Official Report 307KB pdf
I welcome everybody to the sixth meeting of the Enterprise and Culture Committee in 2006. We have received apologies from Richard Baker and Susan Deacon. I remind everybody to switch off their mobile phones.
I hope that the witnesses will not mind if I brief the committee as a Scotsman talking about the English Enterprise Act 2002—I hope that you will overlook my impertinence.
That, together with the paper that you submitted, was very helpful. I invite questions or comments from members. I suppose that one recommendation could be to track down every 20 to 40-year old male who is employed, but who does not own their own home, and who has poor communication skills. That would solve the problem.
What would we do with them?
We could elect them to Parliament.
I am glad that I am over 40 and you are under 40, Murdo.
Sadly, I am no longer under 40.
I meant to check this myself—I probably have the evidence on this somewhere—but do individual voluntary arrangements apply only in England?
They apply in England, Wales and Northern Ireland.
What is our equivalent?
Broadly speaking, our equivalent is the trust deed.
The protected trust deed?
Yes. We do not have an exact equivalent, but the protected trust deed is the nearest thing.
As there are no other questions we will move to item 2, which is still on the Bankruptcy and Diligence etc (Scotland) Bill. I welcome from south of the border a strong team of experts. I ask Mike Norris, who is the head of policy at the Insolvency Service, to introduce the team and to make a few remarks to supplement the submissions that we have received.
On behalf of myself and the other witnesses, I thank the committee for the opportunity to come up and give evidence; I hope that it will be useful to the committee.
No problem.
On my submission, the only specific measure within the Enterprise Act 2002 to which I will refer—members can examine the other figures at their leisure—is bankruptcy restrictions orders, because Mr Grier referred to the issue in his introduction. The take-up of bankruptcy restrictions orders was slow: in the first year there were only 22 orders. However, that is because misconduct could not be retrospective. The commencement of the act was on 1 April 2004. In order to get a bankruptcy restrictions order or undertaking against an individual, the misconduct had to occur after the commencement date, so there was always going to be a low initial take-up.
It would be useful if we could get at least a summary of that report.
I can let Seán Wixted have a copy.
I support and endorse all that Mike Norris has said. On the question about what is driving numbers, I certainly do not think that the provisions of the Enterprise Act 2002 on the duration of bankruptcy have had any material effect on the increase in bankruptcies, with the possible exception that one does tend to find that a number of people who in the past might have opted to go down the individual voluntary arrangement route now prefer to go down the bankruptcy route. As I said in my paper, there are a number of reasons why it might be in the interests of the debtor to do that, not the least of which is that they are susceptible to having to pay contributions out of their income for longer with a voluntary arrangement than they are with bankruptcy.
I would reiterate the points that have been made by both my colleagues. The perception of the discharge provisions and their reduction has not had a marked effect on the users of the system. I refer the committee to page 2 of my submission, which contains bullet-point headings for some of the conclusions of the bankruptcy courts survey. It was usual among respondents that they had progressed into the system through a long accumulation of personal overindebtedness, and the majority of them were consumer debtors.
I was asked by my firm—I think in 2003—to consider where bankruptcies and IVAs were going to go in England and Wales, and I famously went into print in February 2004, just before the Enterprise Act 2002 came into force, saying that the IVA was dead. However, IVAs have virtually tripled in number since then, so I have spent the past two years trying to work out where I went wrong. I have reread the article a couple of times and found that there were a couple of caveats in it, but the one thing that I misjudged entirely was the effect of what we call the IVA factories—the new firms that have come along and are advertising on daytime television, offering people ways out of their debt. Most of them were looking, first of all, to sell debt management plans and informal schemes, and they are now trying to sell the IVAs. They are driven largely by profit, as members would expect.
Those comments were helpful. We also found the submissions extremely helpful.
Broadly, in the past five years, the number of personal insolvencies has nearly doubled, as has the amount that is owed in consumer debt.
So the rates of increase are pretty well in line.
