Finance Committee, 31 Jan 2006

Meeting date: Tuesday, January 31, 2006

Official Report 291KB pdf

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Bankruptcy and Diligence etc (Scotland) Bill: Financial Memorandum

The third item on our agenda is consideration of the financial memorandum to the Bankruptcy and Diligence etc (Scotland) Bill. We decided to adopt level 3 scrutiny of the bill, which means that we will take written and oral evidence from bodies on which costs will fall and oral evidence from Executive officials.

With us are Gillian Thompson, who is chief executive of the Accountant in Bankruptcy; Graeme Perry, who is head of the operational policy unit at the Accountant in Bankruptcy; Nicola Bennett, who is director of finance and information technology at the Scottish Court Service; and Marilyn Riddell, who is the court organisation branch at the Scottish Court Service. I thank you all for coming along and I apologise for keeping you waiting a bit longer than we intended.

Our normal practice is to give witnesses the opportunity to make short opening statements before we move on to questions. I invite each of you to make a brief opening statement.

Good afternoon and thank you for inviting us. I will boil things down to say that as the Accountant in Bankruptcy, I am appointed by Scottish ministers under section 1 of the Bankruptcy (Scotland) Act 1985, as amended. My role is to supervise in Scotland the process of sequestration, or bankruptcy as it is more commonly known, and to act as trustee in bankruptcy for creditors when appointed by the court. I am required to administer the policies of the Scottish Executive in respect of bankruptcy; maintain the register of insolvencies, which contains details of bankruptcy and corporate insolvencies; and provide general information about the process. To do all that I am entitled to employ individuals to work on my behalf. The agency currently has 92 posts in temporary accommodation in Irvine and 35 remaining in Edinburgh. The committee knows something about our relocation arrangements.

You are the only one who went.

Actually, no. To digress briefly, I had one permanent member of staff who chose to up sticks and move from east to west. There was a second, but that did not work out so he left. I am boxing and coxing at the moment. However, that was one person from a staff of 92 that we started with in 2003. Anyway, I will not start on that—I will try to be calm about it.

I also employ private sector insolvency practitioners to work on my behalf. Annually, I am appointed trustee in around 90 per cent of cases. Of those, we normally deal in house with around 25 per cent. This year, that figure is running at 27 per cent of that 90 per cent. The balance of the cases go out to insolvency practitioners.

As I said, we are in temporary accommodation in Irvine, although we are due to move to our final resting pace in Kilwinning in mid-February. I have it on good authority from my project manager that we will make that deadline. Come Valentine's day, our building at the station crossroads in Kilwinning will be open to the public.

We also administer the debt arrangement scheme, and I am the debt arrangement scheme administrator. We approve debt payment programmes, money advisers and payment distributors, and we maintain the debt arrangement scheme register. We aim to do all that efficiently and effectively. We operate independently and impartially and we always try to take account of the rights of everyone who is involved in the process.

The Scottish Court Service runs all the sheriff and supreme courts in Scotland, and our headquarters are in Edinburgh. The information that we will give today represents a small part of the operation of the courts. We deal with criminal and civil business, and bankruptcy is a part of civil business. I do not know how much information you want us to give; it is probably not as relevant as that which the Accountant in Bankruptcy gave. Is that okay for you?

That is fine; thank you. The committee agreed that individual members would ask questions. The committee is fortunate in having two accountants as members, so we have some specialist expertise on this issue.

My first question is for the Accountant in Bankruptcy. Given the bill's lack of detail, which the Institute of Chartered Accountants of Scotland's submission highlighted, will you outline the assumptions that have been made in estimating the cost to the Accountant in Bankruptcy?

Graeme Perry has been very much involved in the detail and in the number crunching, so he will speak in a minute.

The Accountant in Bankruptcy had in-depth discussions with the bill team to try to understand fully what will be required, but we are, I suggest, nowhere near to having the drilled-down detail that would allow us to talk about exactly what the posts that we have identified will actually do. We will not get to that point for some months. Graeme Perry will tell the committee about the considerable assumptions that we have had to work on.

Basically, we have been in consultation with the bill team and have had copies of the bill. We have had to go through it bit by bit to see what new work will come to the Accountant in Bankruptcy. We have also looked at any parts of the bill that will impact directly on how we administer bankruptcies.

Three areas of work will be new to the Accountant in Bankruptcy. We will be taking debtor petitions away from the courts to administer and award them directly ourselves. A bankruptcy restriction order or undertaking will be introduced. Our understanding is that it will be administered in a similar manner to the scheme in England and will be a new focus of work for the Accountant in Bankruptcy. We will also be responsible for income payment orders through the courts to enforce instalment payments of debts.

