Subordinate Legislation
Protected Trust Deeds (Scotland) Regulations 2013 [Draft]
I reconvene the meeting for item 2, which is evidence on the draft Protected Trust Deeds (Scotland) Regulations 2013 from Fergus Ewing, the Scottish Government Minister for Energy, Enterprise and Tourism. He is joined by Chris Boyland, head of strategic reform, and Claire Orr, executive director of policy and compliance, who are both from the Accountant in Bankruptcy’s office; and by Graham Fisher, who is from the Scottish Government’s legal directorate. I welcome you all.
Before we take evidence from the minister, I have something to read out. ICAS has pointed out that there is an error in the text supplied to the committee. It relates to the key statistics in annex B to the paper that members have in front of them.
Under the third sub-heading, “PTDs Discharged—Trustee Fees”, the second bullet point states:
“These figures are based on the actual fee as taken from the Form 7 received by AiB.”
The fourth bullet point states:
“The estimated fee, as provided by the Trustee in Form 3 when the PTD is registered, is often different from the actual fee charged, as provided in the Form 7, when the PTD is discharged.”
However, neither form 3 nor form 7 give details of a trustee’s fee; they give only administration expenses. Although those would include trustees’ fees, they also include the cost of realisation, statutory fees and other expenses of a protected trust deed, which are payable to parties other than the trustee. The statistics should therefore refer throughout to administration expenses, which are quite different in scope from trustees’ fees.
I thank ICAS for pointing that out, and I hope that that is clear to everybody on the committee.
We turn to scrutiny of the draft regulations. I invite the minister to say something by way of introduction.
12:00
Thank you, convener.
The regulations will deliver a number of benefits. First, they will improve transparency. Secondly, they will ensure that fact-finding fees are not paid ahead of creditors’ dividends. Thirdly, they will support debtors who can pay to pay, by making the comparison with the debt arrangement scheme much clearer. In one case on the AIB’s system, the debtor repaid £3,980.52 over and above what they owed—they could have repaid their whole debt nearly twice as quickly if they had gone into the DAS. I am sure that we would all agree that we want the right vehicle to be used for debtors who want to pay their debts in full rather than go into a debt relief scheme. The regulations will also have a positive impact on dividends overall. Perhaps most important, in some cases, they will end the practice of some trustees taking contributions from a debtor’s benefits income.
The Scottish Government has had concerns for some time about the transparency of protected trust deeds and the way that the high costs of fees and outlays can sometimes swallow up any return to creditors. I think that that point was made a moment ago in the convener’s errata. Those concerns have been highlighted by organisations such as credit unions, and I note and very much welcome the support of credit unions across the board for the changes that we are introducing.
It surely cannot be right that more than a third of protected trust deeds will pay no dividend whatever. That is not what trust deeds were for. It surely cannot be right that some firms have increased administration costs by more than 25 per cent over the lifetime of a case, and that more than half the gross receipts ingathered in some protected trust deeds are spent on costs. However, that is what is happening at the moment.
I am pleased to say that we are doing something about the situation. Following extensive consultation with stakeholders, we have listened to views and have developed a package of proposals that I believe provide a balance between the rights and needs of all parties concerned with trust deeds. In the light of stakeholder concerns about the introduction of a minimum dividend for protected trust deeds, we have decided not to proceed with that measure at this time, but we will keep the position under review in the event that the proposed changes do not have the impact that we expect.
I turn to the measures that are being introduced. We are changing the way in which insolvency practitioners can levy their fees for PTDs. They will no longer be able to charge an hourly rate. Instead, they will charge a single, fixed, up-front fee, augmented by a percentage of funds ingathered. That means that insolvency practitioners will now have more of an interest in the success of the trust deed.
We are improving transparency by requiring that creditors be notified of the level of fees that the trustee will charge before they are asked to agree to the protection of the trust deed. Protection of the trust deed means that diligence cannot be carried out by creditors on the debtor—thus providing protection to the debtor as a sine qua non of the protected trust deed.
Creditors will be asked to approve any increase to the trustee’s fixed fee and an annual update on the performance of the trust deed. Where the expected dividend has reduced by 20 per cent or more, trustees will now be required to provide creditors with details of the options available to them.