There is a correlation, although the figures vary from time to time. I think that the increase in the number of insolvencies is beginning to race ahead of the increase in debt, as there is a lagging effect. The peak insolvency rate occurs two or three years after the peak amount of debt.
There is a strong correlation between the two. Some of the modelling work of the Department of Trade and Industry's operational research unit looks retrospectively at the relationship between debt and the number of personal insolvencies; putting one graph on top of the other gives a good fit. The research unit has come to the conclusion that the insolvency graph lags by about six or seven quarters behind the debt graph, so changes in the number of insolvencies follow 18 or 21 months after changes in the amount of debt. Those figures are not published—the project was internal, but it was instructive. Pat Boyden is correct.
Given that time lag, I presume that it is too early to say whether the correlation still exists after the introduction of the Enterprise Act 2002.
I last spoke with someone about this about six months ago. The research unit project is on-going, but I got the impression that nothing has changed and that the correlation still exists. However, I cannot put my hand on my heart and say that that is definitely the case.
There seems to be universal agreement that the main driver for the number of insolvencies is the amount of debt.
There is support for that from the United States of America, where the credit card culture is similar to ours—or perhaps ours is similar to theirs. The number of insolvencies in America rocketed in the late 1990s and the early part of the present decade, but has now flattened out, as has credit card usage. In both countries, the credit card market is virtually saturated. Credit card companies try to take market share away from one another, because they cannot sell any more credit cards overall. In the US, the rate of increase in debt is beginning to flatten out—credit card spending went down for the first time ever in the last quarter of 2005. The American graph would show that, two or three years after the saturation of the market, the rate of insolvencies flattened out and has steadied at 1.6 million a year.
If one considers the history of personal insolvency in England and Wales, certainly during the period that those of us who are here have been dealing with it, it could be said that the regime has been made progressively easier. A number of acts prior to the Enterprise Act 2002 either cut down the period that somebody remained as an undischarged bankrupt, or made it easier—if one can use that term—to get a discharge from bankruptcy. I do not think that it has ever been suggested that any of that legislation, which came in from about 1976 onwards, had any effect in driving up the level of bankruptcy.
If I could just add a couple of points to what Pat Boyden said, I am not here as a publicist for PWC, but it might be worth while for the committee to get hold of a publication called "Precious Plastic" that PWC produces every year, which indicates the growth of credit. It is a short but instructional document.
There is a lot to pursue in what you have said.
The witnesses have covered some of the ground in my questions. I have two general questions. The bill has been presented to us as a way to encourage a more entrepreneurial culture. First, in the light of that, to what extent has the 2002 act achieved its aim of encouraging a more entrepreneurial culture? Is there is any evidence for that? Secondly—to touch on comments that were made a few moments ago—would you, with the benefit of hindsight, pass the 2002 act again? If not, what changes would you make to it?
What would you call it?
We will not tell Alan Johnson your answer.
I have a particular interest in individual voluntary arrangements—which you do not have in Scotland, so my answer to your question will be totally irrelevant to you—so there is one big change that I would make.
We have something called protected trust deeds, which are perhaps not too dissimilar.
I do not know enough about them to answer that one. I wish that when the 2002 act was introduced, it had been made possible for people who were discharged from bankruptcy to promote IVAs. That is not possible at present. My colleagues may disagree, but in my view that would have helped many people to deal with their financial affairs. In England, a large number of old bankruptcies from the previous great surge in the late 1980s and 1990s, to which I referred, are being resurrected because suddenly the debtor's house, which was in negative equity, has substantial positive equity. The same may be happening in Scotland. A number of debtors, who were discharged many years ago, would be assisted if they could enter into IVAs but they cannot. I would have liked that change to be made.
