Subordinate Legislation
Debt Arrangement Scheme (Scotland) Regulations 2013 [Draft]
Item 3 is evidence taking on the draft Debt Arrangement Scheme (Scotland) Regulations 2013. I welcome Fergus Ewing, the Minister for Energy, Enterprise and Tourism, who is joined by Chris Boyland, head of strategic reform, and Claire Orr, executive director of policy and compliance, from the Accountant in Bankruptcy; and Claire Tosh, who is from the Scottish Government’s legal team. Thank you for coming.
Minister, would you like to say something by way of introduction?
Yes, thank you, convener. Good morning.
I am pleased to be here to speak to the changes in the debt arrangement scheme regulations, which will benefit the debtor by freezing the interest that they owe on their debts up to six weeks earlier than happens under the current legislation.
The date of freezing will be brought forward from the current date—which is the date of approval of the application for a DAS—to the date of the application itself. That will be a modest but significant improvement for many debtors in Scotland. A potential benefit that that change will have is that it may ameliorate the accrual of high-interest costs that, typically, are incurred under short-term loans such as payday loans and credit card debts.
The success of DAS speaks for itself. The Association of British Credit Unions Ltd welcomes its use in preference to debt relief products. It is better that, if people can pay their debts, they do pay them. The alternative is those debts simply being written off.
The number of people who access DAS continues to grow at an unprecedented rate—it rose by a further 40 per cent in 2012-13, which means that it has increased tenfold in the past six years. The number of debt payment programmes that have been approved rose from 442 in 2007-08 to 4,632 in 2012-13. That shows that this vehicle is being used, is popular, is working and should be encouraged for those for whom it is appropriate.
The need for the change speaks for itself. DAS is an adaptable solution that is designed to respond to market changes. It is clear that we need to make some adjustments—one of which I have mentioned; there are others of a more technical nature—so that we do what we can, within the limited powers that the Scottish Parliament has in this area, to help people whose debt burden might have built up since DAS was last updated in 2011, partly as a consequence of high-interest lending.
The changes speak for themselves; others have already spoken for them. I am pleased by the broad welcome that our changes have received from organisations such as Citizens Advice Scotland, which has said that our amendments
“should have a beneficial effect”
on its bureaux and its clients.
Of course, that is not the whole story. Last week, the Scottish Government introduced its Bankruptcy and Debt Advice (Scotland) Bill, which will deliver significant reform to bankruptcy legislation in Scotland and will help to deliver our vision of a financial health service to provide rehabilitation to people who are struggling under the burden of debt.
The debt arrangement scheme is not the whole story, convener, but it is an important part and is an area in which I expect to see continued growth. For example, later this summer we are going to run a further television advertising campaign for DAS, and we expect that to increase even further the number of people who will benefit from this important and successful scheme.
I know that members have a lot of questions. I remind them to keep their questions relevant to the draft regulations before us.
All of the changes are welcome. Clearly, they underpin what we would like to see in terms of debt arrangements.
Under the 2011 regulations, broad classes of people could become approved money advisers. In 2012, the Accountant in Bankruptcy recognised that the lack of access to an approved money adviser may play a part in the uneven uptake of DAS across local authority areas. Are you content with the level of qualification that the Accountant in Bankruptcy is pursuing in relation to finding acceptable money advisers? I am concerned by the fact that, according to the list of the top 10 money advice organisations in the Scottish Parliament information centre briefing, one particular organisation looks after more than one third of the debt payment programmes.
As a matter of general principle, it is important that those people who face debt problems—which usually entail difficulties in relation to work, family and health, as those issues are part of a syndrome—are made aware of the need for appropriate advice.
I would like to pay tribute to the quality of advisers that we have in the money advice world: in our citizens advice bureaux, in our local authorities and in the professional world. We are blessed with high-quality advisers.
Of course, every case is different and everybody needs to be dealt with not as a number but as a human being—one unit, one person, one family. It is important to clearly state that principle, because it is easy to forget that part of what we are doing. I think that Mr Brodie would acknowledge that.
