Economy, Energy and Fair Work Committee

Meeting date: Tuesday, October 30, 2018

Official Report 788KB pdf

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Subordinate Legislation

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Common Financial Tool (Scotland) Regulations 2018 [Draft]

We will now consider the draft Common Financial Tool (Scotland) Regulations 2018. We are joined by David Hilferty, the deputy chief executive of Money Advice Scotland; Eileen Maclean, the national council member for the Association of Business Recovery Professionals, or R3, in Scotland; David Menzies, the director of practice at the Institute of Chartered Accountants of Scotland; and Craig Simmons, the sector co-ordination manager with the Money Advice Service. I welcome all four of you to the committee.

The microphones will be operated by the sound engineer, so there is no need to press any buttons. If you want to come in, please raise your hand. There is no need to answer every question, but please feel free to contribute to the discussion.

10:45  

Good morning to the panel. I have three questions that will explore the desire for a common financial tool and some of the pros and cons of that. One of the key arguments for adoption of the standard financial statement is that it will standardise assessment of income across the UK. How important is that, and what impact will stricter limits on expenditure have on debtors? I do not mind who starts.

I represent R3 members, who will, as insolvency practitioners, be putting the SFS into practice on appointment and, obviously, on the basis of the regulations. R3’s position is that it is preferable to have a standard. One of the problems prior to introduction of the common financial statement was that there were several different standards: some firms used that of the British Bankers Association, some used what was then the Consumer Credit Counselling Service’s, and some used their own individual approaches. What we were aiming for with the common financial tool—and are now aiming for with the SFS—is a common platform for analysis, so we have had that for several years in Scotland.

The SFS will be UK-wide, which is preferable. The fact that we have different debt solutions north and south of the border is well recognised, but the majority of creditor organisations are now based in Manchester or elsewhere in the UK, so when individuals get debt advice, it is not geographically specific.

Like the majority of creditor organisations, the big commercial lenders are also spread across the UK—they are, predominantly, down south—and adoption of the SFS will mean that there is a common platform that they recognise. In the past, we have had problems when they have not recognised the Scotland-specific approach because they did not see it often enough to be familiar with it.

We would definitely support the SFS being UK-wide for ease of use for everyone and so that there is a common platform for advice.

Before I move on to hear other opinions, is it your view that the SFS will be accepted by more creditors?

Yes—arguably, that is the case.

As Eileen Maclean said of R3, ICAS generally supports the principle of having a common financial tool because it makes sense to have a similar method of calculation being used throughout the UK. A common financial tool was brought in by the Bankruptcy and Debt Advice (Scotland) Act 2014, and when it was discussed in Parliament, we suggested that the common financial statement was probably not the right method. A discretionary element is always needed. We would prefer to see a tool that has a smaller administrative burden and is more generic. We can explore that later, if that would be of interest to the committee.

Good morning, and thank you for inviting us all to speak. I work for the Money Advice Service: we are the owners of the standard financial statement.

It is worth mentioning that the standard financial statement has been built on the good practice that already exists in the sector. There is the common financial statement, which is currently in the common financial tool, and there is the approach that is used by StepChange Debt Charity and many insolvency practitioners across the UK. Various approaches are used to assess affordability when people are in problem debt.

We have tried to take what has worked well from all the formats and we have learned a huge amount from what has happened in Scotland. The savings category is a prime example of that: it worked well here in Scotland, so it has been built into the standard financial statement.

The main thing to stress about the impact on debtors is that when people go to StepChange Debt Charity Scotland or to the UK-wide Christians Against Poverty, the spending guidelines under which they are assessed are different from those used by the Accountant in Bankruptcy; the standard financial statement will mean that only one approach will be used across the debt advice sector.

That is very important for clients because being assessed under another method might mean that the output would be slightly different to what ends up being in the common financial tool output. That sort of change does not result in a great customer experience, because the person might have to go to a different provider—say, an insolvency practitioner—who would see that the spending guidelines that had been used were different to those that had been used previously, and would be able to find a solution.

The approach should, therefore, reduce the burden not only on advice practitioners and insolvency practitioners but, most important, on clients who, in their hour of need, require a seamless journey.

MAS views the matter from the perspective of our members: the front-line money advisers who deal with the tool every day. If you were to pitch the question at our members, their resounding response would be, “We’ve had a standardised assessment of income since the introduction of the CFT in 2015.” They are more likely to view the situation in terms of the importance of replacing the existing standardised assessment of income with a new one that has not been tested as much as the current system, and which we are concerned will lead to more work because of the additional evidence requirements, which will be touched on during this evidence session.