Having had a chance to think about the issue, I would like to answer the questions that have been put. The first question, which was about levels of entrepreneurship, is similar to the question about stigma. The legislation has been in force for only 23 months—just under two years—and it is wrong to expect a change to have taken place in such a short time. If there is to be change, it will not happen that quickly. The global entrepreneurship monitor, which was published about a month ago by the Small Business Service, indicated that the level of entrepreneurial activity in the United Kingdom is flat and has not changed from 2005. The honest answer to the question is that, at the moment, the legislation appears to have had no effect. Business start-ups are still on an upward path, but it would be wrong to place the credit for that with the Enterprise Act 2002.
In paragraph 7 of my submission, I make a similar point. Because the reduction in the discharge period was included in the Enterprise Act 2002, the perception was created that it would be much easier for individuals to pass through the new regime. In fact, if BROs and bankruptcy restrictions undertakings are taken as a whole, the system is not particularly user friendly. The 2002 act is a balanced piece of legislation that has stigmatising effects as well as rehabilitative aspects. It is unfortunate that the provision for the reduction was not made in an insolvency act 2003, rather than the 2002 act. That might have created the perception of a more balanced regime. The point does not apply to the bill, which amends the Bankruptcy (Scotland) Act 1985.
To be honest, making the provisions part of an act on enterprise caused problems, because bankruptcy and enterprise do not sit well together. In retrospect, the 2002 act was probably the wrong vehicle through which to make the changes, but such are the stresses on parliamentary time south of the border that we must make the most of our opportunities.
My answer to the second question is that I would make two changes. I would not bother with having early discharge—discharge in less than 12 months. As members probably know, discharge can happen from the moment that the official receiver reports that there is nothing untoward in a bankruptcy. The average time to discharge people from bankruptcy in England is six and a half to seven months. I would have stuck with a straight 12 months, because early discharge does not make much difference.
The average time for early discharge is seven months, but that is not the overall average time.
Secondly, I would not have made a bankruptcy restrictions order just a punitive measure. I would have tried to keep an option open for creditors to obtain something, so I would have had the after-acquired asset provisions—I do not know whether members understand them. If assets are acquired before bankruptcy is discharged, they can be claimed in the bankruptcy. However, if someone wins the lottery the day after they are discharged, the money is theirs to keep.
Thank you for your interesting presentations, gentlemen. You all made more or less the same comments and, as we reached the last speaker, I wondered whether you thought that we should pass the bill at all. What is the advantage of legislation such as the bill?
Let us return to the question of credit. I am harking back a little, but the Cork report, which was published in 1982 and led to the Insolvency Act reforms, contains a phrase that I often use in presentations, because it is so apt. The report says:
I echo those comments. In general terms, in our regime the IVA is the facility that forms part of the rescue and rehabilitation process. That is what people who are in debt use if they have a business that they want to continue and can probably make a go of. I seriously doubt whether the changes that have been made in England and Wales, or the proposals to change bankruptcy law in Scotland, will do an awful lot to encourage entrepreneurship.
Do you think that the bill could have a detrimental effect?
I would not have thought so.
Mr Boyden, I think that you made a comment about insolvency practitioners who say, "My recovery rate will be a penny in the pound and by the way, that's my fee, so you'll get nothing." Could you expand on that? I would be concerned if all the money that was recovered went into the hands of insolvency practitioners. I do not suggest that such people should not make money; of course they should. However, the creditors are also important.
The vast majority of bankruptcies south of the border result in no return to creditors. That work is largely done by the Insolvency Service and it is right that there should be a safety net for people who cannot afford to pay. However, the Executive's consultation document on the reform of protected trust deeds notes that some 23 per cent of deeds do not offer a dividend to creditors. Protected trust deeds are supposed to offer a deal to creditors, but not much of a deal is offered in such circumstances and one wonders what the purpose of a deed is, other than to pay money to an insolvency practitioner. I am an insolvency practitioner and perhaps I am constructing an argument against my profession, but in my view such cases should be dealt with through bankruptcies and sequestrations. The process is brought into disrepute if it is regarded simply as a means of passing money from someone who is impoverished to a professional who does nothing for the creditors.
I sit on the officials group on overindebtedness and can confirm that those bodies do occasionally talk to one another.
