Item 2 is to take evidence on the financial memorandum to the Home Owner and Debtor Protection (Scotland) Bill. The committee agreed to adopt level 2 scrutiny, which means that we seek written evidence from financially affected organisations and take evidence from Scottish Government officials. The written evidence that we have received has been circulated.
On behalf of the bill team, I thank the committee for giving us the chance to give evidence on the financial memorandum to the bill. We recognise that the committee is working to a tight timescale within which to get its report to the lead committee, which explains why we are here in relatively large numbers. We hope that, between us, we can answer all the issues that arise, so that there is no need for us to follow up on any issue in writing. The more that we follow issues up in writing, the more we will slow down your consideration.
The committee is very averse to questionable assumptions and looks forward to your explanations.
Members will be aware that over the Parliament's 10 years there have been many initiatives to alleviate the burden of repossession on home owners. I wonder whether Stephen Sandham can take a minute or two to tell us the difference that the bill is likely to make both when we are in and when we come out the other end of recession.
As you say, the Government has taken a number of important steps to support home owners at risk of repossession. First, its campaign to raise awareness of the support available through the national debtline doubled the number of calls. We have provided £1 million to boost capacity in citizens advice bureaux and allocated £3 million to the Scottish Legal Aid Board to boost the capacity of our own part V solicitors and advice agencies. Moreover, to help the people most at risk of repossession, the Government has increased funding for its home owners support fund—the ultimate safety net—to £35 million over two years. As a result, it has taken considerable steps, particularly in supporting various UK initiatives through the home owners mortgage support fund.
What difference will the bill make?
The bill goes further than that. First, it will make it much easier for people to lodge a defence in court. At the moment, individuals mount their own defence to buy time to sort themselves out in only 5 per cent of repossession cases, and part of the problem seems to be that the protection afforded by the Mortgage Rights (Scotland) Act 2001 is not being accessed. The bill will allow all cases to go to court, ensure rigorous court scrutiny of the steps that lenders should be taking to avoid repossessions and allow lay representation, which we think will make the court process easier for people who find it intimidating. The package represents a significant step change from existing support. However, we are unable to quantify the number of repossessions that will be saved, partly because we do not have any data on the number of repossessions in Scotland.
I have a couple of questions about costs in the financial memorandum outside the costs to Government. The Council of Mortgage Lenders disputes the contention that there will be no on-costs to borrowers in setting up the system. How do you respond to its view that lenders might have to start renegotiating service-level agreements with legal firms, the costs of which will be passed on to borrowers?
As the financial memorandum indicates, we think that in the first instance the cost for borrowers and lenders will be broadly neutral. The memorandum also makes it clear that additional costs will fall on both as a result of all cases having to go to court, but of course the flipside or converse is that, for those who wish to enter a defence, the process will be cheaper.
What about the potential for generally higher costs for all borrowers as the industry tries to cover any potential losses it might face because of the legislation?
That is not at all likely. To some degree, the bill will implement some mechanisms that are already in place in England through the pre-action protocol. We are effectively just toughening that up in Scotland by making it a legislative requirement, but the Council of Mortgage Lenders assures us that it already goes through that process in England using the protocol, so I find it hard to imagine that there should be any additional cost. Indeed, some of the discussion in the evidence that was given to the Local Government and Communities Committee confirmed that that was the view of other stakeholders as well.
The financial memorandum states that there should be no costs for local authorities. We have two submissions—one from Dundee City Council and one from Glasgow City Council. The Dundee City Council submission agrees with the financial memorandum that there should not be any financial implications for the council, but Glasgow thinks a bit differently. It says:
I will answer and then hand over to Sharon Bell, because that is more an issue for part 2 of the bill than for part 1.
We agree that, if a debtor uses the certificate route into bankruptcy and if there is a delay, that could impact on the local authority. However, the net impact would be the same for the local authority. There should no direct impact on the local authority overall, apart perhaps from a slight timing issue.