The practical difference for clients in Scotland, compared with clients in England and Wales, is that under the approach that has been taken in Scotland by the Accountant in Bankruptcy, the evidence requirements are already more onerous than those elsewhere. Under the standard financial statement, categories including transport, school uniform costs, the cost of school trips and other things that are difficult to evidence will be moved so that they will always require to be evidenced.

That is the view of MAS’s members, and those are some of the impacts on clients in debt that will start to emerge in the transition to what will be the second standardised assessment of income.

Following on from that, I note that Eileen Maclean acknowledged that UK creditors already have to adapt to specifically Scottish processes. Does it make a practical difference if Scottish statutory debt solutions use a different income assessment method? I will ask David Hilferty to answer that first, because I think that he had already begun to touch on the matter.

When I speak to our members—our money advisers—what I hear is that the difficulty lies not with the conventional consumer creditors that are, as Eileen Maclean has said, based throughout the UK. Those sorts of creditors, which include banks, lenders and credit card firms, have numerous approaches for dealing with customers who are considered to be vulnerable, or who are on low incomes. As advisers will tell you, dealing with those creditors is, for the most part, relatively straightforward.

Difficulties often arise when dealing with what one might refer to as public sector creditors, such as the Department for Work and Pensions, Her Majesty’s Revenue & Customs and, primarily, local authorities, which often use pretty aggressive means to recover council tax arrears. The notion that advisers have problems negotiating with consumer creditors is not one that our members would necessarily accept.

On the second question about the impact on statutory debt solutions, the evidence requirements that must be met in the financial statement can in many cases, as I have said, be onerous. We know of a case in which a father’s expenditure on train fares to visit his daughter was considered to be excessive, and we have also seen a disabled client being asked to evidence expenditure on incontinence pads. Such issues do not necessarily arise in the rest of the UK, but they arise in Scotland because of the approach to statutory solutions.

As I have said, the SFS will move elements such as transport and school uniform costs into categories that must be evidenced, which has not been the case with the common financial statement—and that is before we begin to talk about trigger-figure breaches. All that will lead to an increased workload for advisers, clients and, for that matter, the AIB, unless we get a reasonable approach to guidance, which would alleviate a lot of our concerns about the evidence requirements.

I want to put the same question to the rest of the panel. Perhaps you can also comment on dealing with public sector bodies, such as local authorities or the DWP, as creditors.

The wider issue is that, from a creditor’s perspective, if there is no standard whatsoever, we go back to a scenario in which there is a huge subjective overview, and individual creditors—whether that is a local authority or a small trader—will express an opinion on a debtor’s spend. It will go down to the level of whether someone should have Sky telly, whether they should smoke, whether they are allowed to visit their daughter and what else they can spend their money on. At the end of the day, there are all sorts of privacy issues. Debt is not a crime: we are aiming for a standard of living for people.

We will come back to trigger figures, but if we set a standard against which to benchmark, it is harder for creditors to argue, because we are using a standard against which everyone is measured on a common basis.

Like David Hilferty, I think that the onerous part is currently the level of evidence requirements. It makes absolute sense for everyone to be assessed in a standard way, using a defined framework.

UK creditors are well used to dealing with the different nuances of Scots law and the slightly different procedures that we have. On assessment of contributions, it benefits them to be able to do that on a common basis across the UK, whether it is for someone entering into an individual voluntary agreement in England and Wales or Northern Ireland or someone entering into a trust deed or debt arrangement scheme in Scotland. Such commonality across the board is beneficial to creditors: they would have discretion about whether to permit a debtor to enter that solution. It allows them to assess that far more easily.

I would like to pick up on three points. David Menzies is right that Scotland is leading the way in commonality of approach in formal solutions. However, it is worth stressing that there are still informal debt solutions operating in Scotland, such as informal debt management plans and token-payment agreements with creditors. The move to a standard financial statement will bring consistency across the board for people who are in debt, whether they go for a formal solution or a less formal one.

The point about evidencing trigger-figure breaches will come up more in our discussion. The reason why things such as travel, prescription costs and school meals have come under fixed expenditure costs—forgive me if I am telling committee members what they already know—is that there is no trigger figure. Those costs are viewed as essential expenditure and will not be subject to challenge by creditors. Challenges would be to the more discretionary areas of expenditure. That is very positive for clients, who would not have the spending guidelines pursued against things such as their bus fares.