For the record, the DCA is the Department for Constitutional Affairs.
My final question is about debtors having to pay part of the court costs when applying for bankruptcy. Is that fair and reasonable and, if it is, what should the level of payment be?
A number of respondents to the survey mentioned that the application fee was a bar to their entry into the bankruptcy system and some said that they had to borrow the money to pay it from their relatives or from other agencies. Mike Norris disagrees with me on the contention that the fee is a necessary barrier to prevent overuse of the system. It certainly affects some people's entry into the system, so it should be considered to be a barrier.
I sense a little conflict.
There is not much conflict. The requirement to pay part of the costs is not used as a barrier to entry. In England and Wales, we have made a policy decision that it is only right that part of the cost of administering a bankruptcy should be met by the debtor. The payment amounts to only a small part of the total cost of administering a standard bankruptcy, which is roughly £2,000 south of the border. The vast majority of that sum is met by a fee that is paid by creditors in cases in which there are assets. There is an element of cross-case subsidy of the secretary of state's fee. I could explain that, but it would take quite a long time to do so.
The committee is acutely aware that the bill will not do anything for people who have no income and no assets and that another way of dealing will them will have to be found.
I was struck by the concept of
My evidence of irresponsible lending practices is only anecdotal. Part of the research that Mike Norris has agreed to fund will examine the credit environment. Comparative work that has been done in Canada suggests that overzealous lending activity leads to an increase in usage of the bankruptcy system, but I do not yet have any factual evidence to support the contention that that is what is happening in England and Wales.
Professor Michelle White has done research on the subject in the United States, where there are 40-odd slightly different regimes working closely next to each other. Comparative work is extremely useful in the States. A study was conducted that considered the severity of the various regimes and the number of bankruptcies that they resulted in. One would imagine intuitively that the more lax the regime, the higher the number of bankruptcies it would lead to, but the opposite was found to be true. In states in which there was a severe regime, there were more bankruptcies. The researchers concluded that the lending industry uses a severe regime as a backstop for lazy lending decisions. If a more lax regime was employed, there would be no backstop and the lending industry would have to put more resources into making sensible lending decisions.
Yes, but I will speak in broad terms, as I do not have the exact information to hand. Over the past couple of years, the percentage of credit card write-off that was due to bad debt has risen from about 3.5 per cent to 4.5 per cent of the total lending that is written off. At the risk of incurring Mike Norris's wrath again over my use of US statistics, I point out that the rate in that country is about 6.5 per cent. There has been an increase over here, but that write-off includes fraud. That said, as was reported this morning, fraud on credit cards has fallen recently.
I think that John Tribe mentioned financial education. Has that led to a move towards better education?
Mike Norris can speak more authoritatively on the subject. Currently, the Financial Services Authority has a new project by which debt education is cross-fertilised throughout the national curriculum. In America, the recent movement that Professor Gross reported to Mike Norris is that the growth of debtor education has, more likely than not, created a system from which other practitioners—not the debtors—can benefit.
What a good idea.
Debtor education is very big in the USA, as it is in Canada.
But that education is post-bankruptcy.
Yes. I was just about to say that the education is being provided post-bankruptcy. That said, debtor education in the States is now being provided pre and post-bankruptcy. However, many people are sceptical about the use of debtor education, especially post-bankruptcy. When education is offered as part of the process, it seems to become merely something else that a debtor has to do—they have to do their two hours of financial counselling.
Professor Donna McKenzie Skene at the University of Aberdeen has advocated that it might be appropriate to have debtor education as a condition of discharge. That was in an article in the Journal of Business Law, which compares the Enterprise Act 2002 with the bill.
I am interested in the concept of a two-tier system of bankruptcy that has been suggested. There is a big difference between consumer debt and business debt. The cost implications of consumer debt can be borne by the credit card companies, who can raise their interest rates and put the costs back on all of us. However, in business, when there is a debt, there is a creditor, so bankruptcy can have a knock-on effect on other businesses. I am interested in how a two-tier system could be incorporated in the bill.
