Economy, Energy and Tourism Committee

Meeting date: Wednesday, October 2, 2013

Official Report 540KB pdf

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Bankruptcy and Debt Advice (Scotland) Bill: Stage 1

Good morning and welcome to the 27th meeting in 2013 of the Economy, Energy and Tourism Committee. I remind everyone to turn off or switch to silent all mobile phones and other electronic devices.

Agenda item 1 is the continuation of our stage 1 scrutiny of the Bankruptcy and Debt Advice (Scotland) Bill, for which we are joined this morning by Chris Boyland, head of strategic reform, Claire Orr, executive director, policy and compliance, and Elizabeth Wilson, strategic reform team, all from the Accountant in Bankruptcy’s office; and by Graham Fisher from the Scottish Government legal directorate. Before we get into questions, I invite Mr Boyland to make an introductory statement.

I will be very brief, because I do not want to take up too much of the committee’s time with my introductory remarks. Nevertheless, I want to mention three things, the first of which is the Scottish Government’s proposal in the bill to introduce a common financial tool. As the committee will know, there are two financial tools commonly in use at the moment, one of which is operated by the Money Advice Trust and the other by the United Kingdom StepChange Debt Charity, and the Scottish Government has set up a working group to determine which of those tools would be appropriate for use as a single common financial tool in Scotland.

On the basis of analysis that we carried out and shared with the working group—and which we will be happy to share with the committee—the group came to the view that the Money Advice Trust tool was the right one for Scotland for two reasons. First, our evidence showed that the Money Advice Trust tool supported fewer breaches of the trigger figures. That is important with regard to the proposal in the bill for a minimum of 48 monthly payments, because payments must be sustainable and set at a level that the debtor can manage. I am aware that the Institute of Chartered Accountants of Scotland has suggested that contributions calculated with the Money Advice Trust tool could be as much as 30 per cent lower, but I point out that our research showed only a 5 per cent difference in the monthly surplus.

Furthermore, the Money Advice Trust tool is already widely embedded across the sector. It is used and recognised as an industry standard by the majority of money advisers, the British Bankers Association, the Finance & Leasing Association and the major utility companies, and we think that that is important in considering the potential costs of introducing a single tool. We believe that the more widely used an existing tool is, the lower the costs are likely to be when it is made the common financial tool.

My second point is about the AIB and the potential for conflict of interest. During its scrutiny of our bill, the committee will hear evidence that our proposals will lead to a conflict of interest within the agency and that AIB officials will be making and then reviewing their own decisions. That would be the case only if the AIB’s organisational structure remained fixed as it is at the moment. However, it will not. In fact, we have already begun to restructure to ensure clear lines of independence and accountability between AIB officials. In order to embed the debt arrangement scheme process, which was introduced by regulations in June and is already operational and in force, we have started internal reconfiguration to ensure that firewalls are in place and officials can operate with the necessary impartiality. We will be happy to come back to the committee and report our progress with that work.

Finally, I wanted to comment briefly on the provision in the bill to transfer functions from the sheriff court to the AIB. First, it is important to recognise that this is not the first time that something of this nature has occurred; the Bankruptcy and Diligence etc (Scotland) Act 2007 made the same kinds of significant changes. For example, debtor petitions made to the courts became debtor applications made to civil servants at the AIB. We do not believe that you would find much, if any, support for moving debtor applications back to the courts. We have looked very carefully at the administrative low-level decisions made in sheriff’s chambers and considered them against an assessment of what can or cannot safely be transferred. For example, we want to transfer the process of recalling a bankruptcy where the debt has been paid in full because that is an administrative matter, but we do not want to transfer other applications for recall as such cases are likely to be more complex—involving, say, an allegation of mistaken identity—and will require a judicial decision.

Most of our work across the piece on this bill has been about striking a balance between debtors’ and creditors’ needs and taking a view on who has the most to gain or lose, and we have tried to come to a view about what might be the sensible way to proceed. We know that we are not going to please everyone, but we hope that in time, as with the example of the debtor application process, which moved from the courts to the AIB, these changes will become embedded as accepted practice.

We are on a slightly tight schedule this morning because we have a lot of business to get through, and I am aiming to finish this session by 11 o’clock. I therefore ask members to keep their questions short and to the point, and it would also be helpful if we could also have short and focused responses. There are quite a number of issues that we want to try to cover.

Prior to the committee’s meeting in Irvine on Monday, we held a number of workshops with money advisers, citizens advice bureaux, service users and people with experience of debt issues. The discussions helped the committee members who attended to identify some of the issues around the bill and the impact that they might have, and I want to start by asking you about two or three issues that emerged from those workshops.