We are excluding outlays that were incurred prior to the date when the trust deed was granted, such as fact-finding fees from the PTD itself. Such fees, which can be quite substantial and have been roundly criticised in the money advice world, can no longer be charged separately and will now be treated in the same way as other debts included in the trust deed are treated, which brings trust deeds into line with practice in bankruptcy.
We are making a determined effort to tackle the lack of transparency and the rising cost of PTDs. Key stakeholders have recognised that. For example, ABCUL, the representative body for credit unions, said:
“New measures to clamp down on abuses of protected trust deeds and provide greater transparency for creditors are welcome and vital to make the process fairer.”
PTDs are an important form of debt relief, but they must be sustainable, which means that they must be transparent and offer creditors a reasonable return. That has not always been the case, but the regulations will help to ensure that it is the case in future. If not, we stand ready to make further reforms. Like ABCUL, I think that the new arrangements are welcome and vital in making the process more transparent and fairer to all. I hope that the committee shares that view.
Thank you, minister. We heard evidence from ICAS and R3, whose principal concern relates to the timing of the changes, 18 months in advance of the date on which the Bankruptcy and Debt Advice (Scotland) Bill, which the committee is considering, is expected to come into force. ICAS and R3 think that, given that during the 18-month period there will be no harmonisation between the two different tools—the protected trust deed and bankruptcy—there will be a significant increase in debtors choosing bankruptcy over protected trust deeds. Is that the Scottish Government’s view?
No, it is not. I am pleased that you asked the question, because after reading ICAS’s evidence last week I sought and obtained a meeting with ICAS and R3. I should say that I have met IP representatives previously—I think that it was earlier in the year—to consider such matters and indeed have engaged with IPs regularly. It is fair to say that I am no stranger to IPs in Scotland—
Not in a personal capacity, I hope.
My meeting with representatives of ICAS and R3 last week was extremely helpful. We had a positive discussion. ICAS and R3 were able to ventilate their concerns fully. We do not share their concerns, for three reasons. It might be helpful if I run through them, given that these are serious points. We recognise that IPs operate in a profession in which members carry out their duties in accordance with the rules and in a professional manner, and that cases of abuse, if there are any, are minor. I think that ICAS acknowledged that in communications to the committee as recently as today or yesterday. That is common ground.
However, we do not agree with ICAS for these reasons. First, in England and Wales there is a solution that is equivalent to the PTD: the individual voluntary agreement. The usual practice is for an IVA to run for five years, not three, so there are 60 monthly payments. If ICAS’s argument were correct, we would expect IVAs to have dropped in popularity, importance, prevalence, usage and uptake, but in fact the opposite has happened. IVAs have been a success, despite payments going on for two years longer than would be the case with bankruptcy.
The central tenet of ICAS’s case is that if there is a discrepancy between the periods of total payment—36 months as opposed to 48 months—debtors will automatically go for 36 months. Well, despite the period being 60 months in England, take-up of IVAs increased from 1,928 in 1990 to 49,039 in 2011. The proposition seems to be that debtors will always go for the cheapest option, but that is simply not the case. We are not saying that IVAs are identical to PTDs, but they are broadly equivalent. Therefore, there is clear evidence that a longer period of payment—and paying more—will not discourage people from choosing the option of the PTD, which is equivalent to the IVA, over bankruptcy.
Why is that? There are a number of reasons. From my glimmering recollection of operating in this field as a solicitor for many years before I was elected, I know that those reasons are very real.
First, debtors choose to enter a trust deed rather than bankruptcy because they perceive that there is less stigma. That is very important to understand. A great many people do not want to enter bankruptcy: they do not want to say, “I am a bankrupt.” Whether people are right or wrong about that perception, we feel that the idea that there is that stigma is wrong and that it is something that we should try to remove, because many people who enter bankruptcy do so through no fault of their own as a result of circumstances in their lives such as redundancy, bereavement and so on. There should be no broad-brush generalisation that all people who are bankrupt are rogues, as that is just not the case, and we would therefore like to tackle that stigma.
Be that as it may, there is still a view out there that there is a great stigma attached to bankruptcy. Many people who believe that they can make a substantial contribution and want to give their creditors something back—even if they perhaps cannot pay all their debt—want protected trust deeds because the stigma is not as great as that which is associated with bankruptcy.
There are other reasons, which may be lesser, although they may be more important in some cases. There is a fee of £200 to enter bankruptcy, but there is no fee for entering a PTD, so there is an immediate financial cost for bankruptcy that is not attached to PTDs.
