest or by agreeing to extended contributions from income to cover any shortfall to the estate where the home is not sold.

4. A PTD will usually also contain a requirement that a debtor makes contributions from their income. Currently, the standard period for which such contributions are made is three years, although under the draft Regulations, it is proposed to extend this to four years.

5. At the end of a PTD, assuming the debtor has met their obligations, they are discharged from any remaining money they may owe to their creditors. PTDs, like bankruptcy, therefore offer “debt relief”.

6. The PTD is one in a range of options available to someone with a debt problem. Many debtors enter an informal agreement with their creditors to make reduced payments to their debts – known as a “negotiated settlement” or “debt payment plan”. There are also two other statutory options – bankruptcy and the Debt Arrangement Scheme (DAS)1. Informal arrangements have the advantage of flexibility. On the other hand, the statutory options are legally recognised and creditors can be required to abide by their terms.

Related legislative initiatives

7. The draft Protected Trust Deeds Regulations are part of a “suite” of legislation proposed by the Scottish Government to reform statutory debt solutions. Other parts of this programme include:

  • the Debt Arrangement Scheme (Scotland) Amendment Regulations 2013, which were also considered by the Economy, Energy and Tourism Committee and came into force on 2 July 2013;
  • the current Bankruptcy and Debt Advice (Scotland) Bill making its way through the Scottish Parliament and being considered by this Committee;
  • the introduction of a debt arrangement scheme-type option for business debts (a “business DAS”); and
  • consolidation of bankruptcy legislation as recommended by the Scottish Law Commission. A Bankruptcy Consolidation Bill was announced in the Scottish Government’s legislative programme for 2013-14.

Background to the draft Regulations

8. A PTD must always be supervised by an insolvency practitioner (IP). As a matter of practicality, the debtor must therefore have enough money, in terms of income and assets, to cover the IP’s fee. Otherwise an IP will not be prepared to act. As a matter of good practice, the PTD should also offer a return to creditors.

9. In this respect, PTDs differ from bankruptcy. The Accountant in Bankruptcy (AiB) is able to act as trustee in a bankruptcy where no IP is prepared to act (generally because there are insufficient assets in the estate to pay the likely fee). However, the AiB cannot act as trustee in a PTD. Therefore, in order to be able to enter a PTD, a debtor must have at least enough income (or assets) to cover the trustee’s fee. Otherwise no IP would be prepared to act because they would not get paid.

10. A key issue with PTDs in recent years has been that, in some cases, they offer insufficient returns to creditors because most of the value in the debtor’s estate is used to pay the trustee’s fees. The Scottish Government has engaged in several consultation processes covering this and other issues in relation to PTDs:

11. The AiB has also held various meetings and consultation events with stakeholders.

Proposals in the Regulations

12. The main changes proposed by the draft Regulations are:

  • a minimum debt level of £5,000;
  • an extension from three to four years of the period in which a debtor is expected to make contributions from income. The period in which any assets gained by the debtor (“acquirenda") become the property of the trustee is also extended, from one year to four years;
  • a new requirement preventing a trust deed from becoming protected where a debtor is able to pay their debts in full from contributions from income in four years or less. The Scottish Government is of the view that Debt Arrangement Scheme (where significantly more of the payments made would go to creditors) is likely to be a more appropriate solution for debtors who are able to repay their debts in this timescale;
  • better systems in place to provide information to creditors. This, it is argued, will mean that creditors are more likely to object to trust deeds which do not serve their interests. There will be a requirement to provide standard information about the trustee’s fees and the expected dividend to the creditor when notifying a trust deed application. There will also be a requirement to update creditors regularly and provide further explanation for significantly reduced returns;
  • trustees will be required to charge a fixed fee (augmented by further payments based on a percentage of the funds released to creditors during the administration of the case), rather than an hourly rate;
  • trustees will be unable to include outlays incurred before a trust deed was granted as part of their remuneration. Currently, some IPs pay third parties for work carried out before a trust deed is entered into. It has been alleged that, in some cases, this is an “introduction fee” (a payment for finding and referring potential clients to the insolvency practitioner) rather than a fee for legitimate work done. Under the draft regulations, pre-trust deed outlays will rank only as a debt in the trust deed;
  • where exceptional circumstances require further paid work by the trustee, they will have to seek active approval for this from creditors (with an option for the AiB to approve the fee increase if creditors do not engage);
  • no debtor contributions will be accepted from social security benefits; and
  • equity in a home will be frozen at the date the protected trust deed is granted2.

13. In addition, the AiB will retain the ability to give “directions” (instructions on how to deal with a case) to trustees, either on her own initiative or on request from a trustee, debtor or creditor. Such directions can be appealed to the sheriff court.

Delegated Powers and Law Reform Committee report

14. The Delegated Powers and Law Reform Committee considered this instrument at its meeting on 17 September 2013 and agreed that no points arose in relation to the instrument.