We heard that the increase in the bankruptcy application fee from £100 to £200 is acting as a barrier to many people going through the process. I see from the information that you have provided that there has been a drop-off in the number of bankruptcies over the past three or four years, which might seem surprising given the problem with debt levels more generally in the economy. Is that fall attributable to the rise in the application fee? Is the doubling of the fee a barrier to many people who would benefit from going through the process but at the moment simply cannot do so?

I will start, but my colleague Claire Orr will probably want to come in.

I have two points to make in response to that question. First, the drop-off over the past few years has been from a previous level that was substantially higher than it had been for some time. We might have the figures with us but, if we do not, we can certainly provide them. Perhaps not surprisingly, there was a significant spike around the period from 2006 to 2008 and the number of insolvencies in Scotland went up substantially. There has been a reduction since then, although I think that there might be other factors at play in addition to the fee increase.

Secondly, the £200 fee for access to sequestration is precisely one of the reasons why we have introduced the minimal asset process for debtors who are unable to make a contribution and whose circumstances and debt levels are such that we feel that they should have a simpler, less administratively complex and most likely cheaper route into bankruptcy. We are unable to fix the fee for the minimal asset process at the moment, but we expect it to be significantly lower than £200 and probably around £100.

The downward trend of insolvencies is common across the rest of the United Kingdom and around the world, so I am not sure that it is directly related to the fee increase. When the fee was increased, we reiterated to the money advice sector the process that we have in place for people to pay by instalments. Had there been a significant drop that was due only to the fee increase, we would have expected to see a significant increase in the number of people asking to pay by instalments, but that did not happen. I am therefore not sure that it is as simple as saying that it is totally to do with the fee. I accept that that might be a factor, but I think that there are other factors, too.

Before letting members in on this point, I will ask a follow-up question. You referred to the new minimal asset process that is coming in, for which the limit is £10,000 of debt. My understanding is that the current average debt of clients coming through StepChange Debt Charity Scotland is £14,500, which would suggest that perhaps the £10,000 figure is on the low side. I also understand that, for those going through the low-income, low-assets process at the moment, the average debt is £17,000. Are you confident that £10,000 is the right figure?

In comparing the minimal asset process with the existing low-income, low-assets process, our main point is that there is a high number of transfers from LILA to full administration bankruptcy. I think that I am right in saying that the 2012-13 figure was 700-plus transfers out of 3,481 LILA cases, which is roughly 20 per cent of the case load. The principles behind setting the maximum debt level at £10,000 are, first, to set it at a level that will be of use to debtors in the kind of circumstances that we are trying to address through the minimal asset process; and, secondly, to focus the criteria so that we reduce the number of transfers and are confident that the people who go into the minimal asset process and have the benefits of a simpler and less administratively complex route into bankruptcy will remain in that process. We do not want cases that we discover after a short period ought to go through the full administration process.

I have one more question before I bring others in. I note that the figure of £10,000 is stated in section 5 of the bill. Is that not quite unusual? Should that sort of figure not just be left to subordinate legislation?

I will defer to Mr Fisher on that one.

It is fairly common in other debt legislation in Scotland to have figures listed in the bill, and quite often there is also a power to change the figure.

Some members who want to come in have caught my eye.

Good morning. I, too, have had the privilege of hearing at first hand the experiences of people who have suffered bankruptcy in the past or are presently being considered for it. The fee was a big issue for those people. The jump from £100 to £200 was considered to be very high for people who found themselves in that position. Who makes the decision on whether the fee is reduced or not? Is the figure arbitrary? What is the threshold for it? Further, are there any examples of people who have been exempt from the fee? If people are in the process of applying but cannot pay the fee, that means that their application just sits while their debt continues to grow. Surely that is not a welcome situation for anybody.

10:15

The fees are determined by the Accountant in Bankruptcy and they are generally based on our need to recover the cost of the services that we deliver. As part of our work, we realised that the cost of delivering the bankruptcy application process to make the award was significantly in excess of the £100 fee that had previously been charged. That is what led to the £200 fee being introduced.

The legislation does not permit anyone to be exempt from the application fee. I think that the Bankruptcy (Scotland) Act 1985 expressly stated that there cannot be a waiver of the fee, but the instalment process helps. I accept that that means that the bankruptcy award cannot be made until such time as the fee has been paid, but that is currently what the law provides for.

Surely that is not a healthy position for the person who wants to be declared bankrupt or for the person who is trying to chase the debt, because the debt is still growing and they know that it is not going to be paid. In the meantime, you are putting people through a lot of anxiety and suffering, simply because they are trying to pay that fee. Can the fee not be recovered afterwards, so that the process can take place and people can start to move on and get a fresh start in life?