Organisations such as StepChange, whose offices opened recently in Glasgow, provide a marvellous service for tens of thousands of people with debt problems throughout the country, as do other organisations, some of which are run on a not-for-profit basis. Of course, the difficulty is to ensure that there is a reasonable geographic spread across the country. I think that that, in part, is what Mr Brodie is referring to.
We seek to address that issue in every way that we can, working with the community to which I have referred. It has been a particular problem in the past. My officials might be able to give you a bit more information about where we stand at the moment, but I wanted to start off by setting out the principled response that we recognise that the whole system of the civilised management of debt and of finding the right and appropriate solutions—not the inappropriate solutions—rests on the reasonable availability of qualified and suitable debt advisers.
Claire Orr (Accountant in Bankruptcy)
When we made the changes to the regulations in 2011, the driver was very much about widening access to DAS through the provision of a larger group of money advisers. That was when the decision was taken to introduce the provision in the fee-charging sector, both to provide greater access across the country and to give those who are in need of advice the opportunity to choose where to go for that advice and allow people that flexibility of approach.
So they have a choice.
Yes.
The draft regulations propose that it will be possible for money advisers to become approved if they work for an organisation that is working towards accreditation. However, the organisation might not have a timescale for becoming accredited, so people might use a money adviser who is not accredited.
Can that position be firmed up in the proposals so that an organisation will have to have been accredited or that there is at least a timescale for it being accredited and that, if it does not meet that timescale, it will be removed from the list?
I have the answer, but I think that Claire Orr can probably provide more detail.
We recognise that ensuring that there is good-quality advice is extremely important, but it is also important to say that there will not be automatic approval of organisations that are working towards the national standards. The AIB will have in place a robust process to look at factors such as the timescale—Margaret McDougall referred to that—in which people intend to achieve the qualification. It will be different from automatic approval; there will be a process for considering what is appropriate. We will be happy to develop clear guidance on that.
So the issue that I raised will be addressed in the guidance.
We can make the guidance clear so that people understand what criteria will be important for us in considering approval.
I have a question on a different topic. More women seem to find themselves in debt now than was the case previously. Can anything be done to address that situation? For example, the proposed six-month payment break does not cover the full statutory maternity leave period. Could that issue be looked at?
The current provision under DAS is that the maximum payment holiday is six months. The regulations do not change that: they introduce a degree of flexibility to make it clear that the period can be shorter than six months, but the period is not extended beyond six months.
When the measures were introduced—incidentally, they were introduced in Scotland ahead of their introduction in England—they were widely supported by debt advisers and the debt advice world, because it was felt that six months is a reasonable period for a payment holiday. The measure was primarily designed—to answer Margaret McDougall’s question—for those who become redundant and perhaps need a period of up to six months to find another job and get on their feet again. That was the prime policy driver of the measures.
I believe that a witness, or someone who submitted written evidence, also referred to the length of the maternity period in relation to the payment holiday, so perhaps we can revisit that issue at another time and take evidence on it. If there was a need for further flexibility, we would need to look at the issue on a policy ground.
Ultimately, of course, the decision is based on the balance between the interests of the debtor and those of the creditor. A payment holiday is just that and should not last for ever; it is of a temporary nature and is designed to introduce flexibility and cater for life events. On that basis, a case can be made along the lines that Margaret McDougall suggested. I would be happy to consider that issue further in due course but, as I understand it, it is not part of the current regulations.
I do not know whether Claire Orr has anything to add.
I have nothing to add. What the minister said is correct.
The committee received written evidence from witnesses who suggested that it would be worth while freezing interest on debts at an earlier point in the process. I think that they were referring principally to the difficulty of the high rates of interest charged on payday loans. Does the minister feel that the Westminster Government ought to deal with that issue?