Consideration by the Economy, Energy and Tourism Committee

15. The Protected Trust Deeds (Scotland) Regulations 2013 [draft] were laid on 29 August 2013. The Scottish Government subsequently withdrew the instrument to correct minor and typographical errors. An amending instrument was laid on 13 September 2013, retaining the initial parliamentary timetable for consideration of the Regulations.

16. The Committee considered the draft Regulations on 2 October and again on 9 October. Additionally, the Committee has received written submissions of evidence from the Institute of Chartered Accountants in Scotland (ICAS) and the Association of Business Recovery Professionals’ (R3) Scottish Technical Committee.3

Key issues

17. During the Committee’s consideration, a number of key issues were raised by those giving evidence.

Timing of Regulations

18. The draft Regulations are due to come into force in November 2013, around 18 months before the Bankruptcy and Debt Advice (Scotland) Bill will be in a position to be commenced. The draft Regulations seek to harmonise the protected trust deed process with the changes which are proposed in the Bill.

19. Consequently, the requirements in the draft Regulations for a debtor to make contributions from income for four years towards their debts in a protected trust deed will come into force well before a similar requirement for bankruptcy. It is argued by some that this is likely to make bankruptcy a more popular option for many debtors (where they will only have to make contributions for three years) in the short term. In their evidence to the Committee, ICAS and R3 argued that this is likely to be disadvantageous to creditors.

20. David Hill of ICAS said—

“We have a significant concern that, because the regulations will change the period of payments for trust deeds to four years but the period will remain at three years for sequestrations, a lot of people will be recommended that they would be better with a sequestration than a trust deed. I am not convinced that that is what the Government’s policy is or should be, but that is a likely outcome.”4

21. He continued—

“We believe that it would be best if the regulations were brought in at the same time as the sequestration procedures. We do not think that there is anything substantially wrong with the current trust deed procedures so there is no urgency to bring in the regulations, although some of the changes would be welcome. If the mismatch was three or four months, that would be fair enough, but 18 months is quite a long time. A lot of people will go through the process in that period.”5

22. In response to this concern, the Minister for Energy, Enterprise and Tourism told the Committee that he had met with ICAS and R3 and discussed their concerns but did not agree. He cited the case of England and Wales where Individual Voluntary Agreements had been introduced and were increasingly rapidly in usage despite payment periods being 5 years. He also suggested that PTDs will still prove popular despite any hiatus compared to the provisions in the Bill because, for some, the stigma attached to bankruptcy means that this alternative route is preferred.

Extension of payment period

23. The draft Regulations will extend the time period in which a debtor is required to make payments from income to creditors under a protected trust deed from three to four years. In addition, the period in which the ownership any property acquired by the debtor (such as a lottery win or a legacy under a will) automatically transfers to the trustee will be increased from one to four years.

24. In its written submission of evidence to the Committee, ICAS stated that the introduction of 48 month contribution period appears to pre-judge the outcome of the Bankruptcy and Debt Advice (Scotland) Bill. As such, ICAS was concerned that due to the timing of implementation between the Regulations and the Bill this will be a factor in debtors choosing sequestration over a trust deed in the interim period and will result in a reduced return to creditors during this period. ICAS concluded that there is a lack of evidence that a 48 month contribution period will result in a net benefit increase to creditors and that it remained concerned that the increase in breakage rates and increased administration costs will result in a reduced return to creditors.6

25. In her evidence to the Committee, Eileen Blackburn of R3 stated “It seems to be human nature that people are able to stick to the payment over three years but, the longer it goes on, the more difficult they find it to adhere to the agreement”.7

26. In response to this concern, the Minister for Energy, Enterprise and Tourism told the Committee that he had heard arguments being made for an increase in repayment periods to 5 years and also for a retention of the current 3 years and he was therefore treading a middle ground by proposing 4 years.

AIB powers of direction

27. ICAS was also concerned that the Regulations contained, in its view, extensive powers for the AiB in relation to the administration of PTDs. Its written submission states that—

“We are concerned that these result in a substantial conflict of interest with the AiB’s supervision function. At a time where openness and transparency and removal of conflict of interest in public office is to the fore, this move seems to be counterproductive to those principles.”8

28. ICAS expressed concerns that the AiB is not best placed to take decisions in place of and over-ruling highly experienced and qualified IPs. Its view was that IPs are required to undertake extensive training and qualifications before being authorised to accept insolvency appointments whereas the AiB has no commercial experience or qualifications. It concluded that, “As a result the Regulations fail to ensure that they strike the right balance between the needs of debtors and the rights of creditors.”9

29. Responding, the Minister for Energy, Enterprise and Tourism told the Committee that the AiB was undergoing significant restructuring to ensure that certain staff who would be involved in such decisions and appeals would be ring-fenced from those taking the original decisions.