I cannot find the reference that I was looking for, but I think that I read somewhere in my papers that it was also felt that there should be no additional cost to money advice centres. I am thinking of local authorities again, and also citizens advice bureaux. I know that citizens advice bureaux are really stretched despite the additional resources that they have been given, and that the problem is not always just about money but about staffing and time resources. What assistance has been given for the dissemination of information to money advice centres, wherever they might lie, to alleviate some of that additional pressure?
The financial memorandum indicates that there will be additional costs to the advice sector, primarily in relation to the envisaged lay representation role. We estimate costs to be around £72,000 as a result of 25 per cent of cases requiring lay representation.
In the interests of on-going prudence, how does the bill interface with practices such as the mortgage to rent scheme?
The mortgage to rent scheme is one of the two schemes that are funded under the home owners support fund. Money Advice Scotland and its debt advisers interface closely with us, because the organisation is partly involved in assessing applications and eligibility for the home owners support fund. That work is dealt with in my team, and we are aware of those links and the need to ensure that that interface takes place. A review of the scheme is under way at present.
Thank you.
I draw members' attention to my entry in the register of members' interests, which will make clear that I am not, have never been and have no intention of ever being an insolvency practitioner.
In respect of part 2 of the bill?
In respect of the financial memorandum as a whole.
I can talk only about how we discussed the costs in respect of part 2 of the bill—the bankruptcy, sequestration and trust deed elements. The costs were examined as part of the debt action forum. Although the numbers and finances were not discussed in great detail at the debt action forum, we intimated to the forum's members that there would be a bill, and it would have a cost implication.
Just for clarification, what process was undertaken with regard to part 1 of the bill?
I dealt with that. We undertook a process of engaging with stakeholders during the summer, as the repossessions group report was not published until June. We tried to push matters forward to ensure that the bill was ready as quickly as possibly. During the summer, especially throughout July and August, there was discussion with stakeholders, whom we asked to scope out the costs for all parties, including lenders, borrowers and the advice sector. There were concerns that summer is never the ideal time to consult people, but we were trying to push forward the preparation of the bill as quickly as possible. We think that we got the best information that we could get from stakeholders.
Let us put to one side for a moment the concerns that have been expressed about the process in relation to parts 1 and 2 of the bill. Are you comfortable that the financial memorandum that is before us captures accurately the likely costs of the bill, in so far as you are now aware of them?
Yes.
We are very, very confident of that for part 1. We worked closely with the Scottish Court Service, for example, to ensure that the impact on the Scottish courts is manageable. I know that the committee has received evidence from the Council of Mortgage Lenders, which is concerned about that aspect of the bill. From working with the Scottish Court Service, we are clear that we have bottomed out the costs and that the impact is manageable. We departed slightly from the detail of one of the repossessions group's recommendations—although not its spirit—by moving from ordinary cause process to summary application process, as a way of minimising the impact on the courts. Jane MacDonald can comment on that point if necessary. We consulted the repossessions group on whether the proposal made sense. It agreed, so we are confident about what we have done.
My next question relates to a piece of written evidence that was touched on in the opening remarks. The Insolvency Practitioners Association has provided a series of assumptions that challenge the assumptions in the financial memorandum, albeit it only in relation to the costs in part 2, table 1. I invite you to go through the eight items in the table and to explain why you disagree with the IPA's views.
Do you want me to clarify where my costs have come from or where the IPA's costs have come from?
I would like you to clarify why you think that your cost estimates are robust and disagree with the IPA's suggestions.
The IPA and others have questioned our assumption of 500 cases for the certificate for sequestration. I refer the committee to the financial memorandum to the Bankruptcy and Diligence etc (Scotland) Bill, in which we stated clearly that the number of low-income, low-asset route sequestrations in 2008-09 would be 7,500—not 2,000, as the IPA says in its evidence. In fact, there were 9,417 LILAs in that period. We slightly underestimated the figure, but we said that it would be considerably more than the IPA suggests.
The underestimate was not slight—was it not by about 25.5 per cent?
Yes.
Given the economic situation, do you not expect the number to increase? I appreciate that you have historical figures and I understand how you can use them but, all other things being equal, do you not assume that if people were in trouble with debt in years gone past, that position will be compounded by the economic situation in the years ahead?