Finally on public sector creditors, I can only reflect on the experience in England and Wales. The standard financial statement has been in operation since 1 March 2017. Just over 100 local authorities in England and Wales have signed up to express an interest. I want to be clear that expressing an interest in using the SFS is their approach to assessing affordability. Several authorities have now implemented it and the rest of them are investigating that.

MAS also sits on a Cabinet Office fairness group, which includes representation from the DWP and HMRC. A consistent approach to public sector debts is a key topic on the group’s agenda. I am very encouraged by the momentum that the SFS is building. If it is implemented in Scotland, that momentum will only continue.

11:00  

Finally, is the panel confident that the SFS will be accepted by UK Government bodies? If the common financial statement were to continue in Scotland, who would maintain it? Whether it is the CFS or SFS, what issues are there around assessments, costs and bureaucracy for those who provide advice?

There are a few examples in which the UK Government has already accepted the use of the SFS: the Insolvency Service of England and Wales uses the SFS to assess bankruptcy, and has done since April 2017. It is very positive about the standard financial statement. It is in the pre-action protocol in the court system down south.

I should also mention that, yesterday, along with the budget papers, the Treasury published plans for a statutory debt management plan, which would be similar to the DAS, which is used in Scotland. The Treasury referenced the use of the SFS in that. I have no doubt that the SFS is supported more broadly in the UK.

I am sorry: can you remind me of the second part of the question?

The question was about who would maintain the other system if it were to continue.

Currently, the common financial statement is maintained by a charity called the Money Advice Trust. It has indicated that it intends to cease the common financial statement if everyone moves to the SFS. I believe that it would seek funding if the CFS were to continue. At the moment, we fund the standard financial statement, so it would be of no cost to anyone apart from us.

I tend to agree about the adoption of the SFS by UK Government departments: it is, broadly, well supported.

If we are considering whether the common financial statement is to be maintained in Scotland, we need to understand the basics behind it. Fundamentally, in it, categories of expenditure are allocated against a model. Those figures are taken from Office of National Statistics data on household expenditure. Maintenance is not a huge deal—it is just taking the ONS figures and putting them in the appropriate format. It is a formatting issue.

The SFS and the CFS use the same things, but with categories of expenditure in slightly different areas. I do not see how maintenance of the CFS would be a tremendous burden. I do not know who would be best placed to pick that up—it might be the Accountant in Bankruptcy or some other public body.

On who might maintain the CFS, I know that there is an argument for the Accountant in Bankruptcy supporting that function. However, there would possibly be a conflict of interests, because the AIB would be setting the standard and monitoring it and, in some cases, implementing it. The role might better be taken by a body that is completely independent and which would, as David Menzies said, take the wider economic figures and put them into the model. The Fraser of Allander institute is an obvious candidate. A Government agency or department under the economic directorate might also be considered. It has crossed my mind that it would be important to have some separation between setting the standard and implementation.

I do not have much to add about who would maintain the CFS. If the spending guidelines in the CFS and the SFS are broadly in line, they would be distinct, but not too different. Someone who was persuaded that there are drawbacks and flaws in the SFS would also find those flaws in the CFS. For example, there is no transparency under either option in respect of the relationship between the client, the creditors and the advisers. The client is the only person who does not have access to the spending guidelines. I do not know whether the committee has had access to the guidelines.

To prevent members of the public from seeing the guidelines contributes to the notion and misconception that people who are in debt cannot be trusted and that they could, if they could access the guidelines, somehow game the system. As Eileen Maclean said, being in debt is not a crime. We need to change many of the misconceptions about people who are in debt.

We are also concerned that there is no contingency under either option. The figure is 10 per cent of disposable income, capped at 20 per cent. That means that someone who is paying £50 a month towards their debt has £5 disposable income contingency slack to play with, which is not sufficient to deal with unexpected expenditure.

Eileen Maclean mentioned living standards and David Menzies mentioned the methodology that underpins the CFS and the SFS, which is based on the spending patterns in the bottom 20 per cent of households in the ONS’s living costs and food survey. I have frequently made the case that basing the methodology on what the bottom 20 per cent are spending means that it is based on the spending patterns of people who are spending what they have rather than what they need to spend. That seems to me to be the wrong starting point.

I am fully aware that the decision here is a straight shootout between continuing the CFS and going with the SFS. However, MAS wants to see a full review of potential alternatives, as well as a review of the guidance that interprets the regulations.

On that last point, convener, it would be useful if the committee could request the sight of that guidance.

I wonder whether I could be slightly cheeky. David Hilferty spoke about his network of money advice advisers. When did each of you last provide face-to-face advice to a debtor using one of these common financial tools?