Have you discussed this with your opposite numbers in England and Wales to understand the impact that such work has had on them?

Yes, we visited those responsible for policy and implementation and we had preliminary visits to get an overview of staffing. The problem with bankruptcy restriction orders is that it is reckoned that it will take six to seven months after implementation before the orders start to take effect. The orders will affect offences that were committed only after implementation. When we visited, our counterparts in England and Wales did not have many bankruptcy restriction orders in force. However, we have gauged roughly how many staff we think that we might need to meet Scotland's demand.

The financial memorandum states that the AIB will need 34 extra staff at a cost of £457,000. That works out at less than £13,500 per annum per employee. If we allow for national insurance payments, that suggests average wage rates of as little as £10,000 per annum. How does that stack up?

I need to correct that figure. You will appreciate that our work has had a number of iterations in the process of introducing the bill, so there has been a certain time lag. Unfortunately, the figure that appears in the financial memorandum is not correct. From the iteration that we did before the introduction of the bill it looks as if there might be 25.5 staff for a cost of £457,000. I apologise for that. That means that your calculation is a bit out.

In general, we, much the same as any other casework executive agency, run our business predominantly on relatively junior members of staff who are not at the more expensive end of the range.

I understand that. Reading the submissions, I was struck by the marked difference between the attitude of public bodies to the financial memorandum and that of private sector entities, primarily the Institute of Chartered Accountants of Scotland. The institute has treated the financial memorandum almost with quiet disdain. Essentially, it says that the document is silent on four crucial topics:

"• The criteria for ‘Apparent Insolvency' which is the test by which debtors can become bankrupt

• The future role of the Trust Deed

• The Debt Arrangement Scheme which was introduced 12 months ago and has not been widely used to date

• Any new ‘no income, no asset' procedure."

Is the institute right to be concerned at the silence on those key topics?

The figures that we have provided for the financial memorandum do not take account of those issues because the Executive has not yet brought forward policies on them, apart from what is set out in the recently published draft regulations on protected trustee changes. Obviously, we will produce additional funding requirement figures as the policy is determined.

I do not know that I am in a position to comment on external bodies' views on the silence in the financial memorandum.

However, you are saying that this financial memorandum is a preliminary one that is liable to change quite dramatically.

Certainly for the AIB, the financial memorandum relates to the provisions in the bill as introduced. Anything over and above those provisions could have an additional cost and we obviously have an interest in pointing that out. Currently, we are in discussion with the Executive on the issue of protected trust deeds, for example. It would be fair to say that, like external organisations, we await the Executive's final formal view in relation to how it intends to proceed. However, the financial memorandum relates only to the provisions in the bill.

Nevertheless, the potential impact of the protected trust deeds and further clarity that might be forthcoming would produce a moving feast vis-à-vis the financial memorandum.

I can speak only for my organisation. It would be fair to say that, in the circumstances that you describe, the likelihood would be that our volume of work would increase.

Therefore, the financial memorandum is, at best, work in progress or a snapshot and is nowhere near what the final costs are liable to be.

That would be the case, assuming that the Executive produces policies such as those that you describe. I am not trying to be difficult, but I will leave my bill team colleagues to explain this to you when they come to see you next Tuesday. As far as I am concerned—wearing my practical hat because we are concerned with the delivery of the Executive's policy—I can say only that the financial memorandum and the work that we have done relate specifically to what you see in the bill.

In the context of the financial memorandum being a snapshot, to what extent have you compared notes with your opposite numbers down south in terms of a like-for-like comparison and a long-term comparison of the total costs that are manifesting themselves in England and Wales?

The situation south of the border is vastly different in terms of how we provide a service. The main area in relation to which we have talked to our opposite numbers is that of bankruptcy restriction orders, as Graeme Perry explained. We have no experience of the investigative role that exists in that regard. Beyond that, in terms of debtor petitions, for example, we had initial conversations with one of the courts to see what work it was doing.

We have a considerable amount of work yet to do in order to get a visual image of exactly what the new functions will require us to do. Obviously, we will talk to whoever we think has the right information for us. In general terms, when we deal with sequestrations at the moment, we come to informal agreements with debtors about income payments. One might imagine, therefore, that when we get down to delivering income payment undertakings and orders, they will be done on very much the same sort of basis as they are at the moment. We have talked to the Official Receivers Office in Newcastle, which is the closest to us. The office has some experience of dealing with these cases. However, it would be difficult to draw parallels on costs, because our costs are fairly well pared down.