Some debtors find—this can be very important for some people—that their terms and conditions of employment do not allow them to continue in their job when they are an undischarged bankrupt. If someone cannot get a job or risks losing their job if they enter bankruptcy, they plainly have a very strong interest in PTDs as a possible means of avoiding such a cataclysmic and disastrous consequence in their life. That affects a minority of people, admittedly, but it is the case for a few.
The much wider argument is that a lot of people in Scotland want to pay their debts in full—they do not want to take the easy or cheap option. They do not want to get off with it all; they want, through a sense of moral probity or of duty to pay back creditors, to pay their debts in full, and we want to encourage that.
If ICAS is correct that people would just choose the cheapest option, nobody would pay off their debts—they would all just enter PTDs or, depending on their choice, sequestration. That is not the case, and I am delighted that the numbers of those who are going into the DAS are rising, thanks in part—I think—to the changes that have been made during my period of stewardship of this area of responsibility. That is good news, and we want the situation to continue.
Some people who enter PTDs should be going into the DAS because they can pay their debts off in full, and we want to encourage that.
I respect the IPs’ views, and I wanted to take the time to acquaint myself with the arguments. However, having had the opportunity to do so and to reflect with my officials, I urge the committee to accept that, for the reasons that I have set out, the significant impact on the numbers of people entering PTDs as opposed to sequestration that IPs say will happen as a consequence is unlikely to occur.
Thank you for putting that on the record.
Good afternoon, minister. On the point about debtors wanting to pay their debts, a longer period may sometimes be more acceptable to them, although it will cost them more, because they feel that the payments are more affordable, whereas they might struggle with payments over a shorter period of time.
Do you agree that extending the time period—as with the IVA in England—would enable people to pay off their debt?
That view was expressed in large part by ABCUL, which believes that the PTDs should be allowed to run for at least five years relative to the debt. We received representations that suggested that the period should be equiparated with that south of the border.
After listening carefully to the views of all stakeholders, including ICAS, we thought that, in order to strike a balance between debtors and creditors, four years seemed to be the correct period. I understand that ABCUL is saying that five years might be more appropriate, while ICAS says that three years might be more appropriate. We are adopting a middle view, if you like. I understand Mr Robertson’s point, and it is a valid one.
12:15
I hope that you can clarify something. I have been led to believe that the common financial tool is a bit kinder to people who are on benefits, as it does not extract payments from them. Do you agree that, in that regard at least, the tool is superior to some of the alternatives?
Yes. We believe strongly that the common financial statement will help considerably, and it is right that we introduce it now. It might help the committee if I explain that the common financial statement arose from discussions: the need for a single common financial tool was agreed following meetings of a working group that comprised representatives of ICAS, the IPA, the free money advice sector, the banking sector, the credit union sector and the AIB.
The agreed approach was to adopt one single method of computing how much people should pay from their income. That issue has been looked at for a long time, and the desirability of having a single method is self-explanatory. One wants to avoid the inconsistencies that have arisen in the past, with some people paying vastly more than others. That has been a feature in some instances that I have seen in years past, and even of late. I am pleased to say that, in the bankruptcy reform consultation, 25 stakeholders supported the common financial statement and only four supported an alternative model.
Mr MacKenzie is quite right, in that one of the differences with the CFT is that it prevents money from being taken from people whose sole income comes from benefits. I do not think that it is right—morally, financially or in any other respect—that money should be taken from people on benefits to pay contributions in that way, and that will not happen under the CFT. I want to make clear that I am not suggesting that the problem is widespread. From memory, it is regulation 21 and not the CFT itself that specifies that that will be prevented. In other words, we have set out in law that, in Scotland, people whose sole income comes from benefits will not have some of that income predated to pay creditors.
I understand that ICAS is not happy with the CFT, or may not wish it to be introduced at present—I am not entirely certain of its position, so I hope that I am not misrepresenting its views. However, we feel strongly that the CFT is a good thing and should be introduced now. It is morally correct—incidentally, it has been supported by organisations such as the British Bankers Association, the Finance and Leasing Association, major utility companies and building societies and by other bodies. There is widespread support for it. The UK Government may follow suit and copy what we are doing in Scotland; I am not sure about that, but I hope that it does. We think that the tool is a major step forward for fairness, equity and transparency in the law of debt in Scotland.