Recovery of the fee afterwards is not possible within the current framework. The application fee has to be made up front and our ministers have required us to continue to work towards that.

I do not feel that that is a good position for anybody to be in. If people are entitled to benefits, there is a system whereby moneys can be taken directly from benefits so moneys would be almost guaranteed. Therefore, why put people through a lot of hardship by making them wait until the fee is paid before the case is taken on? Has nobody considered that option?

We have not actively considered that option as part of the bill. The bill is not changing the current provision in relation to the payment of fees.

That does not mean that you should not fix something that is wrong. Surely we should be looking at that option as well, in a bid to try to ease the anguish of families where possible.

I understand your point and I believe that money advisers will often help their clients by allowing them to juggle the priority of the payments that they need to make so that they can make their bankruptcy application. We will consider your point but, at the moment, there is no provision in the bill to change that.

Right, okay.

On the convener’s point about the £10,000 ceiling, if the evidence suggests that the average debt is higher than £10,000, does that not preclude people from entering into the arrangement? If the evidence suggests that the limit should be higher, why is it not higher?

I will go back to my earlier point about the number of transfers from the existing LILA process to full administration bankruptcy. The average debt level in bankruptcy across the board is certainly higher than £10,000. That is not remotely in dispute.

We are trying to set up a scheme in the minimal asset process that will be targeted specifically at debtors who are unable to make a contribution or who have been in receipt of welfare benefits for up to six months. For that specific user group, we believe that the £10,000 debt ceiling will enable us to easily and correctly target the people who are most in need of help.

We further believe that when the maximum debt exceeds £10,000—when it gets closer to the existing average—there is a greater likelihood that people will have a wider range of creditors. They will be in circumstances where the proper administration of their bankruptcy would be more likely to be the full administration route.

I would like to make one brief additional point about the fee level. The level of fees charged for bankruptcy in Scotland at present is lower than that charged in England and Wales.

I accept what you are saying and the rationale behind it, but I am just not sure that I have quite grasped the £10,000 ceiling level, to be honest. I am not quite sure why it was not £15,000, which would have given more people the opportunity to come via the debt arrangement scheme, because the debt out there may be reflected better in that figure than in the £10,000 figure.

I would not necessarily disagree with that, although we must accept that the debt arrangement scheme is something separate and that we are talking about bankruptcy at this point. I am sorry if I am not able to offer any more help, but our approach to the issue is that we are trying to identify a debtor group that is most in need of the minimal asset process. Given the circumstances that people in that group share and which identify them, we think that the £10,000 debt ceiling more correctly identifies them than a higher level would. The point is to target the assistance for the lower-fee, easier-entry scheme specifically at the people most in need.

It is important to say that those people will not be excluded from the ability to apply for bankruptcy, so if they exceed the £10,000 limit for the minimal asset process, they will still be entitled to apply for the ordinary bankruptcy route. They are not being excluded from the ability to have the debt relief that they need; it is just that it would be through a different route in, rather than through the minimal asset process.

I appreciate that. Thank you.

How does one know that one is entitled to that relief? Are you going to say, “It’s from £10,000 to £20,000,” or do people just guess what they would be entitled to?

The role of the money adviser is to help determine the level of debt.

How do they know?

They would have to have evidence from the individual sitting in front of them about the creditors that they were due—

No, but how do they know what amount they can apply for? You are saying £10,000 in the bill, but how does the creditor or the money adviser know that someone can come in with a higher debt and apply as well?

I would expect the money adviser community to be well versed in the provisions of the bill by the time it comes into force. We work closely with the money advice sector, and money advisers would be aware of the different routes available. They would then be able to advise their clients on the solution that was most appropriate to their needs.

So is the bill going to tell us the two figures—the start and end figures—or not?

The minimal asset process is the only one that has a ceiling on the debt level. The other bankruptcy route is limitless, so regardless of the amount of debt that someone has they would be able to enter bankruptcy.

So you are—

Hold on, Hanzala. I think that we are getting a bit confused here.

No, I am not confused. The bill will say that the ceiling is £10,000, yet the witnesses are saying that if people’s debts go over that we can still, to a certain extent, take care of them. How do people know the level up to which they can still apply through the ordinary system and what is the next limit? Is it between £10,000 and £20,000, or between £10,000 and £15,000? You are putting the figure in, not the money adviser.

Only for the minimal asset process. That is the only part of bankruptcy that will have a limit applied to it, and that is for a defined group of people who meet specific criteria—generally, people who are on benefits. That is the only group for which there would be a limit to the debt level. For any other application to bankruptcy, there is no limit. The minimum debt level will be £3,000 for ordinary bankruptcy, but there will be no maximum, and we would work with money advisers to ensure that, just as they are now aware of the criteria for LILA and for ordinary bankruptcy, they would be aware of the criteria for those two different routes in.

