Economy, Energy and Fair Work Committee

Meeting date: Tuesday, January 28, 2020

Official Report 658KB pdf

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Protected Trust Deeds Inquiry

Under agenda item 3, we will take evidence on protected trust deeds from Mike Holmyard, financial health policy manager at Citizens Advice Scotland; Bob Russell, debt advice officer at Falkirk Council; Anna Hamilton, money advice manager at Citizens Advice Edinburgh; and Lee Kilgallon, debt adviser at the City of Edinburgh Council.

I will start, and then we will move on to questions from other committee members. We have heard a variety of evidence on protected trust deeds. Will you give us your views on the level of difficulty that is associated with them? As with anything, there will always be isolated cases that have gone badly for the individual involved, but will you give us an overall picture of how protected trust deeds are working? Are there serious problems that go beyond one or more individual cases going wrong?

There are no hard-and-fast statistics on how many people are badly affected by trust deeds. However, if we look at the citizens advice bureaux network and the number of advisers who have come to us with issues and cases, albeit that they are individual cases, where there have been particular problems such as issues around what happens when a trust deed fails or whether there should have been a trust deed in the first place, there seems to be enough of a continuous stream of reports of detriment to indicate that there is a problem that needs to be resolved.

We are not here to bury trust deeds: we realise that they have a place in the advice landscape. Apart from anything else, the free advice sector would not have the capacity to meet the demand if there were no trust deeds and no commercial sector. We have been here before to talk about funding of the debt advice sector and how difficult it is just now, particularly for the free advice sector.

However, we are here to say that there are difficulties with some firms that do not handle consumers very well. There might be some fundamental issues with the construction of protected trust deeds given that they are based on insolvency law—common law and statute—and there is no consumer law aspect to them. We are here to talk about how those issues at the edges need to be firmed up a bit to make the trust deed market a lot healthier.

I would not disagree with any of that. I have been a practitioner in the debt advice team of my local authority for the past 15 or 16 years and I have seen significant changes. When I started, we had 19 money advisers or debt advisers, whereas recently we have had five or six, and the complexity of the client group is probably greater than ever.

PTDs have always had—and they should always have—a place. However, as a practitioner, I have made only one or two referrals in relation to a PTD in the past five or six years. The reason for that, which Mike Holmyard alluded to, is that we have concerns about the appropriateness of people signing them. Are people having the full picture of their debts taken into account? Are they being listened to in relation to their primary, priority debts—for example, if they are involved in a court case for rent arrears? Many of those things are overlooked and it is suggested to people that things will be okay with a protected trust deed.

When a trust deed fails, it tends to be difficult for us to do anything about it. We tend to see trust deeds only when they fail, which might skew our opinion of them to a degree. However, when we see them fail, we see that they do so very badly. People think that they are going somewhere for help, but they are simply not getting it.

We have heard in evidence that the fixed fees that are applied mean that, in some cases, none of the debt has been paid off when a PTD fails, but the fees have been paid. Is that an issue?

Yes. Previously, we had three-year trust deeds, but they can now be for four years or potentially five years or beyond if there is an owned property. When a trust deed is set up, the person might be required to pay £150 a month over four years with a fifth and final year to buy out equity in the owned property. The primary concern of any client who goes into such a trust deed is whether they will lose their house. That has been the first question that people have asked me in any surgery that I have done. However, it seems that that question is not being addressed.

At present, a trustee might look for the first year’s contributions to cover their fees. At the very least, a percentage should be put towards the fees, a percentage should be used for creditor payments and a percentage should go towards buying out equity in order to address the main concern that most clients have. If the trust deed fails in year 2 or 3, a percentage should be applied for the fees and the rest should be written off. The process should be more balanced throughout, rather than the insolvency practitioner fees being front loaded.

All money advisors at Falkirk Council have had the experience of a trust deed coming to them that should never have existed in the first place because it was neither viable nor sustainable and the money was not there to pay for it. After X amount of money being paid, such cases end up being bankruptcies, which is what they should have been in the first place.

I agree with Lee Kilgallon’s point about equity. Sometimes, it is left to be resolved at the end, which is completely unsatisfactory from the client’s point of view. They should know the exact amount that they will have to pay and what they will get for it. It is of no use to them for someone to say that they will deal with the equity at the end.

Before we come to questions from Jackie Baillie, Richard Lyle has a brief supplementary question.

Organisations that operate protected trust deeds suggest that everything in the garden is rosy. Is it right for a company to take payments from a debtor for 18 months but not send one penny to the creditor until after that time, assuming that they do send something to the creditor?

There has to be a balance in all these things. I am not here to stand up for insolvency practitioners at all; quite frankly, I am here to stand up for debtors. However, I understand that insolvency practitioners’ fees tend to be front loaded because the majority of their work is done at the front, as is the case with any debt advice process. Work is done in the early stages, such as fact finding and understanding the client’s position and what is available to give to creditors.