My question is on possible conflict of interests concerning the AIB and trust deeds. Such conflicts could be avoided, but it has been suggested that a protected trust deed review board will be set up. Who will be on that board? How can we be sure that there will be no conflict of interest?
Thank you for your question. That point has been raised by ICAS and, to be fair, we want to respond to it in detail and treat the view with respect, as we have done with all the other representations. The Accountant in Bankruptcy, Rosemary Winter-Scott, is acutely aware of the need for independence and impartiality in undertaking the new functions that will arise following the implementation of the regulations and the forthcoming bankruptcy bill reforms.
I am pleased to tell the committee that the Accountant in Bankruptcy’s operational policy and compliance team—the OPC—will be charged with undertaking decision reviews and issuing directions to trustees. I mention that because the OPC is completely independent from the parts of the organisation that are directly involved in administering bankruptcy, the supervision of PTDs or managing the provider contract for the firms that act on the AIB’s behalf. The AIB has recently undertaken a reorganisation of teams to distance the OPC physically from the operational teams involved and further reinforce its independence.
In theory, it can be argued that a conflict of interest will occur but I hope that, by mentioning those operational arrangements that the Accountant in Bankruptcy is to put in place, I will persuade members that the apparent conflicts of interest will never become real ones. I am of course aware that the large accountancy firms are often themselves not unfamiliar with issues relating to conflict of interest, acting—as many of them do—for a huge number of commercial companies, many of which operate in the same sector. I hope that, as accountants recognise that it is perfectly possible to discharge conflicts of interest by making appropriate internal arrangements, so the Accountant in Bankruptcy will be able to do so.
It should be said that the Accountant in Bankruptcy has no financial interest of any sort in any of the matters, because no one working for it has any direct financial return from any of the undertakings in which they are involved.
To answer Margaret McDougall’s point, the PTD board will include a wide range of representation, which will include creditors, credit unions and IPs.
So the board will be independent from the Accountant in Bankruptcy. Will it consist of individuals who are brought in to sit on the board?
There will be a large representation on the board, which will include representation from creditors, credit unions and IPs—all appropriate stakeholders in the area. I have 100 per cent confidence in the Accountant in Bankruptcy in those matters. I do not believe that the situation will give rise to any difficulties whatever.
Claire Orr (Accountant in Bankruptcy)
Perhaps there is some confusion about the role of the PTD review board as distinct from the AIB’s powers of supervision. The AIB will conduct the powers that it has on supervision as set out in the regulations but, separate from that, the role of the review board is to aid it with consideration of further changes to PTDs and the operation of the system. That is why we are keen that it include representatives of all parties who are impacted by protected trust deeds.
How many people will be on the board? What is the proportion of independent members to AIB members?
Really only the secretariat will be from the AIB. The board will be chaired and led by the AIB, but all the members will come from sectors that are impacted by protected trust deeds.
ICAS is concerned that there is a lack of evidence that a 48-month contribution period will result in a net benefit increase to creditors. What analysis was done of the impact on creditors and, of course, debtors before the decision to settle on four years was made?
No specific analysis of the four-year period has been done. When we consulted on the changes for the bill and the regulations, we started from a default position of people going into the debt arrangement scheme and paying back for eight years if they could do so in that time. The consultation told us that there would not be general support for that but there was support for a period of six years and other years within that. Therefore, the four-year period has come from that wider discussion, and is in keeping with the principle that those people who can pay their debts should do so.
That is the first stage in the levelling of the contribution period across all the solutions so that no one solution has a perceived advantage over another in encouraging people who can pay to pay. Some of the analysis that we have of existing protected trust deeds shows that a number of them already last for longer than four years. There is already evidence of debtors paying for that length of time.
As I understand it, the IPs have argued that, because the trust deed is a voluntary arrangement between the debtor and their creditors, the creditors have a right to object to the trust deed and prevent it from becoming protected if it does not meet their particular needs. Comment was also made that the draft regulations give the AIB the power to overrule decisions in the trust deed. Does that not undermine the position of creditors?
We believe that the AIB should have powers to intervene but only when there is evidence that the trustee is not fulfilling the requirements under the legislation. The AIB would refuse to record a trust deed as having protected status only when the conditions in the regulations have not been met. That includes when the income and expenditure of the debtor are deemed to be excessive and no valid explanation has been provided by the trustee. If the CFT is used, we do not expect that situation to occur.