I have never been a front-line money adviser; I was appointed as a policy officer at Money Advice Scotland. However, I am very much someone who has always thought that policy officers should not remain in the office with their heads stuck in books and legislation. In Money Advice Scotland, we work to the maxim that, if you assert something without evidence, it can be dismissed without evidence, so we put evidence at the very heart of all that we do.

Our analysis of the CFS and SFS has been based on close engagement with our members. We have had three consultation events and various engagement events throughout the country, in Glasgow, Edinburgh and Aberdeen. We also went through the rather laborious task of doing a line-for-line transposition of CFS financial statements into the new SFS.

You are absolutely right to suggest that I do not have front-line advice experience, but the level of engagement that we have had with our members goes some way towards making up for that.

Are your members people who give front-line money advice?

Yes. Our members are money advice providers in local authorities, citizens advice bureaux, housing associations and some IPs in the private sector.

Likewise, our members are people who give advice. Without going into too much detail, my role is slightly more complicated. I teach the insolvency profession, so I work with the CFS on a regular basis.

I am currently advising a debtor. The last time that I used the common financial statement was last week.

It is a good question. I am not a regulated debt adviser. However, I must stress that the idea of the standard financial statement has been around since about 2013 or 2014—

I am not asking about the idea; I am asking about whether you have practical experience of applying it, because I think that that is the nub of the issue. I have heard people agreeing today that there should be a common financial framework. The question is, which one, how does it work and in whose interest does it work? I know that that question was a bit cheeky, but I wanted to ask it.

I will turn to something more substantive. There are clearly conflicting views between the Accountant in Bankruptcy and, at least, Money Advice Scotland—if not others—with regard to whether the use of the standard financial statement will result in more or fewer trigger figure breaches. What are your views? I put that question to David Menzies first, seeing as it was only last week that he advised someone.

Without prejudging what David Hilferty might say, I do not think that there is a huge difference between the views of the AIB and Money Advice Scotland on that. There is a common view that there will be an increase in trigger figure breaches using the SFS. The question is about by how much that will be and how many there will be.

I am sure that David will talk about this in more detail. The analysis that was carried out by the AIB in relation to the consultation was done prior to the SFS trigger figures being uprated and it showed that around 12 per cent of debtor contribution orders would result in a trigger figure breach. In the initial comparative survey that Money Advice Scotland carried out, the percentage was about 40 per cent. Since the figures were uprated, Money Advice Service re-established that evidence and it came out that the number of bankruptcies that resulted in trigger figure breaches would increase by about 4 per cent.

There is commonality across the board that there will be an increase in the number of trigger figure breaches and evidential requirements—that is just the way that it is. That is where things stand at the moment.

It is important to stress that the initial AIB consultation took place, or at least closed, in October 2017, and the argument about trigger figure guidelines has moved on a lot since then. There have been two separate upratings to the spending guidelines in the SFS, for which a huge amount of credit is due to guidance colleagues at Money Advice Service. We were at the forefront of raising concerns and there was a response to the concerns. For certain figure categories, the guideline trigger figure has been increased by more than 100 per cent.

However, it is worth noting that in the previous uprating in 2017, the trigger figures in the SFS guidelines increased and the trigger figures in the CFS guidelines came down slightly. As much as anything else, that is why we have sets of guidelines that are, broadly, more equivalent. When we asked Money Advice Trust why the trigger figures in the CFS guidelines had come down—that was somewhat perplexing as, for example, household bills have not gone down in the past year or so—it said that people in the bottom income quintile were registered as spending less, which comes back to the methodology. They were spending less because they had less, and the trigger figures in the CFS guidelines accordingly came down. That is another of the drawbacks of the current methodology, which I emphasise is the same whether we use the CFS or the SFS.

When the CFS came in, the number of individuals making contributions plummeted. Between 50 per cent and 75 per cent of debtors in an insolvency solution at that time went from paying a contribution to making no contribution. I just want to put in context the fact that we are now going back to just 4 per cent—or, arguably, 4 to 12 per cent—of debtors making a slightly increased contribution.

Finally, we will hear from Craig Simmons, who was getting praise there.

Thank you, David Hilferty, in particular, for that.

I do not have a lot to add to what he said, but I will mention that it is very difficult to compare precisely the common financial statement with the standard financial statement. What I see as the most reliable indicator is what has happened when the SFS has been live in England and Wales, and none of the providers who use it south of the border have reported any problems or any particular increase in trigger figure breaches.