Given my earlier conclusions and discussions with Mike Norris, I do not believe that a two-tier approach would be workable, because of the issues with identifying what is consumer debt and what is business debt. Mike Norris gave the example of a plumber—how would we identify the debt that arose from his plumbing activities and the debt that arose from his consumer activities?
Most business bankruptcies involve a considerable element of consumer debt, so drafting two separate schemes would have enormous practical difficulties. I am sorry if I am repeating myself, but I return to the introduction of IVAs south of the border in 1996. The measure was intended to be a means of dealing with insolvent businesses—that was never the exclusive purpose, but that was the primary aim or philosophy.
The consumer debtor had not really come on to the radar at the time.
That is right. Consumer debtors only recently latched on to IVAs in a big way.
It is fair to say that that happened at the behest of practitioners, who saw IVAs as an opportunity. I am sure that Pat Boyden would agree that there is an element of the market driving the market—the people who provide the service are actively seeking customers. That is relatively new in insolvency proceedings.
In my experience, it is likely that the plumber will have paid for raw materials via a credit card or personal loan, because of the restriction of credit by traditional builders' merchants, who tend to be canny and deal with people as individuals. The plumber will be able to borrow through personal loans with preset lending requirements, using a freephone number—such credit is available for a person's business. Therefore, if a plumber has credit card debts, bank loans and personal loans and owes to a builders' merchant, it will be difficult to distinguish what the cause of failure is. In our survey of IVA debtors, we found that difficult, so we came up with a broad-brush approach—we said that certain people seemed to be consumers and others seemed to be traders. Sometimes the reason is obvious—for example, if there is a tax debt; otherwise, it is hard to distinguish.
We must bear it in mind that this is the Enterprise and Culture Committee and we are trying to encourage entrepreneurship. If the bill does not include a provision to protect the creditor business, I wonder where we are going. We do not seem to be balancing the creditor issues.
As Mike Norris said, we do not create enterprise by moulding the insolvency process. People do not think about insolvency. I suppose that, if we brought back debtors prisons, people would think twice about taking loans, which might discourage enterprise. However, most people feel that there is a way out and just carry on. Other economic circumstances, such as interest rates, encourage or discourage entrepreneurship.
In America, if someone goes bankrupt but wants to start a business soon afterwards, it is fairly easy to do that.
It is easy to do that over here, too.
It is not perceived as being easy to do that over here.
The real difficulty is the practical issue of things such as getting a bank account, but that is a separate issue. A while back, there was a move in England and Wales for banks to offer accounts to people who would otherwise struggle to get one. I think that the Nationwide Flexaccount was one of those. I am not positive about this, but I think that the Nationwide has withdrawn that facility because none of the other banks joined in and it felt that it was all on its own, taking all the bad risk. However, it is that sort of thing, rather than the safety net, that will encourage people to go into business. There is a safety net and we are tinkering with it and tightening the ropes and corners.
Looking at the issue broadly, I believe that the best way for the insolvency regime to assist the entrepreneur culture is to have rescue remedies as opposed to death remedies. Liquidation and bankruptcy are both processes of death. The other remedies—administrations and voluntary arrangements—are primarily aimed, initially, at rescuing a business. That is the part that corporate and personal insolvency regimes must play in promoting entrepreneurial concepts.
I know that the committee is running short of time, so I will be quick. I agree entirely with Stephen Lawson. The issue is ensuring that people get the most appropriate remedy, having regard not only to their position, but to that of their creditors. We should not lose sight of the fact that there are provisions in the bill that will be of real benefit to business creditors, such as the provisions for income payments agreements. It is early days, but they have been a big success in England and Wales and will put a lot more money back into the hands of creditors. Bankruptcy restriction orders will also be beneficial, if creditors use the information with which they will be provided.