The AIB would also intervene when it has evidence that the debtor has not co-operated with the administration of the trust or has not met their obligations under the trust deed. We believe that the powers that will be given to the AIB could be helpful to the trustee when creditors do not agree to ask the trustee for an increase to the fixed administration fee. In those cases, the trustee can apply to the AIB for the increase to be agreed. The AIB will look at the request and, if it finds that an increase in the fee will result in a benefit to the creditor, it will agree an increase to the fee.
Although ICAS is right to raise the point about the powers of intervention, and I see ICAS’s general point, use of the powers would be occasional. I expect that it would be the exception rather than the norm and, in some cases, it might actually be of assistance to the trustee.
I want to go back to something that you said in your opening remarks about comparisons with the situation in England. Is it not the case that, in England, access to bankruptcy is much more restricted than in Scotland, and the fee is considerably higher than the £200 that is charged here?
That might well be the case; I am not an expert on the matter so I will turn to my colleagues in a minute. I just point out that, in England, there is a two-year difference in the period for contribution payments, which is a substantial difference. The key point is that, if ICAS is right and people simply go for the cheapest option, one would expect people to go to some lengths to find it, would they not? Not only has that not been the case but the number of people who are entering into IVAs has increased massively, so the figures clearly contradict the proposition that people will seek the cheapest option that involves their paying least to their creditors and making minimum contributions for the shortest period of time. The evidence from down south just does not indicate that that is what happens. Also, that is not the view that has been taken by the credit union world, if I can put it that way.
We should bear it in mind that, unlike ourselves, money advisers deal with people who have debt problems every day and all day. In any event, the second set of reasons that I gave about reasons for choosing PTDs over bankruptcy are also pretty valid.
In response to your question, convener, I do not know whether my officials will have anything to add about your point that access to bankruptcy in England is not similar in nature to that in Scotland.
12:30
It is generally similar in every way, apart from the fee. The fee is higher, as you say, convener. In England, it is between £600 and £800, but I understand that the access to the arrangements is broadly similar to those that apply here.
Given that the committee has already heard evidence that the £200 fee is a barrier for many people in Scotland, I wonder whether the £600 to £800 fee in England is a more substantial barrier and whether that, more than other factors, may explain the high uptake of IVAs.
There are other things that happen at UK level. A number of organisations sometimes meet the application fee for people who apply for bankruptcy in England, so different arrangements apply that may cancel that out.
The draft regulations presuppose that the Bankruptcy and Debt Advice (Scotland) Bill will enter the statute book as it is. If any changes are made to the bill during its passage through Parliament, the regulations will have to be amended. Can you assure us that that will happen?
I expect that, as with all bills, there will be some amendment during its passage. I think it unlikely, should the committee be minded to recommend that the regulations be approved, that there would be significant amendment on the essentials, but Margaret McDougall makes a perfectly reasonable point. I can say only that, were that situation to arise, we would address it at the time. However, we believe that there are strong reasons for introducing the measures now. If we delay by 18 months, it would mean that the changes impacting on PTDs would not come in until 2019, and we want to avoid that. We want people to be clear now that money will not be taken from their benefits, which could still be the case were the regulations to be rejected today.
We want to ensure that the arrangements to move away from an hourly fee—whether it is £96 an hour or slightly higher, as some cases appear to indicate—to a fixed fee are introduced. We want to promote the further dissemination of information about the relative performance of firms that do that work, and there has already been information showing that there is considerable variance between the estimated return to creditors and the actual return to creditors, although we are still at an early stage and we will obtain further information and a fuller picture as the years go by.
The regulations will have enormous benefits, and we do not think that it is right to postpone them. That is why we have introduced them now, rather than wait 18 months before introducing them. We believe that society as a whole, debtors individually and creditors should benefit from the provisions. That is why we are moving the motion this afternoon.
If there are no further questions, we shall move to the formal debate. I remind the minister’s officials that they can no longer participate on the record, though they may speak to the minister or pass notes to him. I invite the minister to speak to and move motion S4M-07759.
I refer to the arguments that I have put, without labouring them.
I move,
That the Economy, Energy and Tourism Committee recommends that the Protected Trust Deeds (Scotland) Regulations 2013 [draft] be approved.
Motion agreed to.
We have to produce a report by 11 October, which is two days away. Do members agree to produce a short, factual report and to publish it by then?
Members indicated agreement.
Meeting closed at 12:34.