12:15
Yes. I have made it clear to my counterpart in the UK Government that we believe that there is a strong case to be considered in relation to regulation of payday loans, to limit the amount of interest that can be charged and the way that it is charged. We have made that very clear in debates and in correspondence, but unfortunately we have not been able to pursue that case successfully with the UK Government.
My understanding is that although welcome steps have been taken on investigatory work of a number of companies that may bring about action—I do not want to prejudice those investigations, but the fact that they are taking place is welcomed by everybody—the fact is that, as matters stand under the UK Government’s current course of action and in accordance with the timetable of action envisaged with the new financial authority that is being set up, it is unlikely that there could be any regulation for three years. I do not think that that is fully understood. Three years is an awful long time for people who have payday loans, and it is an awful long time for more serious problems to arise if the number of people who take out payday loans grows. That is my answer to the general point.
The specific point was whether we could have brought the date of freeze of interest rates further forward than the date of application. We were grateful to the Carrington Dean Group for that suggestion, which we considered carefully. However, we rejected it for a number of reasons that we believed to be solid.
Our research shows that, in 41 per cent of cases, debtors who intimate their intention to apply to DAS do not go on to enter a DPP. Carrington Dean suggested that we bring the date of freeze forward to the date of intimation of intention rather than the date of application. However, 59 per cent of debtors who intimate an intention to apply to DAS do not go on to enter a DPP. If a DPP was, in effect, set up with freezing, and a debtor then decided not to apply to DAS—or the DPP was not entered into for whatever reason—in theory the freeze would have to be reversed and interest and charges would have to be reapplied. That would be a complex process that may have a negative impact on the debtor, as it is possible that several weeks’ worth of fees and charges would be reapplied at once.
Therefore, although on the face of it there is a certain logic and desirability in limiting high interest accruing under payday loans or credit card debts—to take two examples—we believe that in practice it would be liable to cause even more problems, given that only 41 per cent of debtors who intimate an intention to apply to DAS take up DPPs and, indeed, that the majority of debtors who go through the situation with a debt adviser decide not to go into a DAS.
I hope that that clarifies our thinking to the committee, because I appreciate that that is a serious and obvious option.
The minister rightly noted the expected and occurring increase in DAS applications, which is to be welcomed because it shows that people are seeing DAS as an alternative to unmanageable debt and bankruptcy.
Citizens Advice Scotland says in its submission:
“We welcome the re-introduction of composition into the regulations. However, we are concerned about the length of time for a debtor to become eligible for this relief.”
The Accountant in Bankruptcy figures suggest that people will not be eligible for that relief for 12 years, and yet the average debt payment programme seems to take six years and eight months to complete.
Why are the criteria for composition set at 12 years and 70 per cent of debt, given that the average duration of a DPP is much shorter than that? Does that not mean that very few people will benefit from it?
That is a perfectly reasonable question. We pondered carefully the issue of when a debtor under a DPP should be entitled to seek a composition. A composition in the legal sense is the right of a debtor to seek to be relieved of a remaining proportion of a debt and reach a settlement on that basis.
When we asked in the consultation document what the fixed period should be, the majority of the respondents answered, “12 years”. When we asked in the consultation what the percentage of debt due to be paid before composition became available should be set at—in other words, if the total debt is £100, what percentage has to be paid before the debtor can enter into a composition—we gave the options of 50, 60 and 70 per cent. Of the respondents who answered the question, five stated that it should be 50 per cent, one stated that it should be 60 per cent and 30 stated that it should be 70 per cent, with 11 stating that it should be another amount. To answer the member’s question, we chose 70 per cent because we listened to the views in the consultation.
Once again, the issue is a balance between the interests of debtors and those of creditors. The purpose of DAS is for debtors to pay off their debts. If we were to move to a composition after two years, for example, it would not really be a debt arrangement scheme any longer; it would be a form of quasi-debt relief. As a country, we want people who can pay their debts to pay them.