I think that you do more work than insolvency practitioners do.

Yes. I would say—

Time is getting on and I need to get this question in. Should fees be more regulated? Should 50 per cent of the debtor’s monthly payment go to the organisation and 50 per cent to the creditor?

I do not mind how the fees are paid as long as there is a satisfactory outcome for the debtor. Creditors are agreeing to trust deeds, and what they are choosing to agree to is that the fees will be collected by the trustee at the front end and the creditors will, in essence, get the surplus. At the end of the day, the debtor should be discharged without any further requirement to pay towards the debts, because that is what has been agreed.

Issues tend to arise either when a debtor is recommended something that is not the best product for them given their situation or when a debtor entered an agreement with the best will in the world and started to make the payments at the agreed rate, but things changed. In such cases, the detriment to the debtor can end up being much more severe than it should be.

I agree with Anna Hamilton. As a debt adviser, my primary concern is to ensure that the client gets the best possible deal that is on the table. I do not have an opinion on whether the trustee or the creditors should get the first share of the money in the first couple of years. However, I suggest that, where cases involve owned property, it should be brought into the balance at the front end of the trust deed rather than being dealt with at the end, so that it is part of the equation and there is potential for the client’s home to be safeguarded. Under that approach, even if the trust deed fails, the client will not necessarily lose their home.

The focus group that we ran in Greenock about two weeks ago was really interesting because, although some of the issues that were raised were about the entire trust deed process, many of them were about the beginning or the entry point of the process. A number of people raised concerns about whether they knew what they were getting into.

There are potential solutions. I will put some of them to you, and I would like to hear your views on what would work. Somebody suggested that all lead generators should be regulated by the Financial Conduct Authority. It was suggested that insolvency practitioners should be banned from accepting paid-for referrals. Another suggestion was that debtors must receive advice from an adviser in the free advice sector before they enter a protected trust deed in order to ensure that the disposal is right—I recognise that there might be a need to increase capacity if we took that approach. Lastly, it was suggested that an official leaflet should be developed and supplied to anyone who is contacted about a protected trust deed.

What are your views on those suggestions? Are there other solutions that we have not considered?

There is an official leaflet. It is called “Debt advice and information package”, and it is meant to be handed out to every potential protected trust deed client. However, it is not particularly helpful, because it basically just says, “You’re in a serious situation and you should seek advice.”

On the other solutions that people came up with, lead generation in particular has been a big problem in the sector. The Accountant in Bankruptcy tried to deal with it in 2013 by changing the regulations. Before that, the fees that lead generators were charging were being added to trust deeds as an up-front cost. In 2013, this Parliament changed the regulations so that that could not happen. We can see that the AIB’s direction of travel has been to exclude lead generators from the market.

Statement of insolvency practice 3.3, which insolvency practitioners often refer to, says that it is not acceptable to accept leads. I will quote exactly what it says, because it is important:

“The special nature of insolvency appointments makes the payment for, or offer of any commission for, or the furnishing of any valuable consideration towards, the introduction of insolvency appointments inappropriate.”

Insolvency practice therefore precludes lead generation.

11:30  

Regulation of lead generators by the FCA would be a positive step, but I do not know why there are lead generators in the market at all, because everybody is trying to move away from that model. I question the value of lead generators in the process. They do not appear to do anyone any good. They do not do the debtors any particular service; they earn their money from a protected trust deed referral—that is where most of the money comes from for their businesses—so the debtor cannot be assured that they are getting full advice. The insolvency practitioner is responsible for the advice of the lead generator, so they must check everything that the lead generator has done, as well as paying fees to them. The creditor then loses out, because those fees have to come from somewhere.

At the end of the day, what value do lead generators add to the process? I would advocate their removal from the insolvency business. They are not helping at all.

I agree with that last point. The free advice sector could give the initial advice, provided that it was properly funded, as Jackie Baillie said. That is a big issue, because there have been a lot of cuts in the provision of debt advice, as everyone knows.

That is helpful.

I strongly agree with Mike Holmyard. The purpose of the lead generator is simply to fund the lead generator’s pocket. Figures such as £1,000 to £1,500 have been quoted in some cases, for, in effect, cold calling people who are in the direst need.

As a practitioner, I see people who are at their lowest. Sometimes they are suicidal. A client who feels that they are on the verge of losing everything—their home and their family—will sign up to whatever someone asks them to sign up to, because they trust the person to tell them the right things. When they get a way out, they will take it, whether or not it is the right way out for them.

I am not saying that a trust deed is not the way out for some clients. It might well be the correct option. However, in my surgery, I see trust deeds that have failed badly and made the client’s situation worse—and sometimes I am unable to stop it, because the legal document is signed and protected. Often, the person should never have been considered for a trust deed in the first place.

I strongly believe that the free money advice sector should be giving advice on these issues. A client cannot go into bankruptcy or a debt arrangement scheme on their own, without having the correct level of advice. Why is it different for a trust deed? That concerns me.