So, if I had a debt of £11,000, I could still apply under the normal bankruptcy route.

Yes.

But the bill says £10,000. How would I know that I am still entitled to apply, even though my debt is above the maximum?

That is a fair point: ordinary members of the public might not be aware of what exactly is on the statute, but it is the role of the money adviser to advise their clients on the routes that are available to them, based on their circumstances.

We need to move on, as we have a lot to get through. Margaret McDougall is next.

We heard evidence on Monday that money advisers were holding files—cabinets full of files on people who were unable to proceed with the LILA route, because they could not raise the fee. That is an issue. Do you have any idea how many people are on hold until they can reach that figure?

I am not aware of any figures for that. It is quite common for the advice sector to have evidence of that sort, but such evidence is not submitted to the AIB in any formal way, so we do not have any data around that. If the advice community would like to provide us with that evidence, we would be happy to look at it.

If you are saying that the fee will be back down at £100, that would be more acceptable, although the people to whom we spoke did not want there to be a fee at all, as they were on benefits and found it really difficult to raise that fee. As has already been said, their lives are on hold, as they cannot move on and their debts are increasing.

I do not know what evidence you used to reach the £10,000 figure. StepChange says that the average debt that it deals with under LILA is £17,000. Approximately 65 per cent of its clients would not qualify under the new minimal asset procedure. They will be pushed into another process under the Bankruptcy and Debt Advice (Scotland) Bill, which will cost them more. That will stretch out the period over which they will be without credit.

We consulted on the level at which the maximum should be set. Various views were expressed, with figures ranging from £20,000 to £50,000, and other comments were applied. We do not have the full detail of that with us today, but we can reconsider the process around arriving at the £10,000 figure. It was very much based on the discussions that we had during the process of consultation with our stakeholders.

Okay. I will leave it at that.

I was very interested in what you were saying about the money advice tool and the common financial tool. Am I correct in saying that, when ICAS is submitting its criticism of the approach with regard to the payments that will be made and the calculation, it is not criticising the common financial tool, but it is criticising the money advice tool, as the common financial tool has not been fully developed yet? Am I correct in that assumption?

That is not quite the case. The existing money advice trust common financial statement is a tool that is widely in use across the sector. The working group that we set up has determined that the right course for the Scottish Government to take would be to fix the existing money advice trust tool as the future Scottish Government single common financial tool. When the eventual act is in force, it will, I hope, become the case that the tool that is currently known as the Money Advice Trust common financial statement will be the single common financial tool in Scotland. When the Protected Trust Deeds (Scotland) Regulations 2013 go through, which we hope will happen later this autumn, that will be the case for protected trust deeds. It is already the case for the debt arrangement scheme. That will be fixed consistently across every statutory debt solution in Scotland.

10:30

I appreciate that harmonisation, which should be welcomed. I absolutely agree with using a single tool, so that we do not have different calculations being used indiscriminately. However, I am a wee bit concerned that you used the words “we hope”. That suggests that there is doubt and that another tool might be used.

I am sorry—as a civil servant, I tend not to say that things are absolutely certain to happen until at least a year or so after they have happened. [Laughter.]

The financial tool and how it works are of central importance to how we deal with debt. I was slightly concerned to read in our briefing that the tool involves an algorithm or a series of algorithms. I always assumed that algorithms were the province of theoretical physicists and not mere accountants or money advisers. Will you confirm that an algorithm or a series of algorithms will be used?

I used the word “algorithm”; the witnesses did not. They should not be held responsible for that word choice.

I said that I came across the term in our briefing. I merely ask whether an algorithm is used.

To be honest, I do not have the technical knowledge of the tool’s workings to answer that. I understand that it is a means of determining from figures that are input about a debtor’s current spending level what their contribution will be.

I am happy to confirm that, as we have said, the tool has been developed by the money advice sector for use by that sector. The tool does not sit still and is updated regularly. That is the case whether the workings beneath the bonnet could be described as an algorithm, spreadsheet or something else.

Whether or not what is used meets the strict mathematical definition of an algorithm, we are talking about a fairly complex and sophisticated calculation.

That point presupposes a little more knowledge than we can bring. It is certainly a calculation.

Can anybody else on the panel answer questions about the nature of the calculation? We have agreed that it is fundamental to the bill’s success.

Perhaps Nicholas Grier can provide some background, but I will let Ms Orr answer.

The tool is founded on research at the UK level. The Money Advice Trust had a gentleman—whose name escapes me—conduct extensive research into the cost of living. The trigger figures were developed from that work. They are the amounts of money that are calculated to be essential for different components of people’s lives.