A related issue is that, under the Bankruptcy and Debt Advice (Scotland) Bill, there will be a common financial tool so that the debtor will be paying the same from income, whether the debtor enters a trust deed or bankruptcy. In other words, the approach is not inconsistent as regards how much should be paid from income. There should be a common approach—that is sensible as a matter of principle.
If, at the moment, some debtors are paying a total of X pounds and entering a trust deed, for example, but almost all of that money—90 per cent, for example—could in effect be used in a DAS to go to creditors, it is sensible that that money should go to creditors under a DAS rather than the debtor going into a trust deed and suffering the consequences, as regards financial status, that that entails.
For all of those reasons, a majority of the consultation respondents supported the 12 years and the 70 per cent. For those reasons, as well as the principle that I have tried to set out, we felt that that was the way to go, albeit it is quite a long period. It is longer than the average DAS, which is much shorter than that—six and a half years.
Given that repaying debt can have such a devastating impact on families, is the minister willing to keep an eye on the situation and review it at some point in the future for those who show willing and pay off a large percentage of their debt?
We always want to respond to changing circumstances in society as a whole, but in this case we have responded to the majority view that was expressed in the consultation. Plainly, some offered a different view, but we have responded to the majority view and it seems that the tenfold growth of DAS from 442 to 4,632 indicates that it is working fairly well at the moment without composition.
Many people would say that 12 years is a long time to be paying off a debt under DAS. Perhaps Claire Orr or Chris Boyland could advise the committee—or, if we do not have the statistics at hand, we could write to the committee—as to the number of debt arrangement schemes that exceed 12 years—in other words, the number that currently might fall into the category in which composition becomes possible. We could write to the committee about that, but DAS is not designed to form a backdoor method of debt relief. It is a debt payment management tool.
In its evidence, ABCUL suggested that lenders who charge interest up front have an unfair advantage, because they will not be affected by the requirement to freeze interest when a debtor enters a debt payment programme. Has the Scottish Government considered that issue, and are there any plans to take action to address it?
The proposal is interesting and indeed is similar to policy proposals that we have already considered. Having looked into these matters in a legal sense—Claire Tosh is present this afternoon in her capacity as a solicitor for the Government—we felt that such measures reached beyond the effect of debt enforcement and a scheme such as DAS, and interfered in detail with how lenders charge for and levy interest on loans.
I also regret to say that, because of the question of competence and vires, it is not clear whether the Parliament could give effect to such a proposal; the issue might be partly reserved. Perhaps Claire Tosh can tell me whether that is the case.
Claire Tosh (Scottish Government)
That is correct.
The proposal is interesting and merits consideration but it might be outwith the Scottish Parliament’s current powers.
Is there a concern about the law of unintended consequences? For example, if we—rightly—legislate or pass regulations to protect debtors, creditors will find it harder to recover their money and will therefore be much less likely to lend. As a result, debtors will be driven into the hands of the loan sharks.
I am not aware of any evidence that what you have suggested has happened or that creditors’ lending practices have changed as a result of DAS. The figures speak for themselves. Were there any evidence, I would be surprised if it did not show that creditors saw DAS as a good thing; after all, it means that they get paid. They receive at least 90 per cent of the total sum due, albeit there is the element of freezing of interest on charges.
I appreciate that in considering this whole area one must be aware of the potential consequences of what one does. I would certainly ascribe to that sensible approach and we bear it in mind when considering all kinds of debt reform.
As members have no other questions, we move to the formal debate on motion S4M-06896. I ask the minister to speak to and move the motion.
I was pleased to have the opportunity to make an opening statement in which I briefly set out my reasons for commending these regulations to the committee and believing that they should be approved. I will therefore stand on my earlier remarks.
I move,
That the Economy, Energy and Tourism Committee recommends that the Debt Arrangement Scheme (Scotland) Regulations 2013 [draft] be approved.
Motion agreed to.
I thank the minister and his officials for their attendance. We now move into private session.
12:28
Meeting continued in private until 12:32.