I have a couple of quick questions to finish with. First, to return to the US experience, is there any benefit in our copying the US and going down the chapter 7 and chapter 13 routes? It seems to me, having lived and worked in the US, that many businesses there that survive by going down those routes would not survive in this country under the old regime or the proposed one. My second question also concerns the US. I believe that the US has changed its legislation back and extended the period before a bankrupt can be discharged because it was thought that the shorter period was not working. I believe that Australia has done the same. Can I have your comments on that?
I will take the second point first. I think that Australia has gone back to a three-year discharge from a six-month discharge, but I might be wrong about that. Australia's regime is a strange one to look at. Australia tends to indulge in a lot of knee-jerk legislation. High-profile things happen, for example—
We are definitely not guilty of that.
I am being unfair to my Australian counterparts, but changing bankruptcy regimes on the basis of a few high-profile barrister failures, which is what happened, does not seem to me to be a sensible way to legislate. The United States has changed its regime, but the change is not so much around the discharge period. The US has introduced the idea of trying to force people into the chapter 13 route so that they cannot hide behind the chapter 7 process, which perhaps allows them to divest their assets, go into the process with no assets and keep their income. The US has put in place a means test that all chapter 7 debtors must pass, which is done around median incomes in a state. If someone falls above that median income, they are compelled to go into a chapter 13 bankruptcy. That is the main change in the US regime. I think that Pat Boyden can confirm that what I have said is accurate.
Yes. In order to get a discharge from the chapter 7 or chapter 13 processes, I think that someone must have financial counselling as well. That is fine.
My short answer to your first question, convener, would be no.
Do we have an equivalent to that here?
No. In England and Wales, our choices are bankruptcy and IVA, or an informal route.
Should we have such an equivalent?
I would argue that we do have an equivalent in the form of the IVA. The big benefit of an IVA for a debtor is its flexibility.
For a businessman—an individual who has cash flow problems or whatever, but who runs a reasonable business, which could be profitable if it was not for the burden of debt—an IVA offers a good solution. The only problem is that it is very much subject to creditors' requirements.
A 75 per cent vote is required to approve an IVA. There is some suggestion that that might be reduced. I hope that it will be—I think that it ought to be. Whether or not that will have any great effect in facilitating more IVAs being granted for businesspeople, I do not know.
Later, we will be considering a report from our Finance Committee, whose responsibility it is to consider the financial memorandum that accompanies the Bankruptcy and Diligence etc (Scotland) Bill. One of that committee's major concerns relates to the cost estimates of the Accountant in Bankruptcy. What budget is available to you, Mike? How many staff do you have and how many bankruptcies do you deal with in a year?
Pat Boyden is more au fait with bankruptcy numbers than I am.
We dealt with about 46,000 bankruptcies in 2005.
As well as those 46,000 bankruptcies a year, we also deal with about 7,000 or 8,000 compulsory liquidations of companies that are wound up by the courts. We have about 2,100 staff, of whom around 1,600 work in our operational arm, in our network of official receivers' offices, of which we have 30 to 35 around the country.
What is the total amount that you get from central Government to fund your organisation?
The total amount from central Government is about £40 million to £45 million. We probably get an equivalent amount back from creditors through the various fees that we charge, such as the registration fee for IVAs.
So your overall turnover is about £90 million.
It might be creeping up to about £100 million now. It is something of that order.
I hope that you never go bankrupt. Thank you very much. Your written and oral evidence has given us a lot of food for thought and was very well presented. We might approach you again informally for follow-up information if that is okay.
Yes. I hope that we have been helpful and I am sure that we are all happy to do whatever we can to assist you in your future deliberations.
That is great. Thank you.
That is okay.
I invite you to say a few words, before we ask you questions.
Most of what I have to say is in our paper. Rather than focus on the detail of the bill, we have considered it from a policy perspective. We have considered whether bankruptcy legislation acts as a constraint on the growth of businesses; the degree to which it acts as a constraint on entrepreneurship, particularly given the proposed reduction from a three-year to a one-year sequestration period; and whether Scottish companies will be put at a competitive disadvantage compared with companies in England and Wales.