You can see what I am getting at. How the calculation works is an essential part, but not the only part, of the bill. If we are moving to a single tool—I absolutely agree with that—it is imperative that the right answer comes out of that tool. I am a wee bit disturbed that none of the panel members can give more information. I invite you to write to the committee to give us information. I would like to take the calculation for a test run in real-life scenarios. As ICAS has criticised the tool, it is only right to see some worked examples, to assure us and give us confidence. Does that sound reasonable?

Of course. We are happy to provide you with further information on how the tool works. It is worth noting that it works in practice at the moment in the debt arrangement scheme. It is the basis on which calculations are made about the sustainable contribution that people will make under that scheme, which can be over a long period. There is therefore clear evidence of how the tool works in practice.

As I said, the tool has the support of the money advice sector more generally. For example, citizen’s advice bureau advisers use it in preference to the other tool that is currently used, because it takes a slightly more generous approach to the debtor.

Okay. Thank you.

I do not accept that we should necessarily rush to use a single system. Has the system been audited and tested against what currently happens with debtors?

By “system”, do you mean the common financial statement?

Yes.

It is in use at the moment.

I did not ask whether it was in use. I know that it is in use. Has it been audited in relation to beneficial outcome?

I am not 100 per cent clear about what form such an audit would take. What I can point to is the research that we carried out for the Scottish common financial tool working group, if the committee has not already seen that work. Our research, which supported the group’s decision to move towards having the common financial statement as the single tool, involved examining the evidence on the performance of both tools—the common financial statement and the StepChange tool—comparing the tools and looking for evidence against a number of criteria, a key one of which was sustainability in relation to the number of breaches of the trigger-figure ceilings.

I will take that as a no.

Would it not be better to test both systems in actuality and look at the outcomes? I am sure that the working group did a diligent job, but at the end of the day the proof of the pudding is in the eating. Can we have an audit of the common financial tool? Can we have a test bed of the StepChange tool, so that we can see what is best for debtors? I am not criticising the common financial tool, but I want to be sure that it works in the interests of debtors.

I am sorry if I am not giving you exactly what you are looking for, but I struggle slightly to see why the research that we carried out, which was a head-to-head comparison between the two tools, using data from the system about real-life cases to compare how each tool performed for real-life debtors, would not give you what you are looking for.

Let us just leave it there.

I am concerned about several things that you have said. First, you said, “We know that we are not going to please everyone”. That might be what happens in the end, but I get concerned when people start off by saying that. Secondly, please do not use analogies with England. We are not in a competition; we are here to serve the customers.

On that basis, can you tell me how many people in debt you talked to?

Are you asking about people to whom I spoke personally?

Yes, and not just in terms of the consultation. How many people have you actually talked to about the consequences? We have talked about fees, and we heard on Monday that the fee increase has put severe pressure on people. Perhaps I can make it easier for you. How many end users—the debtors—did you meet, and how often did you meet the AIB?

Sorry, I did not grasp the second part of your question.

How often did you meet the Accountant in Bankruptcy in the context of the development of the bill?

We are the Accountant in Bankruptcy.

Sorry, in terms of—I am getting confused. Let us take the first part of the question. How many clients did you actually talk to?

I understand the point that you are making. We try hard to reach out to as many people as possible. During the public consultation, I think that we received only one or two responses from members of the public. It is generally a difficult issue on which to engage people. That is why we work with the money advice community, which can tell us the views of its clients. We do not have a direct conversation with people.

Of course, the AIB speaks every day to people in debt who make bankruptcy applications and applications for the debt arrangement scheme, so we understand the challenges that people face, but we have not had a direct conversation with a group of indebted individuals, because it is quite difficult to get people to agree to come and speak to us in that forum.

We did not have any difficulty with that.

In the past, we have tried to engage with people and it is quite difficult. For example, through our debt arrangement scheme marketing campaign, we have tried hard to get case studies of people who have experienced debt, and it is extremely difficult to get people to come forward to engage with us.

Maybe I am cynical, but if we increase fees and limit the debt level, that will mean increased revenues and a lower volume. What is the ethos? What is the AIB’s objective as far as the bill is concerned?

We have some very clear objectives. The first principle is ensuring that everyone has access to fair and just processes.

But you have not talked to people who are indebted.

We have spoken to their representatives and have had an extensive consultation on that basis. We have listened hard to the points that were made through that consultation and have made a number of changes to the bill, relative to the position from which we started in the consultation. We have reflected the views that were expressed by the representatives of people in debt and those who deal with the insolvency system more generally.

I have no more questions.

I am conscious of time. Other members want to come in, so we need to move on. If we have time, we will come back to some of those points.