Is allowable expenditure graded according to region or area?

I am happy to answer that question. The spending guidelines that are attached to three areas of expenditure are UK-wide guidelines. It is all tied up with the standardisation of the format for its use throughout the UK. The key thing to stress on that is that the guidelines and guidance for the SFS state that there will be areas—very rural areas, for example—where there might be higher expenditure.

Where spending guidelines are breached, there should be a note added to the statement and where there is a good reason for the breach, that should be accepted. That tends to be the practice that we have seen thus far.

11:15  

Is it an ad hoc approach that depends on the individual and the location?

The flexibility of the process is part of the design. The SFS takes into account a person’s domestic situation, the type of house that they live in and the fuel that is used, so that certain categories, such as fuel and heating, have an upper limit and are not triggered. It is also dependent on the number of adults and children who live in a property.

It is a concern that we have raised, particularly in response to the additional costs of living in remote and rural Scotland. Eileen Maclean and Craig Simmons mentioned that transport and energy are not triggered categories, but if someone is submitting a statutory application to the AIB, those categories have to be evidenced in any case, whether the spending is considered excessive or not.

We need to consider the wider context of the money advice sector. Investment from local authorities in money advice services has dropped by 45 per cent in the last two years. We need money advisers on the front line, advising clients. We do not need money advisers chasing up fuel bills and bus tickets that need to be submitted as part of an application.

Is the SFS better in that it can take account of regional differences in individual cases?

There is broadly no difference between the SFS and the CFS—they use the same source figures. There is no regional variation, but both approaches allow a degree of flexibility or rationalisation for individual circumstances. However, that takes us back to the first principle, which is that someone should get the same result regardless of which debt adviser they go to. I am not convinced that that would happen under either the CFS or the SFS, because some advisers would allow something—cigarettes or travel—and others would not. The adviser would have to consider how much is too much travel for the client to visit their daughter. Neither the CFS nor the SFS gets advisers away from making that judgment.

The point is not necessarily about which tool we use, but about how we implement it. We all agree that there is a wider discussion to be had about the level of confirmation and evidential requirements that go into supporting that, both in relation to the cost to the money advice sector and the insolvency profession and to the level of evidence that the Accountant in Bankruptcy—which oversees the implementation and which, in the context of sequestration, sets the contributions—requires. There is work to be done there.

From sitting on the bankruptcy stakeholder group in my R3 capacity, I know that the issue about the level of evidence has been fed back to the AIB. I have been advised that the AIB is considering that.

I have a simple question that builds on some of the information that you have already given us. What is the likely administrative impact on money advisers and insolvency practitioners of a switch to the standard financial statement?

As I have already indicated, there is a large evidential requirement, which is a burden that results from the way in which the AIB operates. Those concerns relate to both the common financial statement and the standard financial statement.

Neither the CFS nor the SFS will increase the administrative burden an awful lot, except for in relation to the trigger figure breaches, for which there is clear evidence that there will be an increase. There will be an additional administrative burden in relation to the discussion back and forwards between the AIB, the insolvency practitioner or debt adviser and the debtor around obtaining that evidence and justifying the breaches.

Based on the analysis carried out by the AIB and Money Advice Scotland, we make a conservative estimate that the cost to the economy in Scotland is somewhere between £155,000 and £450,000 per year, depending on the range of breaches. There is undoubtedly a cost.

Are there other costs, such as for changes that will have to be made to systems? I imagine that some sort of bespoke system or software will be needed.

There will be some changes. It depends on how each organisation operates. Money Advice Service provides an Excel spreadsheet and some places will use that. The Accountant in Bankruptcy has built the common financial statement into the Basys system that it uses, so that will have to be updated. There are information technology costs there. Other organisations, such as StepChange, will have to invest in IT changes, too.

Given that we are talking about back-office costs, you seem to be indicating that they will be fairly minor.

They will be relatively minor. The cost is in context, but the question is whether it is justified.

What is “relatively minor”?

We are not talking about millions of pounds.

As an insolvency practitioner, I keep abreast of myriad changes, such as the new Scottish insolvency rules, and we just have to absorb such costs as part of doing business. Most of the IPs are already on board. There are many things that we can do to talk directly to AIB systems, but that is not a significant cost to the IP community.

Implementation costs will vary between organisations. However, as David Menzies has said, the potential for additional day-to-day operational costs, due to the additional evidence requirements, is universal. If we can get good guidance on the proposals, some of those concerns will be mitigated.