You spoke about the reduction in the recovery period to one year and the perception of creditor businesses. Can you say more about whether that reduction will make life more difficult for creditor businesses? That perhaps goes back to the point that Shiona Baird made.
I echo the comments of one of the previous witnesses. Business recovery relates to recovery mechanisms for businesses that are struggling rather than bankruptcy issues for companies. There is no differentiation between the circumstances of individual entrepreneurs and those of businesses.
But perhaps a perception that a regime is being introduced that would guarantee creditor businesses a slightly better return would be helpful.
Almost anything that improves such perceptions on the part of business is likely to help.
In your submission you raise the issue of the competitive disadvantage that could be caused to business in Scotland if there is not parity with the system that operates in England and Wales to deal with bankruptcy. Is not the issue the need not only to address the potential disadvantage but to give business in Scotland a competitive advantage? If so, how can we ensure that that happens?
I agree. Rather than create disadvantage, we should create advantages. Most of the issues in trying to promote entrepreneurship relate to access to finance and the need to address some of the perceptions. Some of the concerns about access to finance for business start-ups are based on the perception that raising finance for business is more difficult than it is. It is about creating an atmosphere that enables people to think that it has become easier for them to raise finance for their business.
Can much be done in this piece of legislation to give Scottish business an advantage?
Probably not, given that bankruptcy legislation does not place much emphasis on either stimulating or discouraging entrepreneurship. How it is presented might affect perceptions about the overall business climate for entrepreneurship in Scotland.
Does a bit more work need to be done to help someone to access finance after they have gone through bankruptcy and want to do something as simple as open up a bank account?
Yes. Help could be given to do the things that help people to get back into business. Addressing some of the barriers that were mentioned earlier, such as getting access to bank credit again, would be particularly useful.
In your submission, you say that you do not think that the bill will have much of an impact on business growth in Scotland. You say that, if anything, it might have a small impact in the short to medium term, but you go on to say that it might have an impact on entrepreneurship in the long term. In what way will it have such an effect?
Our experiences of stimulating entrepreneurship in Scotland in the past 15 years suggest that the process is very much a cumulative one. A positive change in the legislation might add to the positive perceptions. Over the past 15 years, there have been significant shifts in attitudes towards entrepreneurship in Scotland. When we first researched the issue in the early 1990s, there was a significant gap between Scotland and the rest of the United Kingdom. However, the recent global entrepreneurship monitor report shows that that gap has all but disappeared. The kinds of regulatory changes that we are discussing can add to that process and build momentum, which will mean that the cumulative process that has been evident in this area over the past 10 years or so will continue.
Is there any evidence on the impact of business bankruptcies on creditor businesses? I am quite concerned that the balance is not even.
I am not aware of any evidence in that regard.
Do you think that any work has been done in that area?
I am sure that work has been done in the academic field, but I am not aware of it.
Thanks for your oral and written evidence, Brian.
Meeting suspended.
On resuming—
I welcome Allan Wilson, the Deputy Minister for Enterprise and Lifelong Learning, and his officials, who make up our third panel of witnesses on the Bankruptcy and Diligence etc (Scotland) Bill today. Minister, you may introduce your officials and make a few introductory remarks.
Convener, "a few" will be the operative term. As I mentioned during the suspension, I have around 15 pages of notes to get through. You will be pleased to learn that I have cut them down to three pages, however, as I thought that, given that the committee is engaged in stage 1 consideration of the bill, it would be helpful to allow more time for questions, which my colleagues Katrina McNeill and Andy Crawley, from the Scottish Executive Justice Department, and John St Clair, from Scottish Executive Legal and Parliamentary Services, can answer. It will be useful to explore the policy intent and you can give us the benefit of the considerable amount of evidence that you have already taken, in order that we may develop the process at stages 2 and 3.
I remind members that the minister is here to discuss part 1 of the bill. At the end of the process, he will come back to discuss the other parts of the bill. Members will be glad to know that today's meeting marks the end of our consideration of part 1 of the bill. We will move on to deal with floating charges and diligence next week—something to look forward to.