Earlier, we discussed the obstacles to becoming bankrupt, such as people having difficulty finding the cash to make the initial payment. The AIB and some debt advice centres request from creditors a final balance of debt. When the committee was in Irvine on Monday, we got some feedback that suggested that it can sometimes take quite a while to get hold of that final balance of debt. Meanwhile, the debtor is accruing even more debt. Are any steps being taken through the bill to address that? Will there be a cut-off date by which creditors must comply—a date by which they must provide that information?

Yes, is the short answer. The bill will introduce a fixed period for creditors to submit their returns. From memory, I believe that it is six weeks.

The period is 120 days.

I beg your pardon. There will be a fixed 120-day period during which creditors will need to submit their returns.

That is a relatively long time. I would have expected the creditor to have that information to hand and to be able to provide it in a more timely fashion. Why has 120 days been agreed on?

Creditor organisations will probably say that they would need at least that length of time. To an extent, that is a question for them; their representatives will give evidence to the committee.

In part, the question goes back to the point that I made at the end of my introduction about not being able to please everybody all the time. We have not introduced the 120-day period as a concession that we will fail in the objectives that we are setting for ourselves in the bill; we have brought it into the conversation simply to acknowledge that, by its very nature, insolvency involves a balance between the desires, needs and rights of the creditors and the rights of the debtors. It will always be difficult to strike a balance that pleases both sides.

We feel that 120 days is the right deadline. Some organisations and representatives, such as members of this committee, might say that 120 days is giving people too much time. I am certain that representatives of creditor organisations will say that it is minimal and that some of them will not even be able to manage that.

10:45

That timescale does not impact on the award of bankruptcy being made. The creditors’ claims will be requested after the award of bankruptcy is made. The person needs to know only that they have a debt with a particular creditor in order to apply for bankruptcy. The final position would be confirmed through the 120-day claim process—the person in debt is not disadvantaged at that point.

I have two further questions.

Make them brief, please, Alison.

You have suggested that we are seeking to strike the best balance between the needs of creditors and debtors. With regard to the four-year period for debtor contributions, ICAS has suggested that there might be breakage and, more likely, that debtors will be unable to sustain payments for that period. What research has been carried out in order to put that proposal forward?

That takes us back to Mr MacKenzie’s point about the fundamental way in which the common financial tool determinations interact with other parts of the bill. In this instance, they interact with the proposal for a minimum of 48 monthly payments. ICAS has provided evidence suggesting that that will lead to an increase in breakage rates.

Our point is that the reason why we are fixing the common financial statement as the tool that will determine the amount that is being paid on each of those 48 monthly payments is because the evidence suggests that that will determine a more sustainable level of contribution—the 48 amounts will be at a level that the debtor can manage.

My final question is on the Accountant in Bankruptcy. Is it genuinely able to review its own decisions? I have concerns about public perception—we have heard about firewalls and so on. When an organisation reviews its own decisions, the public find that less than convincing. Did anyone consider introducing an independent review of those decisions?

We originally considered whether to set up a panel, but decided that it would be preferable to have control of reviewing in-house. However, we have taken steps to separate the functions of the operations of the agency from its policy and compliance elements; they will operate as two distinct parts of the AIB. There would be no crossover between the original part of the process and the review part.

Does Mark McDonald have a question on that?

My question is on a different topic.

Okay. I have members who have brief supplementaries on the same issue.

On Monday, one of the things that cropped up in the conversation was the role of creditors and the lack of awareness about the DAS among companies that do not come under Scottish legislation. Another issue was about determining exactly what is owed to a particular creditor because the creditor balances are not made readily available. Is there anything that we should do to ensure that when someone enters bankruptcy, they know exactly what the target is?

That goes back to the provision in the bill to fix the 120-day period for creditor returns, which speaks to the second part of your question, about getting information from creditors about how much money they think they are owed.

On the first part of your question—on the visibility of Scottish legislation to UK organisations and lenders—I cannot comment much on that other than to revert to our continuing efforts to engage with the representative bodies of those organisations whenever we can and to ensure that they are aware of the changes that we are making.

I will add to that briefly. We have a stakeholder group that involves representatives of the creditor sector. We have the Royal Bank of Scotland and Lloyds Banking Group on our general stakeholder group. They have been with us on the journey of reforms that we have been making and they are well aware of the changes that we are making. We also extended our reach further and have visited some of the major creditors in England to ensure that they understand.

On DAS, there was a particular effort made when the 2011 changes came in. As part of that process, we now have much stronger engagement with creditors across the whole UK. They are on our information technology system, which means that interaction with them is now much easier than it was. Progress still needs to be made, however, and we continue to try to improve.