We believe that the low-income, low-asset route has assisted most of the people in Scotland who have met the criteria. We truly believe that only very few people still cannot access bankruptcy. We know that some people cannot access debt relief but do not wish to go down the most severe route of bankruptcy.
I accept that the Edinburgh Gazette change—whatever the rights and wrongs—will achieve a cost saving, but is it appropriate to regard fee income from certificates for sequestration or income from protected trust deed notices as savings? They are really fees and charges that are levied, rather than savings. I admit that they will reduce the net cost to the public purse, but they are not savings.
The Accountant in Bankruptcy pays £396,000 a year out of the public purse to advertise in the Edinburgh Gazette—
What about the fee income from certificates for sequestration and income from protected trust deed notices? You suggest that they are savings—are they really?
What is listed is income, which—in effect—reduces the agency's outgoings.
Who will be responsible for paying the fees and charges?
The debtor will pay the application fee and the insolvency practitioner—in effect, the debtor—will pay the fee to register the trust deed.
I presume that that money is unavailable for creditors to use for the underlying debt.
Yes.
We have covered the first three items in table 1 for part 2. Is the figure for the register of insolvencies—£72,000—a straight-line projection that is based on previous fee income?
Yes.
Some of the written evidence queries not the staff costings, but how you reached the requirement for four and a half additional staff, which drives the costing. How did you come up with a requirement for four and a half full-time equivalent members of staff?
The number of staff is based on the additional work that the Accountant in Bankruptcy will be required to undertake. One and a half members of staff will be required to deal with the increased number of applications through the certificate route. Because those cases will not necessarily stay in-house, there will be no requirement for the AIB to have any more than 1.5 additional members of staff. Two staff members will be required for registering trust deeds and one additional staff member will be required to enter the information into the register of insolvencies. In effect, the total is based on the number of applications and the time that it takes to complete tasks.
If I recall correctly—I do not have the document in front of me, so I might have this wrong—the AIB's budget, or at least the amount that the AIB takes from the Scottish Government, has reduced by £0.1 million for financial year 2010-11 from financial year 2009-10. In that context, why cannot the AIB absorb the new costs within its existing staff complement, which I think is reasonably substantial?
We have a staff complement to deal with the duties that are required of us by the Government. As members will know, our budget is provided from the SG budget. In the past two years, we have made substantial savings and we have returned moneys to the Scottish Government through those savings. The agency continues to make investments in its information technology and processes to ensure that we continue to make savings. Ministers are keen for us to become self-sufficient in the long term, so we are looking to minimise our requirement to increase staff numbers. We seek to improve our processes by functionalising our working process to make it much leaner so that it involves less downtime and achieves economies of scale.
As others have, R3 has pointed out in its written submission that a potential consequence of removing the family home from protected trust deeds—I find it difficult to say that for some reason, so let me call them PTDs—is an inadvertent increase in sequestrations because more objections will be made to going down the PTD route. What is the assumption around the likelihood of that happening? If that were to happen—regardless of whether it is thought to be likely—what would that do to the likely costs within the AIB?
The Accountant in Bankruptcy has the capacity under its contract to put work out to insolvency practitioners. Six firms throughout Scotland provide us with insolvency experience. Invariably, technical and complicated insolvency cases are put out under contract to those insolvency practitioners. In the event of a sudden rise in the number of cases, that allows the Accountant in Bankruptcy some flexibility in deciding whether to administer a case in-house or to put it out under contract. That approach reduces the requirement for the staff complement to fluctuate according to the volume of cases, but it also allows the insolvency practitioners' expertise to be used in specific cases.
Am I correct to assume that, if a case goes down the sequestration route rather than the PTD route, the total cost will be greater?
I would probably disagree with you. Trust deeds are administered only by insolvency practitioners, who have high charge-out rates. They are professionals, as we all acknowledge. However, insolvency does not have to be administered by an insolvency practitioner. Some cases are administered in-house by the Accountant in Bankruptcy. A low-income, low-asset case will cost the public purse about £125. Other cases cost many thousands of pounds, depending on their complexity.
You have not said it explicitly, but can I take it from the tone of what you have said that you would not necessarily accept the presumption that there would be an increase in sequestrations?
Yes.