I disagree with what David Menzies is saying. I do not believe that there is any evidence that there will be an additional burden as a result of using the SFS rather than the common financial statement. The spending guidelines are broadly similar and there is one less expenditure category that is covered by spending guidelines, so I do not think that there will be an increase there.

We provide an Excel tool and we have also produced an evaluation toolkit that can be dropped into systems. That does a lot of the work and reduces the burden slightly. We have produced quite a lot of training that will be available free of charge to advice agencies.

Mr Simmons, could you explain a bit more about the Money Advice Service? Am I right to say that it is a UK Government agency—if that is the correct term?

We are an independent body set up by the Government—the technical term that is often used is a quasi-autonomous non-governmental body, or quango. Our statutory objective is to improve the quality, consistency and availability of debt advice in the UK.

The reason why we are the right people to develop a tool such as the SFS is that we have no axes to grind. We want to deliver a sector that works well both for creditors and for debt advice agencies. We have no other motivator.

How did the tool come about? Who decided that there was going to be a standard financial statement?

We were established in 2012 and carried out a consultation on what would be the right sector-wide initiatives that would help improve the quality, consistency and availability of debt advice in the UK. One of the strongest things that came back, among many points, was the need for a standard approach to financial statements across the country—that was the driver. As I mentioned earlier, there are a lot of disadvantages to having various different approaches. That is what the sector told us was needed.

You have said that the Money Advice Service is independent of the Government. However, one concern might be that, although we are fairly comfortable where we are just now and the two models are not that different, political pressure could be put on your agency in the future, either to squeeze down or inflate what debtors are allowed to keep. Are there clear rules about that?

The methodology that is used to define the guidelines is written and set in stone through the process that our statistician goes through every year, and we produce all the calculations. It would not be easy to change the methodology secretly. We have a governance committee that includes Citizens Advice Scotland, Money Advice Scotland, most advice providers in the UK, a number of creditors and the AIB, all of which have a say in the methodology.

The Money Advice Service’s position is that creating the standard financial statement is a collaborative project. It is the sector’s tool rather than ours, and the decisions are taken in consultation with practitioners; we do not just make the decisions and then roll them out. I put on record how grateful we are to the AIB, because it has been a very collaborative process and the AIB has shared with us a lot of learnings about the common financial tool that has been used since 2015.

I turn to the other three members on the panel. Are you also comfortable with the Money Advice Service doing the work and with the process, the protection, the safeguards and so on?

Yes.

That is great.

Yes. As Craig Simmons said, any change to the methodology is low risk. A governance group has been set up that covers a range of bodies across the sector. On the other hand, if you quite like the notion of reviewing other ways in which we might do this, there is a low probability of that happening. That is another aspect to your question.

Generally, I have no concerns with how the tool is put together and how it is working. Our concerns about the regulations are more a matter of principle and are about them not being in the control of legislators in the Scottish Parliament. We have concerns about the system of insolvency practitioner regulation, authorisation and monitoring. I suggest that some of those aspects are not sufficiently protected in the regulations. The regulations move some of the responsibility for those matters into the hands of the Money Advice Service rather than that responsibility being in the legislative provisions.

I am sorry—what is the concern?

We already have a well-defined system of regulation. The code of conduct that is available for the SFS, for example, dictates or allows the governance group to decide who can and cannot use the SFS. However, in the regulations, there is a requirement that says, “You have to use this.” There is the possibility of the governance group saying, “This firm is not applying the procedures correctly, so we want to withdraw its licence,” which would impact on the ability of that debt provider or insolvency practitioner to provide its services in the regulated sector.

Are you saying that the picture is a bit confused?

Yes. That confusion could be easily resolved by having the licensing done directly by the AIB or the Scottish Government. The regulations are confused, in that sense.

Could Mr Simmons comment on that point?

Yes—I am very happy to do so. What David Menzies has said is technically accurate but, in practice, the likelihood of what he suggests happening is very slim, because we have designed the SFS in collaboration with the AIB. The principles that we have set out on how to use the SFS are the same as those that are used by the AIB, and the governance group that David Menzies mentioned includes the AIB. I cannot foresee a day when we would withdraw a licence without consultation with the AIB, because that consultation gives some additional comfort. The SFS has been live since 1 April 2017 and, as yet, we have had no reason to remove anyone’s licence. The likelihood of there being disagreement is very small.

That provision already exists with the CFT, because a debt provider or insolvency practitioner has to be licensed by the Money Advice Trust to use it. When we talk about licences, we mean registration so that we know who uses the CFT. We have had no instances of any insolvency practitioner having a licence to use the CFT withdrawn.