On the discharge of DAS that has been extended to four years, there is also a six-year period after that during which a person who has been bankrupt cannot get credit, which makes the total period 10 years. Is that right?

It is perhaps not quite that straightforward in the sense that it is a matter for creditors and credit reference agencies how they risk-score lending to people beyond the period of their bankruptcy. Someone who is in the debt arrangement scheme or is insolvent and bankrupt cannot obtain credit during that period. What happens beyond that is a matter for creditors to determine. In practice, people will generally find that their access to credit can be restricted for approximately six years.

One of the aims of the financial health service that we are trying to develop is for us to work with creditors and credit reference agencies to distinguish between people who have been on a debt arrangement scheme and paid back all that they owe, from people who have been in bankruptcy, and to get them to try to have more lenient credit-risk scoring for people who have paid back than for those who have not. We are at the very early stages of those discussions, so it is too soon to say whether the practical impact on people will change.

I am sorry Margaret, but we have to move on; we are very short of time. Hanzala, do you have a quick question?

On people who want to register as bankrupt, I have brought up the issue of money advice, and I was given an explanation that led me to believe that if a person fills in a form or is helped to fill in a form, that is in itself legal advice. I have since been told that that is not the case and that someone would require legal advice under the new legislation. I suggest that rather than say that someone must have legal advice—that it is mandatory—the bill should use the word “desirable”, so that if anyone does not have legal advice in the full sense of the word, it will not stop them from registering as bankrupt, and they can get legal advice thereafter. That would particularly help first-time applicants.

I can understand why legal advice would be a must for people who have gone through the process before because they are obviously not getting it, but rather than say that first-time applicants must have money advice before they apply, it should be desirable. What is your opinion of that?

We continue to stand by what we have said previously. We believe that for people who have difficulty with the application process, whether for reasons of language or for other reasons, advice is the answer. The availability of, access to and receiving of high-quality advice from an approved money adviser is the solution that will see them through those difficulties.

So, they can continue to be in debt for the duration.

No. We do not believe that that would be the case. We believe that the requirement to have advice and access to advice will help them through their debt problems.

We need to move on, Hanzala. We are short of time and I still have to bring in Mark McDonald.

Am I correct in saying that some debts can be written off and will not be pursued by creditors when a person enters bankruptcy?

Bankruptcy itself is a debt relief measure.

What I mean is that during the bankruptcy creditors will, obviously, pursue debts through asset recovery and so on. Is that correct?

Entering into sequestration is a means to put a halt to pursuit and to arrestments and suchlike.

What I mean is that, at the moment, a number of people who find themselves in debt trouble will seek high-interest loans as a means of alleviating their immediate debt problem, but obviously that simply stores up bigger problems for the future. At the point at which the person enters bankruptcy, what currently happens to those high-interest loans?

Such loans are included with the rest of the debtor’s debts and are given no preference. Where the debtor is able to make a contribution by way of repayment, those debts would be treated along with the others.

The point that I am trying to get to is whether there is scope within legislation for those debts to be defined in such a way that they would be written off and would not be pursued at the point of bankruptcy.

In effect, that is what would happen. If someone becomes bankrupt, their assets are conveyed to a trustee whose job is to realise assets to pay back creditors. There may or may not be anything realised to pay back creditors, but at the end of the bankruptcy those debts are written off and cannot be pursued by the creditors.

At the moment, there is no incentive for due diligence on the part of high-interest payday lenders, which actively lend to people with poor credit ratings. High-street lenders such as banks will not touch those people, but payday lenders are happy to lend high-interest loans to them. Is there a means through bankruptcy legislation by which that could be addressed? Obviously, payday lenders might apply more due diligence if they were aware that their debt would be treated somewhat differently under bankruptcy legislation.

Are you asking whether those debts could survive instead of being discharged as part of the bankruptcy?

That is correct.

We consulted on whether some debts should survive the bankruptcy. We considered whether debt that was incurred in the 12 weeks prior to the bankruptcy should be excluded from debt relief, but that did not find favour among any sector in the consultation process, so the proposal was dropped. The main reason for that is that bankruptcy is supposed to provide a final solution that, by writing off the debt, gives people the fresh start that they need. Also, such a proposal might just create a preference for a group of creditors to which we might not particularly want to give preference. For those reasons, such a provision was not included in the bill.

We are very short on time, but we have not yet touched on the provisions on financial education, which I want to get on the record.