However, as someone who works for the money advice or debt advice team in a council, I can say that, if the Parliament wants us to give that advice, we will need significantly more funding.

May I press you on that? People have come to the committee before and said that there is a lack of funds for things. Are you talking about doubling current capacity? What order of magnitude are you talking about?

I do not have the stats with me. If my boss was sitting here, he would be shouting at me for not bringing them.

You can write to the committee.

Yes—that would probably be best.

I can tell you that, when I started 15 years ago, there were 19 full-time money advisers in the advice shop—I hope that you guys have heard about the advice shop and have referred constituents to it. I have been there for 15 years. Until recently, we had three advisers. We recently appointed three new advisers, and it will take six months to a year to get them up to speed so that they are competent to do the job, including court representation and the stuff that we have talked about.

Will we go back to the days of having 19 money advisers? I do not see that happening in my lifetime. However, I would like a significant amount of additional money to be provided, not just for staff on the ground, but for training, so that we can pass on the knowledge that we have in the advice shop to other surgeries and other areas of Edinburgh, and so that we can continue our work in re-education and in schools and prisons. We want to be able to continue to work in conjunction with citizens advice bureaux and to hold surgeries in community centres where we used to hold surgeries, which we have had to withdraw from because of lack of funding. That is where we need to be. If we had more money advisers, we would be able to do that.

Anna, do you have anything to add?

I totally back what Lee Kilgallon has said. On the resourcing of money advice, there is no way that the sector could take on the provision of free advice in relation to the 8,000 or so trust deeds that I think there were in Scotland last year. We see a proportion of the people who have entered trust deeds—we see those people who have problems. Fortunately, we also see some people who decided to check whether a trust deed was the right thing for them; invariably, it was not. We are glad that clients have flagged that up for themselves and understood that there might be an alternative.

We deal with the mop-up afterwards and we deal with a few clients who come to us and recognise that a trust deed might not be the best option for them and that there might be an alternative. However, it would be a huge leap for the free advice sector to see everybody who is affected. I do not think that the City of Edinburgh Council is unique in the difficulties that it is experiencing in resourcing money advice.

One would assume that, if you provided the advice on entering a protected trust deed properly, there would be fewer failed protected trust deeds and you would see fewer difficult cases down the line.

That is possibly the case, although there are many ways in which a protected trust deed can fail.

I understand that.

In a number of cases, a protected trust deed should not have been issued in the first place. In other cases, not enough foresight was shown when the product that was recommended to the client was looked at. Sometimes, it is not recognised that changes are likely to occur in the person’s circumstances in the near future that will make it impossible for them to manage the trust deed for four years. In other cases, there is a catastrophic change in circumstances of a kind that can happen to anyone at any time. Such changes cannot be foreseen. Sometimes, cases are not dealt with appropriately at that stage. We pick up the pieces in all those cases.

I will begin with what I hope is a simple question. If a person has a protected trust deed that runs for four years and they die part of the way through that period, what happens?

A claim is made on the estate of the dead person. If they had property, for example, the funds from the property would be used to pay the trust deed. The trust deed—plus statutory interest and the IP’s fees—would be paid in full. Therefore, the deceased person’s estate would potentially have to pay much more than the value of the person’s original debt.

Are you saying that, in effect, a death in those circumstances is treated as a default?

Yes. That is the case if there is an estate or an insurance policy to make a claim against. The person has contracted to pay back as much of their debt as possible under the protected trust deed. The situation has changed—the person has died—there is an asset that can be claimed against and the debts are paid in full. I am not saying that that is right, but that is what happens.

Legally speaking, that might be the case, but is it fair?

No, but there are other situations that are similarly unfair.

Such as?

I will give an example. A case was reported to us in which a female employee of Glasgow City Council entered into a protected trust deed at the end of 2018 when it was well known that a lump-sum payment of wages was due to her. The lump sum was paid and the lady attempted to pay off what she thought was her debt, which was about £12,000. At that point, however, the trustee became aware that she had received her back payment. The firm—it was a Glasgow firm, so it would have known that the back payment was coming—demanded another £12,000, on top of what the employee had already paid, to cover its fees.

There are a number of such unfair situations, which tend to happen when people come into money or assets that they did not expect to receive. That brings us back to what Anna Hamilton said. There are two types of unexpected occurrence. One is an unexpected income shock, in which someone’s income is reduced to a level at which they can no longer maintain a trust deed. The other can involve an unexpected joyful event such as winning the pools or the lottery, or an unexpected inheritance, in which case it is expected that the debt will be paid back in full.

Given that the current situation is manifestly unfair—no one has said otherwise—should there be changes to the regulations or legislation as necessary?

In the case that you mentioned, the interests of the family—the people who stand to inherit—should certainly be prioritised over the debt.

Does anybody disagree with that?