11:30  

David Menzies said earlier that the standard financial statement and trigger figures are calculated using average spending by the bottom quintile of household incomes. Is there a concern that the standard financial statement does not take account of what some critics would regard as a reasonable standard of living, as opposed to the standard of living of the lowest-income households, which, by definition, probably spend less than they should in some areas?

Your point about the spending guide has been a topic of debate in the sector. Just over a year ago, I think, we did an exercise with the Joseph Rowntree Foundation to compare the spending guidelines with its minimum income standard, which found that the two are broadly aligned. It was most interesting and a surprise—certainly to me—that the ONS figures look at the lowest quintile of income but not the lowest quintile of expenditure. I do not want to get into jargon, but the expenditure levels for the lowest quintile are the second-lowest quintile of expenditure—that fact gave us some reassurance that those expenditure levels are broadly aligned with the Joseph Rowntree Foundation’s minimum income standard. We are committed to running that exercise regularly to see whether they stay aligned or diverge. If they start to diverge, we will look into it.

The question was not whether the figures are aligned with the minimum income standards but whether they should be aligned with reasonable income standards.

The governance group of advice providers, the AIB and creditors considered that issue and deemed that the current methodology is the most appropriate.

Do other panellists have any comments?

I will come in on that. I will give credit to Craig Simmons again—I apologise that I will make him blush—because we have long called for the comparison work to be done on where the trigger figure is set and what is understood as a socially acceptable living standard. We were really pleased to see that work undertaken, and the committee may be interested in seeing the research. The only household type that had a better deal under the minimum income standard and under the trigger figures was a single person. In the analysis, every other household type fell slightly below the minimum income standard, and lone-parent households were disproportionately impacted.

When we talk about the guidelines being broadly aligned, that may look the case on paper. If a household has £15 a week less than a minimum income standard, the figures will look broadly aligned on paper but, in practice, we can think of what that household will forsake week to week for a payment agreement that might last for five, six, seven, eight, nine or 10 years. It is easy to view a financial statement as an abstract concept—in essence, it is an income and expenditure form with guidelines on spending—but it is so much more. In effect, it sets out a standard of living for a household or client over the period of repaying their debts.

We have consistently said that it is a drawback of a CFS or an SFS that we do not have a way to check whether the payment agreement leaves somebody with a socially acceptable living standard. We have advocated checking that it does, but there is not a lot of support—I will rephrase that, as there is no support—from the SFS governance group. It is an example of something that we would aspire to if we had control. I do not know why a practitioner would not want to know whether the payment agreement that they have set up leaves somebody with an acceptable standard of living.

The regulations are for Parliament to decide whether to approve or not; we cannot amend them—we take it or leave it. I was intrigued that ICAS says in its submission:

“We would strongly encourage the AiB and Scottish Government to defer any decision on the use of CFS or SFS and instead urgently carry out an assessment of the policy effectiveness behind the CFT.”

Is it your view that we should not pass these regulations?

That is clearly for Parliament to decide—

Yes; I am asking for your view of what Parliament should do.

There is certainly a need to review the common financial tool and the methodology behind it. Whether it is the SFS or the CFS, the contribution levels will be broadly the same. It is not necessarily desirable for us to change to the SFS and then carry out a review and implement a further change further down the line if we need to. I would prefer it if we carried out the review now and made one change at the right time.

The implication of what you are saying is that there has been no review at all. There must have been some review.

I am not aware of there having been a review of the effectiveness of the CFT that was introduced in the Bankruptcy and Debt Advice (Scotland) Act 2014.

So, in a sense, this legislative change is being proposed in the absence of any assessment of the policy effects of the existing tool. Is that right?

I suggest that the underlying rationale behind the regulations is that, on a UK-wide basis, there is now the standard financial statement and the withdrawal of the CFS being maintained. Those two items are what is driving the change in regulations, not whether there is a policy need for that to happen.

There is perhaps a tendency for the Parliament and the Government to approach this issue with an attitude of, “Well, what can we fix?” and there is an idea that they can fix a bit of bankruptcy law and bring in the SFS for the CFS. However, sitting behind this issue is a range of other policy issues involving, for example, the minimum wage, the living wage and what is a socially acceptable minimum level of income, and the regulations that we are discussing are not going to address those issues.

Arguably, a lot of other issues are involved as well. For a long time, we in the insolvency profession in Scotland have called for a root-and-branch review of whether the family home, for example, should be included in a bankruptcy or a protected trust deed. We can have that debate, but that must be set against a wider discussion about housing policy.

