Economy and Fair Work Committee

Meeting date: Wednesday, December 21, 2022

Official Report 621KB pdf

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Subordinate Legislation

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Bankruptcy and Debt Arrangement Scheme (Miscellaneous Amendment) (Scotland) Regulations 2023 [Draft]

The next item of business is evidence on the draft Bankruptcy and Debt Arrangement Scheme (Miscellaneous Amendment) Scotland Regulations 2023. I refer members to papers 1 and 2, and welcome to the meeting Tom Arthur, who is the Minister for Public Finance, Planning and Community Wealth. He is joined from the Scottish Government by Suzanne Houston, solicitor, and Alex Reid, who is head of policy development.

I invite the minister to make a short opening statement.

Good morning, convener and committee members. Thank you for taking the time to consider these draft regulations.

It is very important for us—and for portfolios across the Government—to consider policies in the context of the current extreme cost of living pressures. We want to act quickly where we can make a difference. There are four areas of particular focus in the regulations.

The first area is debt arrangement scheme payment breaks. Through the debt arrangement scheme, in the region of 16,000 individuals have taken control of their debt and maintain a debt payment plan. For at least some of those people, the increases in the cost of living will pose a threat to the sustainability of those plans. We want to ensure that the arrangements for securing a payment break are sufficiently flexible, bearing in mind the current volatility in living costs. The provisions in the regulations would allow for a break of up to six months where those wider pressures on household income apply. I consider that to be an important change that will help those payment programmes to succeed.

The next two issues relate to access to bankruptcy. Stakeholders working with us on a policy review have recommended the removal of the minimum debt level for minimal asset process bankruptcy, which is currently set at £1,500. The recent report of the Social Justice and Social Security Committee, following its inquiry into low income and debt, also made that recommendation. I understand the concern that the current threshold might prevent individuals from accessing debt relief that they desperately need. The regulations remove that minimum debt level.

We have made significant progress in reducing or removing the fees that are associated with self-nominated bankruptcy. The Social Justice and Social Security Committee has recommended further tweaking of the fee waiver criteria to encompass all the people who have been assessed as being unable to pay a contribution through the common financial tool. I am happy to take that forward, which will provide further benefit to the most financially vulnerable.

There is a further change that I consider necessary, which is linked to the entirely appropriate actions that have been taken on fee reduction. Wider pressures on the public purse mean that we need to look at all the options in the current system that can help it to recover costs and remove burdens on public finance. The regulations would increase the deposit that creditors must provide when the Accountant in Bankruptcy is nominated as trustee following court bankruptcy.

The need for that is twofold. First, there is the reduction in fee income, which I highlighted. Secondly, there is the fact that the administration of court petition bankruptcy when no funds can be collected comes at the significant cost to the public purse of almost £2,000 per case, on average. The initial deposit that is paid by creditors is repaid when a bankruptcy generates funds. When no funds are produced, it seems reasonable that the creditor bringing the action should bear more of the cost.

I will conclude there. I hope that the committee will agree to a motion to recommend approval of the regulations, and that it agrees that they are a sensible measure at this time.

We move to questions for the minister and his officials.

I do not have a question on the particular issues that the minister has raised. However, in the previous parliamentary session, the Economy, Energy and Fair Work Committee looked at debt arrangement schemes and produced a report.

One of the key things that came out of the report was the question of independent advice before someone enters into one of those arrangements. The current arrangement does not allow for that; the financial advisers are all in-house to various interested parties.

The question of independent advice came up against a bit of a brick wall in relation to who would pay the cost. However, the committee found that many people were going into debt arrangement schemes that were possibly inappropriate and did not work for them. Will the Government therefore look at that again to see whether there is a solution to that issue?

The committee will be aware more broadly of statutory debt solutions such as providing individuals with the debt advice and information pack, but I will ask Alex Reid to come in on Mr Beattie’s specific points.

My understanding is that concerns might have been related to protected trust deeds. There was an inquiry into protected trust deeds, and there were concerns about situations in which they might not be the appropriate solution.

There is a requirement for debt advice in relation to access to the debt arrangement scheme. That is built into the programme. The issues around protected trust deeds that were raised as part of that inquiry are being considered as part of the wider review of debt solutions, which is on-going. We have consulted on recommendations that have been made by stakeholder working groups, which are working on the wider review of debt solutions.