No, I certainly do not disagree. In an instance in which property is not involved, any remaining debt would pass with the person who passed away. However, where there is an estate—as Mike Holmyard said—the amount of money that is recovered could be significantly higher than the original debt level, to cover fees and so on.

I cannot imagine a situation in which that would be okay, especially if it involves a family home. Certainly in my experience of the cases that we deal with, it is very rare for someone to have a second or third property; the inherited asset is primarily their family, and only, home. If a person was to die, the family would not only lose their loved one—they would potentially lose their home after the trustee has paid the majority of, if not more than, the sum of the debt. That part of the system requires fundamental change.

I will move on to a slightly different issue. Insolvency practitioners argue that they make a valuable contribution to dealing with demand for debt service. Do you agree?

The figures for the number of people who enter a trust deed suggests that they do. It suggests that there is a place for trust deeds for people who are made aware of the situation that they are getting into and how it will help them to resolve their financial position by having their debts written off at the end of the process, having made their payments as agreed.

I do not have figures for the whole of Scotland or anything close to that—I do not think that anybody has figures that could tell us about anything other than the tip of the iceberg, which is the people who have problems. Those are the people whom we see. For many people who venture into a trust deed, it is the right solution for them at the time, but things change. There is definitely a place for a version of trust deeds, but the current version is not ideal.

I agree with that. There is definitely a place for trust deeds, but it is clear that tighter regulation is needed, because there are some abuses—if we want to call them that—in the system.

Mike Holmyard raised the question of how the free sector might cope if insolvency practitioners did not take on the role that they currently play. There are clearly resource issues in that respect. What would have to be done to enable the free sector to cope? Would it be any more cost effective than the current arrangement?

I believe that the Money Advice Service looked at the value of debt advice. I cannot remember off the top of my head the figure that was attributed to the sector—it was something like a return of £10 or £15 for every £1 that is invested in a debt advice service. There is value in that. Given that we do not charge our clients for the debt advice process, it is clear that more money is being recovered for creditors where possible through the arrangements that are set up, as our clients are not paying IP fees and that kind of thing.

11:45  

We have to recognise that our client group has changed significantly over the past 10 years. In the past few weeks, we have done work on the income and expenditure of the people who come to see us, and we think that nearly 50 per cent of them now do not have a disposable income that would allow them to make payments towards their debt. As well as those who have just enough to get by, there is a significant group of people who have a significant deficit on their budgets every month and who are having to beg, borrow and steal to get by.

In considering how much value we could add if we took over the process, we have to weigh up all those factors. The client group is changing and people are definitely worse off than they used to be, but if we weigh that up against the charges that are regularly paid in the IP sector, it is a different kettle of fish.

To briefly go back to Mr Beattie’s previous point, as other panel members said, there is a place for trust deeds, and the main reason for that is that we in the free sector simply cannot manage the number of clients who need money advice or a debt advice service. The trust deed has a place when appropriate but, more often than not, certainly in the cases that I see, it is not appropriate. I have various case studies, one of which I believe is fairly typical and important. I had a client come in with £16,000 of debt whose disposable income was low if not zero. They were on the verge of signing a trust deed at £100 or £150 per month over a four-year term and thought that they had better get it checked out just to make sure. They have used us before and they trust us, so they asked us to have a look at it for them.

More often than not, and certainly in the most recent three cases that I looked at, which I am now actively dealing with, there is a MAP—minimal asset process—bankruptcy in which the client is discharged after six months, with a debtor contribution order set at zero. The person in this case went from paying £125 a month over four years to paying zero over six months, and with the same protections in place. In the last half a dozen cases that I have dealt with, that has been a fairly typical response to what has been in effect mis-selling of, or mis-advice on, a trust deed. However, there are lots of insolvency practitioners who we know and trust and whose trust deeds are a viable and sound option for people. The key is for people to get the correct information and advice at the start so that there is a balance. We need to get it right at the start.

Given the eye-watering fees that are sloshing around, could it not be self-funding if the free sector took over the process?

It depends on what you are talking about. In the first place, we in the free sector do not have regulatory authority to provide protected trust deeds, which is why we always refer those cases on. The suggestion would also involve training a group of money advisers to be the professional conduit that IPs currently are.

But would it be a big leap?

I do not know enough about the qualification route of insolvency practitioners, but I believe that they have accountancy and law qualifications to do what they do. Make no mistake, it is a highly trained profession.

Lee Kilgallon and Bob Russell have spoken about protected trust deeds failing, and Anna Hamilton has spoken about picking up the pieces. In responding to Colin Beattie’s question, Lee gave an example of somebody who should never have been in a protected trust deed. In general terms, where is the advice to enter protected trust deeds coming from in cases where those concerned should never have done so? Do you not know about that when people come to you? Do you ask them where they got their advice from? Do you have any picture of that?