Is there merit in having a fuller model in the financial memorandum? It could give us a clearer indication of the assumptions made and of the long-term ramifications of what will happen when the issues on which the bill is currently silent are addressed.

It will be for the Executive to consider whether that is appropriate. This committee and the Enterprise and Culture Committee might decide that they want more information. From our perspective, all I can say is that we will be ready to provide such figures if they are required.

In the long term, have you plans to meet the Institute of Chartered Accountants of Scotland, the Credit Services Association and the Society of Messengers-at-Arms and Sheriff Officers, in order to get a complete view of the implications for you and for them?

We meet ICAS regularly. I employ 60-odd insolvency practitioners in this unusual position that has arisen, so I am very interested in our relationship with ICAS, which is good. Inevitably, external bodies—if I may describe them as such—are bound to have a slightly different view from mine. I hope that my colleagues would regard us as being in the tent as opposed to outside it, if you see what I mean. When it is required, we will meet ICAS to talk about these issues.

What about the Credit Services Association and the Society of Messengers-at-Arms and Sheriff Officers?

That is for the bill team. The bill relates to messengers-at-arms in terms of the changes to diligence. I do not have a specific interest in that, although I am interested more broadly in the commission that is to be set up. The focus of my attention must remain on sequestration and the changes to our business that we will have to put in place. However, we will talk to anyone who wants to talk to us.

I turn now to the witnesses from the Scottish Court Service. What does it cost to regulate officers of court through the Society of Messengers-at-Arms and Sheriff Officers?

There is minimal cost to the Scottish Court Service. There is a slight involvement from the sheriffs principal, requiring a minimal administrative input. We are talking about a few thousand pounds at the very most.

We are talking about a new non-departmental public body costing £632,000 a year. What benefits will flow from that, especially for your own organisation?

We may be straying into policy issues. We are an executive agency and I do not know—

Let me rephrase the question. What financial benefits will accrue from having the new NDPB?

Nothing directly to us, I do not—

So it is just going to be a cost.

I want to return briefly to the witnesses from the Accountant in Bankruptcy. I understand what you say about the uncertainty over what you may be asked to do. If you step back and think of your upheaval with relocation, how can you be confident that you will be able to manage any additional role when it is not clear how big any additional role will be? On a simple level, could you physically accommodate a significant number of additional staff in your new building?

I do not mean to be facetious, but I have had to do a considerable amount of crystal-ball gazing since I took up my post in September 2002. It is not often that one is able to do a bit of patting on the back, but when we were moving towards relocation, particularly in 2003, we went through a series of processes, as you will understand, so that by the time we came to look for a building we had already done some thinking and calculations about what size we might be by 2006-07 or 2007-08. The figure that we calculated was 140—that is the figure that George Lyon gave you—so we looked for a building that would certainly accommodate 140, and the building in Kilwinning would allow us to accommodate 150 Accountant in Bankruptcy staff comfortably.

As we have already done that crystal-ball gazing, I am pretty confident that there is no question of our building being too small. In any case, one must inevitably think about different ways of working in future. For example, we must ask whether we would always want to have everyone in the building or whether some people could work from home or work part time. There are multifarious ways of dealing with that.

There is no doubt that trying to plan for the delivery of something that has not yet gone through the parliamentary process is a challenge, but is it as much of a challenge as relocating 100 per cent from one side of the country to the other? At the moment, I think that we have a good understanding of what will be required of us and we know roughly how to figure the numbers of staff, but we will have to do a considerable amount of further work. In fact, the global figure of £1.4 million that we have identified for 2006-07 in the financial memorandum may well change as we go through the process.

The Scottish Executive may choose to consider other matters; it may make other proposals and invite the Parliament to consider them. However, the length of time that it takes for the process to wend its way through Parliament must also be considered. When I was bidding for the money for start-up costs for 2006-07 and for costs rolling on beyond that, I did so under the 2004 spending review. That involved quite a bit of crystal ball gazing, except that the ball was a different shape, if you see what I mean. We have constantly to re-examine where we are and to ensure that channels of communication with the bill team are open. We also need to be mindful of how long it takes us to recruit and train staff. At the moment, it feels like a bit of a challenge.

To complete the circle, the IT costs as reported in the financial memorandum are based on £800,000 for further development of our case management system, but the cost might be less than that or it might be more. My sense at the moment is that the changes that will have to be made to the system might not turn out to be quite as complicated as we imagined, but I have not yet started the process of looking around to see who would do that development for me. It is only really when I get into that business that I will be able to say more concretely how much that will cost.

I sympathise with the difficulties that you are operating under. We have a similar difficulty, which I do not think is your fault, in scrutinising the financial memorandum to a bill for which major elements of policy have not yet been determined.