As members will be aware, there are three parts to the review that we are undertaking on our statutory debt solutions. Part 1 was completed, and amendments were brought forward in 2021 in response to the pandemic. Some of what is emerging through the legislative commitment in the programme for government will reflect what has happened in part 2, but there is also a third part, which is a far more wide-ranging review that will we undertake in due course. I am happy to keep the committee abreast of developments on that and will be keen for members’ views and input.

Perhaps I can ask the minister to take into account the extensive work that was done by the Economy, Energy and Fair Work Committee in the previous parliamentary session, which threw up a number of key issues, including the question of independent financial advice.

I am happy to give that undertaking, and I assure the committee that its work has been very much valued and appreciated by the working group that is undertaking the stage 2 review.

It has been suggested that the increase in the fee for creditors would have an impact on creditors’ willingness to take forward bankruptcy proceedings. Will the minister say a bit more about what the impact of that would be? Is he confident that AIB’s income will be supplemented to compensate for the anticipated reduction?

I refer the convener to the detail that is provided in the business and regulatory impact assessment, but, broadly, in the past three years that the AIB has been the trustee, around 56 per cent of bankruptcies have resulted in no fees being recovered to cover administration costs. The measures that we are taking are proportionate. I note that the increase from £300 to £750 stands in contrast to the situation in England and Wales, where the fee has moved from £990 to £1,500.

That is a proportionate response and, as set out in the BRIA, it will have an impact. It will not lead to full cost recovery, but it will make a significant contribution, which we would all recognise is important given the challenging public finance landscape that we face.

The fee going up from £300 to £750 is a 150 per cent increase, which is quite large. You talk about the impact, but, given that the thresholds for who can access minimal asset process bankruptcy are being reduced, that will put a considerable extra burden on creditors who are already likely to lose money—after all, as you rightly say, a large number of cases do not result in money coming back. How do you justify that, given that it will be a huge extra burden on creditors when there is potential for a large increase in the number of people going into MAP bankruptcy?

I will ask Alex Reid to come in shortly. The majority of organisations taking forward creditor petitions for bankruptcy are local authorities, and we have engaged with them on that. The MAP threshold, as I referred to in my opening statement, came out of the working group and was a very strong recommendation, particularly from the money advice sector.

It will not be a huge number of people who take advantage of the removal of the £1,500 threshold, but, for some people, it will be very significant. That was recognised in the deliberations of the review group and certainly in the discussions at the meetings that I convened. I ask Alex to come in if he wants to add anything.

On the MAP threshold, stakeholders have acknowledged that the number of people who have unsustainable debt that is less than £1,500 might be relatively small, but that the measure will be important. If there is no surplus income to pay a contribution, there is a requirement for debt relief, but it is important that there is access to that. The number of people that it will affect is small, but the measure will be important for those whom it does affect, which is a point that has been made by stakeholders, as well as by the Social Justice and Social Security Committee.

The creditor petition fee is, in effect, a deposit. The fees are fully recoverable; when funds are available in a bankruptcy, creditors receive those funds back.

Is it correct to say that, in a large number of cases, there are no funds and that they do not get paid back? In those cases, would the creditor need to pay?

That is right.

What will be the likely increase in the number of people who decide to go down the route of MAP bankruptcy as a result of the removal of the minimum debt threshold? Do you have any expectations as to how that number might increase and how that might impact debt arrangement scheme agreements and the choice between that and making an application for bankruptcy? Has there been any analysis of that?

As indicated, that came out of the engagement with stakeholders via the standing group. As Alex Reid has said, we are not anticipating that it would affect a huge number of people, because we are talking about debts of less than £1,500. However, the reality is that, for some people, debts of that level are unsustainable. As such, although the proposed changes will affect a small number of individuals, they will have a significant impact on those people.

More broadly, I will address the point about how the measure interacts with the wider suite of debt solutions that we have in Scotland. DAS is long-standing: it is unique to Scotland and an important part of the landscape. The range of solutions reflects the fact that we have measures available to suit individuals who are in a variety of circumstances. By its very nature, MAP is for the most vulnerable people who have unsustainable debt.

I invite the minister to move motion S6M-06962.

Motion moved,

That the Economy and Fair Work Committee recommends that the Bankruptcy and Debt Arrangement Scheme (Miscellaneous Amendment) (Scotland) Regulations 2023 be approved.—[Tom Arthur]

Motion agreed to.

The committee will produce a short report, which will be published. I thank the minister and his officials for joining us. I briefly suspend the meeting to allow the next panel of witnesses to join us online.

09:43 Meeting suspended.  

09:45 On resuming—