We will obviously endeavour to find out where the advice has come from, but our primary concern is to try and fix the mess that the client is in. We would concentrate on that as a priority. However, it is important for us, as money advisers, to know where that dangerous advice is coming from. It is not just poor advice; it is dangerous.

Mike Holmyard mentioned lead generation and cold calls. That is happening. People are getting called when they are at their lowest point. They can be told, “I can give you this magic cure that will make your debt go away. Just sign this document, and you can go.” In some cases, that may well fix the situation. In the cases that I have mentioned, however, it is making the situation abundantly worse. It is impossible for us to tell exactly where the calls are coming from or how people have gone down that road—they may have made a phone call themselves—but the lead generation of cold calling and the advertising across the media are highly prevalent.

I want to follow up on that point. The lead generators themselves do not provide any advice; they are generating a lead for insolvency practitioners.

Yes.

So, although someone may be persuaded from the cold calling that a solution is in their best interests, the advice that they get as to whether they proceed with it will come from a professional in many instances.

Carrington Dean, which gave us evidence last week, noted in its written submission that, from the 40,000 inquiries that it takes from consumers, 93 per cent of the people it speaks to

“are advised that a Trust Deed is not in their best interests”.

It told us that people are talked through all the options. Are you basically saying that, although that may be the case on paper, it is evidently not happening in practice? Otherwise, people would not be entering protected trust deeds.

I am certainly not going to question individual insolvency practitioners’ practices, because I do not have any facts on that, but the clients I see in my surgery tell me that they have been contacted by lead generators and have been given false hopes and told what are clearly untruths or lies regarding the figures and the debt involved. They might be told, “You’re a home owner, but don’t worry—it’ll be okay.” I would like to think that it is the fact that people are approaching an established insolvency practitioner that is the reason why 93 per cent of people are rejected, and that it is the lead generators who are not doing their job properly to get the right people into that category. They are sending so many people down, because they are getting the money for them. That is the primary concern. They will pass people on, whether that is the right thing to do or not, because they will get £1,000 for it.

Without knowing the facts, it will be difficult for me to question that. I can comment only on what clients have told me directly—and they have said that they have been promised that certain things will happen, but they do not happen.

On the point about lead generation, the follow-up advice and the insolvency practitioner, the impression of what the protected trust deed will do is often set at the outset. That is the problem. That is why those guys are not adding any value to the process.

Last week, you heard from Michelle Thorp, who said that the Insolvency Practitioners Association, as a recognised professional body is now recommending the use of FCA-authorised companies. There are people who are on trust deeds now who have been advised by one person with a phone. Anybody could have set up as a lead generator prior to the IPA going down the regulatory route. We do not know what advice has been given to consumers.

I have also come across an example of somebody on a guarantor loan. They were told by the lead generator that the guarantor loan would be dealt with by the protected trust deed. Of course, it was not. The protected trust deed went through, and the guarantor was called on to cover the payments. The guarantor was a friend of the borrower, so it caused difficulty in their friendship. They came to us together to seek advice on what they could do. Citizens Advice took that complaint as far as it could on behalf of the client. We received a recording of the follow-up phone call. The IP can be heard telling the lady that the guarantor loan was not going to be sorted out. However, it was a follow-up phone call after the advice had already been given. A child can be heard crying in the background. The lady is trying to carry out domestic duties and is not taking anything in. She had already been given the impression that the guarantor loan would be dealt with.

Carrington Dean, which you mentioned, is unique because it is regulated both by the FCA and as an RPB. Not all IPs are FCA regulated. What is meant by “advice” needs to be defined, because if a firm is not FCA regulated, it is not able to give advice on other debt options. Aside from Carrington Dean, which is the biggest provider of PTDs in Scotland, there are firms that cannot offer a full breadth of advice because they are not regulated to do so. When it is said that people receive advice about their options before they enter into a PTD, what is meant by that? Is it advice about their insolvency options, because that is all that those firms are allowed to give advice on, or is it about all of the options that are available?

The regulation issue is important. The CAB network is FCA regulated. It has to give advice on all options and explain why some options are not appropriate. It has to be prepared to back that up if the FCA investigates. The client has the right to complain, and they can go to the financial ombudsman service if we get it wrong. That is not the case if an organisation is not FCA regulated. Where could a person go with their complaint?

That is an important point.

On the point about where advice comes from. I will reiterate some of what has been said in previous evidence hearings.

There is something cloaked about the advertising and the way that people are entering PTDs—for example, as a result of pushed adverts on Facebook. Before coming to the committee meeting, I looked at a client case that related to a website called Mumsoutofdebt. The entire website is geared towards emotional bargaining before a person has even signed up to a PTD. It says that children will get more from their mum and that they will be a better parent, if they take out a PTD. There is also a website called Dadsoutofdebt.

One of Citizens Advice Edinburgh’s clients entered into the PTD process through the Big Debt Payoff competition. The prize was that all of a person’s debts would be paid off, which was pretty unrealistic. Fortunately, people sometimes come to us before they sign up to things like that.