Common Financial Tool

30. In its evidence, R3 expressed some issues relating to the proposed introduction of a Common Financial Tool. R3 stated that whilst it supported consistency and transparency of contribution calculation, it questioned whether these were temporary measures and whether amending legislation will be required to bring trust deeds into line with sequestration and the Debt Arrangement Scheme. In R3’s view, “The Bill and the Regulations appear to contradict the policy intention to have consistency across personal debt procedures.”10

31. The Association of British Credit Unions Ltd (ABCUL) stated that it “firmly supports the adoption of a single common financial tool for all PTDs, as well as for all Debt Payment Programmes and bankruptcies”. However, its preference has always been for a new common financial tool to be developed by the AiB, with initial and on-going input from a range of stakeholders, including credit unions.11

Fees charged by Insolvency Practitioners

32. In its written submission, the ABCUL stated—

“Credit unions believe PTDs have become open to abuse, both as an “easy” means for debtors to escape their financial obligations, and as a profitable product for debt management companies and insolvency practitioners to provide. The system has become grossly imbalanced against the interests of creditors.

We therefore welcome the Scottish Government’s determination to rebalance the PTD process to make it more transparent and fairer to all parties. It should come as no surprise that this rebalancing will not be welcomed by those who will lose out when their activities are more open to scrutiny, when regulation is tightened, and when a greater share of funds must be paid to creditors rather than claimed in fees.”

33. ABCUL welcomed the proposed restrictions on fees trustees can charge, and the requirement to obtain creditor consent and/or approval by the AiB for any increases. Its stated that credit unions recognised that there is a cost involved in the administration of a PTD, and where a PTD is genuinely the best debt solution for the debtor and creditors alike, we do not object to trustees recovering that cost and being paid a fair wage. However, it commented that credit unions had seen far too many examples of trustees claiming unreasonably high fees for their own work, or paying remarkably generous fees to third parties (sometimes associated with the same firm).12

34. Responding to this criticism, David Hill of ICAS stated—

“We are professionals doing a job, and we have to be paid for doing the job—that is our argument. If fees are deemed to be unfair, there are procedures to deal with that but, as with anything, quality advice and provision has to be paid for.”13

35. He further commented that—

“The average fee for most trust deeds, as per the report, is just over £6,000. Some people will view that as atrociously high and some people will think that it is reasonable.”14

36. Furthermore, in his view, the Regulations did not set a restriction on fees, although they provide for a set fee.15

Recommendation to approve the draft Regulations

37. In their concluding evidence to the Committee, representatives of both ICAS and R3 stated that their preference was for the Regulations to be “deferred” and, failing that, the Committee should “reject them”.16

38. However, in its written submission, ABCUL stated that it broadly supported the new Regulations, and having consulted credit unions across Scotland at length on these issues over the last few years, it was optimistic that they will help deliver a process which is fairer than the current system.17

39. In the debate on this issue on the 9 October, the Minister for Energy, Enterprise and Tourism told the Committee that in his opinion it was necessary to bring the Regulations into force as soon as possible and not to delay, and there were a significant number of benefits, especially for debtors with few or no assets, from making these changes.

Recommendation

40. Following the conclusion of the debate, the Minister for Energy, Enterprise and Tourism moved motion S4M-07759 that the Economy, Energy and Tourism Committee recommends that the Protected Trust Deeds (Scotland) Regulations 2013 (draft) be approved.

41. The Committee agreed to recommend to the Parliament that the Protected Trust Deeds (Scotland) Regulations 2013 (draft) be approved.


Footnotes:

1 The Debt Arrangement Scheme was created by the Debt Arrangement and Attachment (Scotland) Act 2002. It enables a debtor to pay back their debts over an extended period of time without the threat of enforcement action from their creditors. However, in order to use the Debt Arrangement Scheme, debtors must be able to pay their debts in full over the extended period. This means that debtors with, for example, low income or high levels of debt, may not be able to access the scheme.

2 The current system gives trustees considerable flexibility in how they chose to value a home.

3 Paper EET/S4/13/28/3. Available at http://www.scottish.parliament.uk/S4_EconomyEnergyandTourismCommittee/Meeting%20Papers/20131009p.pdf

4 Economy, Energy and Tourism Committee, Official Report, 2 October 2013, Col 3365.

5 Economy, Energy and Tourism Committee, Official Report, 2 October 2013, Col 3366.

6 ICAS. Written submission of evidence.

7 Economy, Energy and Tourism Committee, Official Report, 2 October 2013, Col 3370.

8 ICAS. Written submission of evidence.

9 ICAS. Written submission of evidence.

10 R3. Written submission of evidence.

11 Association of British Credit Unions Ltd. Written submission of evidence.

12 Association of British Credit Unions Ltd. Written submission of evidence.

13 Economy, Energy and Tourism Committee, Official Report, 2 October 2013, Col 3366.

14 Economy, Energy and Tourism Committee, Official Report, 2 October 2013, Col 3367.

15 Economy, Energy and Tourism Committee, Official Report, 2 October 2013, Col 3389.

16 Economy, Energy and Tourism Committee, Official Report, 2 October 2013, Col 3374.

17 Association of British Credit Unions Ltd. Written submission of evidence.

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