In our workshops on Monday, we heard some evidence on financial education, which everyone agrees is a very sound concept. If we approach the issue in schools, we can make people aware of issues such as annual percentage rates and the importance of budgeting. However, the bill seems to be closing the stable door after the horse has bolted, in that the provisions are about providing financial education to people who are already insolvent. Evidence that we heard on Monday suggested that people who live on very low incomes, for example on benefits, are actually very good at balancing budgets and understand the issues around financial matters. For them, often the problem is not a lack of financial education but their circumstances—for example, a crisis that comes along and tips them into a problem with debt. What evidence is there that offering financial education will make any difference?

11:00

Perhaps I can start and then colleagues can come in.

First, the national standard financial capability education module will not be restricted to the issues that people might immediately think of, such as budgeting and household management. The potential exists for it to go wider than that, for example, to teach people how to switch utilities provider.

It is easy to fix an idea of what financial capability education will be, but my point is that it is not fixed at this stage. We are working with Money Advice Scotland and the financial sector to develop the financial capability national standard in order to make sure that those who have the most experience of people with debt problems design the national standard, which will create a preventative solution for assisting people who are in debt.

The second point—which I will make quickly—is that although we envision its use in money advice and in a bankruptcy process, once there is a national standard to govern how a certain topic can be taught, or once people can be trained, there is no reason why it cannot be used in other circumstances as well, for example in early years education.

Will you explain very briefly to me the process whereby somebody who has been declared bankrupt and has to go through this financial education module will be assessed or tested on it? What are the sanctions if they do not comply?

We certainly have not put anything in the legislation that speaks of sanctions for non-compliance. I do not want to seem to bandy semantics, but I imagine that the module will be such that it will be clear whether or not the person has worked through it. There need not necessarily be a test.

What happens if the person does not work through it?

The process is not fully worked out. The module would be part of the time that they spend with their adviser, who would help them through the process, who will have identified their needs and who would, I imagine, continue that conversation with them.

It will be a condition that the individual is required to comply with what the trustee asks them to do, which would be to complete the programme of education. They would be encouraged to complete the programme because to do otherwise could be linked to non-co-operation in their bankruptcy.

It is also important to say that the module will not be mandatory for everyone in bankruptcy. It will specifically for people who have been bankrupt before or who have been in a protected trust deed or a DAS before. It will not be for every single person who comes through insolvency, but will be used where we identify a person in repeat bankruptcy who might therefore have greater need of assistance.

I will take very brief supplementary questions from Margaret McDougall and Dennis Robertson, and then we need to end the session.

Who is expected to provide the education? I spoke to money advisers on Monday and they did not know who would be asked, but they expected that it may well fall to them and to the likes of citizens advice bureaux and credit unions. Has an assessment been done to find out what the additional impact of this bill will be on money advisers and the voluntary sector that provides advice services to clients?

We have worked closely with the money advice sector to develop the national standard and the module, so that the advice sector will use it in the future. We envisage that, as part of their ordinary engagement with their clients, the money advisers will facilitate the availability of the programme of education, which may be delivered online or through other means. We do not envisage it taking up much more of the money adviser’s time as they will already see and have a relationship with a client.

There is already a huge pressure on money advisers and citizens advice bureaux. This programme will add to that pressure. We heard that people cannot get through on the telephone when they try to get in touch with money advisers because they are so busy and that there are queues out the doors of citizens advice bureaux because of other issues in communities. How will they cope with all this additional work with no more resources?

We do not think that the measure adds a new burden on the advice sector, as we believe that the relevant group of clients will already be known to the money advisers, so it will not increase their work. However, I understand your point and we can look at the wider role of organisations such as credit unions in building people’s financial capability.

It is useful to remember that, in the consultation, there was significant support for financial education to be part of the process. Respondents clearly suggested that organisations such as local authorities and money advice professionals are ideal to deliver such a service. That is the reason why we have taken this approach.

You have partially answered my question in saying that the process will not be mandatory for everyone. I am sure that you see the process as habilitative, but will it be individualised? Will the training programme be based on individual need, or do you foresee a set programme being followed?

At this stage, we see it being a set programme with a module being developed. There might be more than one module, so there could be scope to cater for different situations. At this stage, the first step is to develop the national standard, which will set out the principles and the key things that the programme of education will cover.

As the convener said, there does not appear to be any sanction, but do you envisage there being one? You said that not completing the programme would potentially be breaking a contract between the individual and the trustee.

I guess that the ultimate sanction is that the person’s discharge could be delayed if they do not comply with what their trustee asks. Their co-operation is needed to achieve their discharge.

We have run a little over time, but you will appreciate that we had a lot of ground to cover. We are grateful to all the witnesses for coming to help us with our scrutiny of the bill. I am sure that we will engage further with you in the coming weeks.

I suspend the meeting briefly to allow a changeover of witnesses.

11:06 Meeting suspended.

11:11 On resuming—