People are being targeted because of what are, frankly, protected characteristics. They are being targeted not because they are in debt but because they are a mum or dad who is in debt. Strange things are happening that allow people to be targeted through advertising in that fashion. People are not being asked whether they need support to deal with their debts and then being made aware of all the options that are available to them.

I agree with Mike Holmyard. If a firm wants to give advice on debt in Scotland, it should be giving advice on all of the solutions that are open to debtors, not only the options that are available through legislation. There should be other options. Citizens Advice can take other approaches with clients that do not take them down the legislative route. All of the options should be open. I understand that IPs are not going to provide the other options to debtors, but they should be able to discuss them and direct people to the appropriate places to seek support.

Through some of my work, I have found that there is some evidence to show that advertising directly relates to inappropriate access to PTDs.

In evidence last week, we heard the clear message that the failure of a trust deed—if someone does not complete it and does not get a discharge—tends to be the result of non-co-operation. Do you have any comments on that?

12:00  

I will happily take that question. We see people who are going through a process that is quite stressful, as they have agreed to pay off their debts over a period of four years. They are usually protecting something; that is the purpose of entering a trust deed. It might be their career—for example, they may be a member of a professional body, which means that they cannot become bankrupt where bankruptcy would be another solution. Alternatively, they might be protecting an asset such as their home. There are a number of reasons why people might go into a trust deed when they do not have access to bankruptcy, which is a similar product in terms of duration and contribution.

When people enter a trust deed and something happens, and they are dealing with something so major that they can no longer make their contribution, they are expected at that point to jump through hoops for a trustee. A number of debtors will back off from the process at that stage, when they would probably benefit from engaging more. All the cards are in the trustee’s hands, and the debtor has nothing but answers to give; they are on the back foot throughout the process.

I would like an automatic discharge to occur if the trustee cannot prove, through some audited process, that the debtor has not co-operated—that would work in the same way as it does for bankruptcy. There is an onus on the debtor to supply evidence to prove that their situation has changed to a degree that they can no longer continue with the process. They are often strapped for cash in the first place—they are giving every single penny of their disposable income to a trust deed—so a slight change of circumstances can knock things off course dramatically.

When we see clients, they are often too far down the line. They cannot apply to the sheriff for an appeal, and they cannot go through the insolvency process. When we support people to make a complaint, we tend to tell them how to do it—that is the approach that we usually take. More recently, we have started to support people with the complaints process. There are not a lot of complaints going in—we certainly see more people than we see complaints being registered. We are now supporting individuals to see whether we can engage more people in that process, but that is difficult when they are feeling a bit beat-up.

We experience a lack of co-operation with our clients, too. In some cases, after a while, people no longer get in touch with us, and they do not re-engage. They simply stop making their arrangements. We accept that a significant number of people will be in that situation.

I invite members to look back at the failure rates in the annual reports for the Accountant in Bankruptcy. Back in 2015-16, one firm had a failure rate of 88 per cent, while another had a rate of 87 per cent. The following year, the same two firms had failure rates of 63 per cent and 74 per cent respectively. That points to a lot of people who are not co-operating. I would suggest that there was something wrong there, either with the sales process at the outset or with taking a blanket approach to people who were struggling, which was to simply shut the process down.

The RPBs, from which the committee took evidence last week, do not understand why people are failing to complete their protected trust deeds. That is where we need to go. David Hilferty suggested in evidence last week that, although the trust deed process should be happening, there should be an understanding of why people are not completing them.

There is now a better approach, but it is almost a case of closing the stable door after the horse has bolted. There has been an issue for a significant number of years. Those failure rates were highlighted to the AIB as a problem, but until now nothing has been done. Looking at the issue now, we still do not know anything. We knew that there was a problem in 2015-16, but we still do not understand what the problem is.

I have one final question. The Money Advice Service published a report in July 2018 looking at the supply and demand of debt advice across the UK. It found that the unmet demand in Scotland as a percentage of the supply was 88 per cent, which was the highest of any region of the UK—the West Midlands was 42 per cent, the north-east of England was 32 per cent and Yorkshire and Humber was 55 per cent. What is going on in Scotland? Is that difference due to more indebtedness or to undersupply of debt advice in Scotland? It is probably both.

Who would like to take that for the team? I am conscious of time.

I will take it for the team. Much of the debt advice in Scotland is funded by local authorities. As debt advice is not a statutory function, when local authorities are strapped for cash, it is an area that they can cut back on. That is the issue. We have seen something like a 40 per cent reduction in Scotland—

That is the case for budgets in England, too, so why is the situation different in Scotland?

It is down to choices. The local authority debt advice presence is not as great in England and Wales, where much of the debt advice is funded directly by the Money and Pensions Service—previously the Money Advice Service. We have £4 million of levy funding coming to Scotland, but that is only part of the picture. The vast majority of services come through the local authorities, so when the local authorities cut back on debt advice funding, it has a more significant effect in Scotland than elsewhere.