Let us suppose that policy decisions were taken such that there was no expansion in the number of staff that you use. Would that mean that you would have surplus space in your new building that you were paying a premium for, or would you be able to subdivide or sublet the building?

The way that the building was built is interesting. It was not purpose built for me; if it had been, it would not look exactly as it does. It was built in four sections and on two floors. In theory, if we were streamlining to the extent that we did not need to occupy the whole building, it would not be difficult to sublet, should the Executive choose to do that.

That was just an aside. I want to ask about the new information disclosure scheme. I understand that it is a new departure and that, inevitably, any estimate of the costs and fees must involve an element of assumption. However, can you talk us through in a bit more detail how you see the costs and revenues from the scheme operating?

The range of the costs is extraordinary. The costs of the scheme are estimated at between £193,500 and £1,935,000—potentially a 100 per cent variation.

Yes. The difficulty is that, not having any previous experience, it is difficult to estimate the volume of cases, and it is not easy to look to other jurisdictions for assistance because our system is different from those that exist elsewhere. All that we were able to do was provide the bill team with estimated costs at different levels of business.

We have set the critical point at about 50,000 applications per annum. We envisage being able to assimilate the work up to that point within the existing sheriff courts but expect that, beyond that point, we will need more staff than we can accommodate in the existing courts. We will then look for a centralised function, which triggers set-up costs, all the IT development costs and so on.

I appreciate that it is difficult for you to answer this question, but what process have you gone through in terms of the charges that you would levy for accessing information? Do you have a method for estimating the charges? How will you go about setting fees?

It would not be for the Scottish Court Service to set the fees. The fees, along with the associated policies, would be set by the Justice Department.

On that basis, you would not be able to estimate the extent to which any of the costs could be offset by fees.

They could be fully offset, but we cannot say at this moment whether they will be, as that depends on whether we go for a centralised system. That would also be a matter for the Justice Department.

A policy decision.

Yes.

The policy is meant to be full cost recovery on the civil business. That is what we try to work towards. Although we are not in a position to develop that policy, that is what we aim to deliver towards.

Does that mean that, regardless of whether the costs are £193,500 or £1.9 million, they will, potentially, be offset?

I understand that, in this particular part of the proposals, no policy decision has been made on what fee might be charged. I was trying to give you the general—

The normal policy.

Yes.

Jim Mather has a supplementary question on that point.

The Credit Services Association states that it anticipates increased costs for its members as a result of bankruptcy becoming an easier option. Do you expect an explosion in volume and, if so, has that been factored into your submission?

Are you talking about an increase in the volume of bankruptcies?

Yes. The Credit Services Association is concerned about the cost to its members if bankruptcy becomes an easier option.

Perhaps I could answer that question. I guess that the Credit Services Association assumes that the changes in the bill are likely to lead to an increase in the number of bankruptcies. My sense is that, if there is an increase, it will certainly not be of the order that has been suggested. As we speak, at the end of January, we have already had an increase in bankruptcies of about 52 per cent this year—that is without the changes in the bill. Information from the Insolvency Service is that the increase south of the border is running at about 30 per cent, which is with the legislative changes there. This is not a comment on policy, but the Insolvency Service's view is that the increase is not a result of the one-year discharge provision, but is economy driven. My perspective is that that might well be true, given that the change that has already taken place in Scotland feels like an economy-driven one.

We factored into our calculations a 25 per cent across-the-board increase in the number of bankruptcies. That was in the summer, before the bill's financial memorandum was produced. However, that figure was based on an assumption that this year's situation may be a blip. That was our initial thought, but we are now simply not sure about that. However, prior to this year, we normally factored in a 5 to 7 per cent year-on-year increase. We are not as yet entirely clear about what we are seeing this year.

That is why I asked earlier about the modelling. Clearly, the feedback from down south is that, when similar changes were introduced there, there was an explosion of bankruptcies, which is the message that we have had from the Credit Services Association. The issue is about trying to identify what element of the increase kicked in following the new legislation and what element was hard wired into the model as a result of economic causes and effects. Has any effort been made to separate out the two factors and their relative impacts?

That question probably demands a detailed response, so rather than ask the witnesses to respond to it now, I ask them to provide a written response, which would be helpful.

I am happy to do that. However, I must say that the situation south of the border is the Insolvency Service's territory. As I said, its view is that the legislative changes there have not brought forth the 30 per cent increase. However, we will investigate with Insolvency Service colleagues and get back to the committee.

I would appreciate that.

We have not asked one or two questions that we were going to ask, but we will deal with them in writing. I thank the witnesses for their evidence.