There is a tendency to think that bringing in the SFS will fix all of the other issues, but it will not. The SFS is a tool, a mechanism and a measure, and there is a range of other issues that must be addressed and which I would suggest, with respect, are outwith the scope of these regulations.

David Hilferty, do you have any comment on whether we should defer a decision?

As I have said already, the drawbacks in the CFS are also present in the SFS, which means that there is not much difference between the two options in that regard.

We echo the call of David Menzies for a review of the effectiveness of the policy. We would also welcome a review of potential alternatives.

This process has engaged with a range of insolvency practitioners, money advisers and creditors, but we have not really heard from people who are in debt and are involved in the plans. One of the most encouraging things that I have seen from the Scottish Government in recent years was the establishment of experience panels, which was done with the view that the best people to shape a new system are those with experience—often quite unpleasant experience—of the previous system. We need to do that in a debt advice context for the decision about whether to go ahead with the current process or review what other options might be available.

Do we have any sense of what those other options might be? What are the alternatives? Have they been explored already?

I could talk about the experience of countries that do not use this particular method of assessing debtor contributions or surplus income. For example, Canada and Australia have a number of bands that take into account how many people are in the household and how many of them are dependants and so on, and they set an element of income that is outwith the scope of debtor contributions, and then they set a percentage above that.

It is a very straightforward system that is easy to understand. It does not involve costs to maintain it or a large administrative burden. I suggest that that could be used as a model in Scotland. I would not suggest that we use exactly the same model, because I think that there are some disadvantages that that model does not particularly take account of, such as people with additional support needs and so on, in relation to whom various levels of expenditure might be required. That sort of system, with an adapted percentage and, perhaps, an additional lower percentage in relation to people with additional needs, could work effectively in Scotland.

In paragraph 9 of your submission, you say:

“The end result would be to increase the returns to creditors.”

What is the basis for that view?

It would do so simply by reducing the costs of administering the calculation. To clarify, it would not necessarily result in increased debtor contributions, but it would lower the cost of administration.

There are any number of alternatives. As David Menzies has outlined, you could have a set percentage contribution—if consistency is the objective of the policy, that seems like a consistent approach. If you wanted to enshrine the living standards issue at the heart of the process, you could draw on the Joseph Rowntree Foundation’s minimum income standard. You could apply the SFS without spending guidelines because, as a format, it is absolutely fine—it looks good and it works well, but the concern about it comes from the spending guidelines. I do not say that to be facetious; we saw in the AIB’s submission that spending guidelines should not influence contributions. If they should not influence what someone is paying towards their debt, why have them at all?

As I said, there is no limit to the alternatives that we could be examining.

I would like to give some extra reassurance to the committee that the standard financial statement has been some years in the making. It looks to build on the good practice that is out there. It has taken what has worked in the common financial statement and in the StepChange approach and various other models that are used in public approaches to affordability assessments. Further, it has been tested at length with the money advice community. I am confident that it represents the current best practice that is available.

On the point about spending guidelines, it is worth touching on what is now guidance for using the standard financial statement. That says that they are exactly that: they are guidelines; they are not allowances for people’s expenditure to be capped at. To pick up on the point that David Menzies made, that allows a degree of discretion and flexibility for money advisers to consider a person’s individual circumstances and say that their expenditure has to be higher than the model recommends, which means that the money adviser can put a note in the form to record why that view has been taken.

Finally—I will not take up too much of the committee’s time on this—our assessment is that the ONS survey, which is the basis of the methodology, is the most robust set of data that is out there at the moment for building a set of guidelines such as the ones that we are dealing with. We considered the approach of the Joseph Rowntree Foundation—we work quite well with that organisation, actually—but its sample size is quite small, and it is not annually updated across every household type; only bits of it are updated annually, which means that it runs the risk of not being up to date.

You say that you have tested across the sector, but have you tested it with debtors?

It has been used in England by a number of large providers, who report that it is working well.

That is what the advisers say, but what about the debtors?

It is being used with hundreds of thousands of debtors in England at the moment.

My point is to do with whether the experience of the debtors and their views of the system are being taken into account.

That is not happening as yet, because it was rolled out only a year and a half ago. However, we have a plan to evaluate the impact on the client, on the debt adviser and on the creditor when we reach a certain scale. We hope that Scotland will be on board when we do that so that you can test the impact of the new policy. We will evaluate it. We always do.

If there are no further questions from committee members, I thank our witnesses for attending. We now move into private session.

11:44 Meeting continued in private.  

12:41 Meeting continued in public.