Thank you.

I want to stay with the failure issue raised by Andy Wightman. Who decides that a PTD has failed? It sounds obvious, but is it a person failing to pay once, twice or three times, or is it when a person fails to engage? What constitutes failure and who decides whether a PTD has failed?

There are various things. It can be different in every case, but my understanding is that usually the trustee will be looking for something from the debtor and either the debtor will not be able to provide that or will provide information that does not satisfy the trustee, so the relationship breaks down and the debtor stops engaging. At that point, the trustee may move to be discharged, if they cannot see any further remuneration for themselves—if they cannot see that there will be any further ingathering of funds and there will be no completion at the full level of the trust deed. At that stage, instead of going back to the first issue and understanding what the problem is and why there cannot be a conclusion, it is easier to discharge. The trustee makes the determination about whether they want that discharge.

Can the debtor appeal that decision?

They can; they have 21 days to appeal to a sheriff against a decision to not discharge them from the trust deed but to fail the deed instead. There is also an opportunity to make a complaint to the Insolvency Practitioners Association.

We heard last week—and I think that Andy Wightman mentioned it just now—that someone can be discharged from a PTD by co-operating, even if that meant that they did not pay anything. Is that true?

A debtor can be discharged from a protected trust deed if they have satisfied all the conditions that they entered into. That does not mean that they have to have paid all of the contributions, but it means that, in good faith, they have to have done all that they can to complete the promise that they made at the outset of the trust deed.

Who determines that?

The trustee.

I have to say that I have never seen a case in which someone has made no payments to a protected trust deed and has been discharged from their debts. That is highly unlikely.

I would not say that we have seen a case where someone has made no contribution, but we have seen cases where the trustee has elected to discharge a debtor from the trust deed when the situation has changed to such a degree that the debtor would not be able to honour the obligations of the PTD.

However, we have seen many more instances in which that has not been the case, even when we have tried to argue on behalf of the debtor, but it has not worked.

When a PTD fails, can it be restarted if, for example, someone says that they can afford to pay it because their circumstances have changed, or is it the case that, once it has failed, it is gone?

It is gone. Once the trustee has discharged themselves from the process, it is finished.

The equivalent situation in a bankruptcy is that the person would not be discharged if they failed to co-operate. People are stuck in a bankruptcy until they contact the trustee and start dealing with them again. The ultimate aim of bankruptcy is that everybody is discharged from their debts.

If a protected trust deed fails, the person gets their debt back. From an advice point of view, if someone cannot guarantee what their income will be or what will happen to them over the next four years, it is safer for us to recommend that they look at an option in which there is a definite outcome, such as a bankruptcy. In a bankruptcy, they will be discharged from their debt if they co-operate and make their payments. If their circumstances change, the sequestration can cope with that and will allow them to make lower payments.

That is not the case in the protected trust deed market. When a failure happens because somebody has not made their payments or their circumstances have changed, it is difficult to find the flexibility that is needed to allow them to extend or end the trust deed.

Would you support that kind of flexibility being introduced to the PTD system?

Absolutely.

We have a financial system that does not support debtors. Debt advice is an art; I used to do it. There are people who cannot pay because they enter into an agreement to pay £50 a month, but that £50 goes on something else—their kids need shoes or they need to buy this or that. Debtors are people who are continually put upon.

There is a problem with trust deeds. Thousands and thousands of pounds in fees are being made by trust deed suppliers—I make no apologies in saying that. The supplier can walk away, but the debtor cannot walk away and the creditor gets nada—nothing—so why are we doing it? We really need to change the situation. I am sorry, but I have to come back—

Mr Lyle, do you have a question for the witnesses or were you answering your own question?

I have a question.

We need to change the situation. Lee Kilgallon said earlier that we need more debt advisers, which I agree with. I used to be a local authority councillor. Why can local authorities not go into trust deeds and charge a decent, reasonable fee that people could live with? Why can you not give them the advice that such things are not for them? You have that experience, so please tell me.

The challenge is that we would then not be giving free and impartial advice. However, if the local authority were to gain from my advice to somebody to enter into a trust deed that we would sign them up to, it would be fine if that was the right decision. I would have no issues with that.

I enjoy working in the free sector, ensuring that the client is at the heart of what we do and giving advice to clients when they need that advice about the best options for them, whether that is a bankruptcy, a trust deed or an informal payment plan for the short term because they have a significant change coming in three to six months. That is a common problem with trust deeds, if people do not look ahead by three to six months to when their kids leave school and their benefits change, for example. We are aware of that, so we advise that something else is put in place and that they come back with a statutory protection later when their situation is stable.

We are there for the long term and what is best for the client, rather than the short term and what is best for the insolvency practitioner or whoever is selling it.