Linda Fabiani alluded to the question whether local authorities will face financial costs under the bill, through their being creditors. I assume that no specific financial assistance is envisaged for local authorities, if that is the case.
No. We do not believe that there will be a cost to local authorities; we believe that the bill will be cost neutral to them. The procedural rules for the new certificate route, for example, will require the authorised persons to confirm that the debtor has no access to alternative, or less drastic, debt relief. The debtor who is unable to pay the debts will, without access to bankruptcy, remain in limbo.
Would the financial memorandum not have been better if there had been broader consultation of industry groups, some of which have been quite critical of the bill? Would you have been in a stronger position if you had had discussions with R3 and the IPA in respect of telling the committee why you agreed or disagreed on likely scenarios, and why you were confident of your case? Would not that have put you in a stronger position than you are in, in today's scenario, in which we have received pretty confrontational written statements from a group of bodies that clearly feel aggrieved and which believe that they were closed out of the consultation process?
I disagree that those people were not party to any of the discussions.
They were not part of the debt action forum, were they?
The IPA and R3 were not party to that, but the insolvency sector was represented by the Institute of Chartered Accountants of Scotland, which is the recognised regulatory body and is a normal contact for the Accountant in Bankruptcy and ministers in dealing with such issues.
I do not have the ICAS submission in front of me, which is remiss of me. As a member of ICAS, I will be in its black books. However—if I recall correctly—did not it suggest in its most recent submission that it had somehow been constrained from engaging with that element of its membership that is involved in insolvency practice?
It did give that impression in its evidence.
Was that inaccurate?
I would disagree with ICAS. Mr Ewing's evidence to the Local Government and Communities Committee last week also disputed it. It is clear that the ICAS representative went to ICAS's members and asked for specific evidence relating to the value of cars, which we also look at in the subordinate legislation. It has no financial impact on the bill. There is evidence that ICAS went to its members. At one point, when discussing matters in the forum, the minister requested that forum members keep the discussions in a closed shop for a period in order to allow open discussion and to avoid sending rumours running. It is clear in the terms of reference of the debt action forum that representatives on the forum were encouraged to seek further evidence from their members, so I dispute ICAS's claim.
I will pick up on the points that Mr Brownlee made. You have seen the submissions from W D Robb and Co and from the IPA. First, why was there not a normal 12-week consultation period? Why was it only four weeks?
The four-week consultation period was specifically for the housing sector—
The four-week consultation was on additional measures that might be taken into the bill, in relation to protection for unauthorised tenancies.
You have seen the submissions from W D Robb and Co and the IPA. Paragraph 4 of the W D Robb and Co submission states:
I will respond to that point, because it relates to part 2 of the bill.
I will pick up on another point that Mr Brownlee made. If you had consulted insolvency practitioners such as W D Robb and Co in the first instance, you could have got rid of an awful lot of the unhappiness—let us put it that way—and misinformation that seems to have been flying about.
Mr Ewing met Irene Harbottle and a number of other insolvency practitioners on 3 June and on 23 September to discuss these matters. At no time did they say at the meetings with Mr Ewing that the proposals in the bill or any of the debt action forum's proposals would have an implication for staffing or the staffing costs of their organisations.
The Insolvency Practitioners Association's submission states that the Accountant in Bankruptcy estimated that there would be 2,500 LILAs but that, in fact, there were over 9,000. Is that correct? Was there an underestimate?
It is correct that the figure was over 9,000 for 2008-09. In fact, 9,417 cases were awarded bankruptcy through the low-income, low-asset route. However, when we did our projections for the Bankruptcy and Diligence etc (Scotland) Bill in 2006, we anticipated over 5,625 LILAs in the first six months of the eventual act's being in place, and 7,500 in the following year—not 2,000, as IPA stated in its evidence. I totally dispute that we ever said that there would be only 2,000—that is a mistake.
So, if I have got it right, you said that there would be 7,000 LILAs.
I said 7,500 in—
And it was 9,000.
Yes.
So there was a slight miscalculation.
It was the best guesstimate at the time.
The IPA made its own calculations, and its estimate of the likely costs of implementing the bill appears at the end of its written submission. I assume that you will dispute those costs, so I hope that you will be able to tell me what the costs will be.
I believe that there will be a saving of £304,000, which is exactly what is in the financial memorandum.
I am glad that you are so positive.
Thank you.
Given the bill's impact on the private sector, was a regulatory impact assessment carried out?
There was no formal RIA. We took advice from our Government colleagues who have responsibility for RIAs. It was felt that, because of the inclusive process by which the proposals that the bill now represents were developed, the way to assess the impact on organisations was to work with them in the manner that the Government did through the debt action forum and the repossessions group. I do not think that an RIA would have added a great deal to the picture that we have, and there was not time to do a formal RIA adequately. We would have wished to carry out one over the standard 12-week period, but you may recall that the Government was under considerable pressure to act quickly. For that reason, we therefore did not enter a formal RIA. However, we feel that, through the stakeholder groups and the work that we have done and which continues to be done, we have a good handle on the bill's impact.
Simply saying that it was not considered sufficiently important to carry out an RIA will not assuage the concerns of people who may lose their jobs because of the bill. They did not have an opportunity to look at the bill's financial implications.
I did not say the RIA was not important; it is important for measuring the bill's impact. However, we felt that the way to do that was through the two stakeholder groups that, with the Government, drew up the proposals that are now contained in the bill. We felt that a more inclusive and interactive way of developing the policy and the bill and assessing the bill's impact was to talk directly to those who were going to be affected by the bill.
Mr Sandham, do you want to add to that?
One of the key bits of part 1 of the bill is around the pre-action requirements on lenders. The important point, of course, is that lenders should undertake those anyway. In a sense, all that the bill is doing is requiring court scrutiny of what lenders should do anyway under the Financial Services Authority regulations. The Council of Mortgage Lenders tells us that it complies with all that stuff anyway. In a sense, no additional regulatory burden should therefore be imposed on lenders.
Do officials consider it to be part of their role to advise ministers whether or not to consider the code of public consultation for proposed legislation, or are the meetings with certain groups, which it is believed were closed, sufficient?
I do not think that the groups were closed. If it helps the committee, we can send the committee the terms of reference of the debt action forum and the repossessions group. Sharon Bell alluded to the relevant statement in the terms of reference. I do not have the reference with me, but it says that it was understood that members of the group would—[Interruption.] In fact, I do have it here. It says:
I think that I heard Ms Bell say that finances were not discussed. Mr Brownlee asked a question about consultation and part 2 of the bill. I understood that discussions had taken place at the debt action forum, but that finances were not discussed.
That is correct.
We could end up going round in circles on this. If finances were not discussed and there is no public consultation, I do not know what opportunity members of the public or other interested bodies have to look at the financial memorandum before it is published. Is that consistent with the consultation code, which I presume bill teams operate under when they propose legislation?
We mentioned earlier that there was a process of consultation on the financial memorandum. I do not know whether Stephen Sandham or Sharon Bell wish to say any more about how the issues in each part of the bill were put to the test over the summer. If you wish us to respond to the committee formally, with an assessment of how the way in which we have operated is consistent with the code on consultation, we would be happy to do that.
That would be helpful—we will take you up on that.
You are aware of the tone of the questions and the concerns that have been raised. Is there a danger of creating a perception that you are rewriting the rulebook to suit your own ends? You have constrained a consultation, there has not been a regulatory impact assessment and there is a group of professionals who substantially disagree with your conclusions and who are extremely angry.
Who would like to answer that one?
Thanks, colleagues.
There are no further questions. Do you have any final comments to make?
Returning to part 1 of the bill, I remind the committee that the overarching assumptions that we made about cost were based around a projected 60 per cent increase in repossessions—and, therefore, in actions in court. That was taken from a forecast by the Council of Mortgage Lenders. The council has revised that figure down substantially; its forecast for next year is effectively a 33 per cent increase from the 2008 figure that we used as a base. There is a huge amount of reassurance in that: regarding part 1, we have very much gone to the absolute upper limit of what the costs will be, so if anything they will be substantially less. I draw that to the committee's attention.
I thank the witnesses for their evidence, expertise and attendance here today.