In North Lanarkshire Council, there are money advice centres. There are also a couple of council officials who give money advice.

Do you contact companies and make payment arrangements with them on behalf of clients who walk through your door?

12:15  

Yes, absolutely. That is the bread and butter of what we do. If somebody comes through the door, we first gather the information and we go from there.

In the vast experience of all of you, compared to trust deed failures, how many of your arrangements with companies fail? The failure rate for trust deeds is 88 per cent. How many failures do you have in setting up a regular payment? That regular payment could be varied from week to week and month to month. You could phone up the company and say, “Jeannie McShoogle has come in to tell me that she cannae pay £20 this week, but she can pay £10. Will you take it?” “Yes, we will.” Most companies want their money. They want their payment back. I am sure that you do that.

I have no statistics on it and I could not give you a figure, but the failure rate is substantially lower than 88 per cent.

The more important issue is the consequences of a failure. With a trust deed, the debtor gets all their debt back. With other debt options, such as a bankruptcy, the payment can be changed and it does not affect the discharge. If they are in a debt arrangement scheme, their payment can be varied. If they can no longer sustain the debt arrangement scheme, at least every month, 78 per cent of their payment has been made to their creditors. Therefore, when the debt arrangement scheme fails, they are further forward with their debt than they were at the start.

With regard to the arrangements that you are sending in, you or the debtor are making payments. They might be from a company. They might get a payment book or they might do a standing order. That whole payment goes to the creditor. The creditor gets £10. The arrangement has made it £10 and the creditor gets £10. With the trust deed, the creditor does not even get the £10. For 18 months, they get nothing. Why should we defend trust deeds? I know that we need something. My view has always been that people need debt advice and debt relief. If we write off their debts, that is recorded and they cannot get into debt again, because if they know that they can get their debts written off, everyone will run out and buy something, not pay for it and get it written off. We cannot advocate that.

I suggested that the Accountant in Bankruptcy should become more involved and set up a system that is better for debtors and creditors. In all the time that I have been a member of this committee, the system has not worked; it has to be reviewed. Last week, I smiled when one of the witnesses suggested that it was the Parliament’s fault and, since it was the Parliament’s fault, we would fix it. To finish my question, how would you fix it?

I agree with David Menzies. As has been said before, we need a review of all the statutory debt solutions—the debt arrangement scheme, bankruptcy and protected trust deeds—to work out what they are for. The committee has had evidence that one tweak changes everything. In the first week of evidence, Richard Dennis talked about the change to the length of bankruptcy and how that aligned with protected trust deeds. Suddenly, the protected trust deed market took off again. If we make little tweaks such as that around the edges, they always have a knock-on effect somewhere else. As in the case of protected trust deeds, somebody sees an opportunity.

As the past four years since the alignment of the period of payment have shown, people will always step in when they see a gap and an opportunity. Rather than simply creating more gaps and opportunities, let us look at everything in the round. We should ask what a protected trust deed is for and whether it is still suitable. In evidence last week, David Menzies said that it is not suitable for what it is currently being used for, and I agree with him on that.

Let us look at what a bankruptcy should achieve. Should it be about funding the Accountant in Bankruptcy? Should people have to make contributions? Should people get debt relief when they enter into bankruptcy? Those are all fundamental questions.

Should people be allowed to leave a DAS once they have paid a certain amount of pennies in the pound? There is currently a limit set on that. If people have paid off 70 per cent of their debt over 12 years under a DAS, they can, with their creditors’ permission, potentially be let off paying the rest, but that period is far too long.

There are a number of issues that we can look at and change, but we need to look at everything and not just keep on changing little bits or finding a solution in only one area.

If someone owes a company £1,000, should they be able to negotiate a part payment?

Yes, absolutely.

They can already do so, can they not?

Yes, they can. They can create a full and final settlement of a particular debt if they come into a bit of money.

I will give Lee Kilgallon the opportunity to comment on how the system should be changed for the better.

I would not disagree with anything that Mike Holmyard said. For as long as I have been a debt adviser, we have tweaked and changed the statutory options. Any insolvency practitioner, and any money or debt adviser or counsellor, will tell you that what we are doing just now—especially in the areas that we have talked about with regard to failures and what is not working—is not good enough. People are not getting the right service, and they are not getting the product that they want.

Is it fair to keep someone on the hook? Last week, David Hilferty talked about keeping people on a tight rein for four, five or six years. That is a long time for someone not to have any disposable income, with no option to take their family on holiday or to buy the kids some extra wee bits as people want to do. I see the mental health impact of that situation daily. It is vital that we recognise that issue. The Government has to look at that area, and I hope that we can come up with something that will give people debt relief more quickly when there is no sustainable reason why they should be in a plan for longer. That is what I would like to happen.

Our time is up, so we will finish there. I thank you all for coming in today. We now move into private session.

12:23 Meeting continued in private until 12:57.