It is argued that discharge after one year will assist businesses. The issue is about cultural change and ensuring that the Government is seen to be sympathetic to entrepreneurial activity. We would argue that part of creating that culture is making it easier for businesses to start up again—to enable them to take on the slings and arrows of outrageous fortune, so to speak, and have another go.
I want to pursue that because we have heard a lot of evidence to the effect that the bill will not do much for entrepreneurship.
Minister, I understand that you are saying that you would like the legislation to encourage failed entrepreneurs to go on to start up another business. However, one of the policy intentions of the bill that is expressed in the policy memorandum is that it should increase entrepreneurship. It is still not clear to me how exactly the bill will do that.
The cultural change that underpins that issue has been generally welcomed by business organisations, which agree that people should be encouraged to try again. The change to a one-year discharge period gives people an opportunity to move on and sends a message that the Executive supports an entrepreneurial economy. In itself, that does not transform anything. We have never said that it would. However, if the Confederation of British Industry, which is a fair judge of these matters, feels that that will help to promote a more entrepreneurial culture by enabling early business restart, that is reflective of the mood that we are seeking to create.
The minister talked about a change of culture. Previously, bankruptcy carried a stigma. However, the fact that we will have bankruptcy restrictions orders only where there has been culpability means that it will be publicly recognised that the people who do not have those orders are completely innocent. Where an individual—I am talking about people, not companies—has failed through economic circumstances, they will be able to go back into the economy. That will be good for business start-ups. The change of approach will de-stigmatise the bankruptcy progress.
Minister, it would appear that one of the main ways in which you hope to promote entrepreneurship and business start-ups is by reducing the discharge period from three years to one year, which will result in a change in culture. Has the Executive any evidence of another country experiencing an increase in business start-ups and a change in culture after it has introduced a similar discharge period?
There is EC evidence that the introduction of such a period promotes a more friendly approach to entrepreneurship. Reducing the discharge period on that premise is not just a United Kingdom phenomenon; it is being adopted across the EC.
Could we have copies of that research?
Yes, we can get you information on that.
That would be useful.
I can provide some background information. The main reason why there has not been much take-up is that not enough money advisers have become approved to offer the debt arrangement scheme. It is not an open house. A person can get into the debt arrangement scheme only if they go through an approved money adviser—that is, not an ordinary money adviser but one who has an extra qualification. There are various reasons why not enough money advisers have become approved to offer the scheme, including the fact that some money advisers may not be particularly happy with the scheme. To address that concern, we are completing a thorough review of the legislation so that we can identify barriers to take-up and fix them.
That is true. Part of the review that Andy Crawley mentioned involves working with organisations in the sector to consider their low-income clients, who are potential beneficiaries. Given that the debt arrangement scheme works on the basis of surplus income, it is clear that it will not be the answer for everybody.
Is it the Executive's policy intention to move people away from protected trust deeds and towards the debt arrangement scheme? I will explain why I ask that. The committee has been provided with some evidence about the fact that the bill is largely silent on protected trust deeds. There is a suspicion that the intention is to encourage people to use the debt arrangement scheme rather than protected trust deeds. Protected trust deeds have no cost to the taxpayer, whereas the debt arrangement scheme incurs a cost to the taxpayer. Those who have given us that evidence believe that a protected trust deed can do exactly what the debt arrangement scheme would do, and at no cost to the taxpayer.
There is no policy intent in that regard. I would agree that protected trust deeds are a low-cost option for the public, which is important. However, we would also note that it is the creditor who pays the fee, as the debtor's contribution goes to pay fees, rather than the creditor. As I have come to discover, there is a great deal of vested interest, depending on which side of the fence people are on. There is no policy intent there, however.
I entirely agree with the minister about that. Our view is that if the debtor is able to enter into a debt arrangement scheme, that is better for the debtor than going bankrupt. It is better than signing a trust deed and it is better than sequestration. In that sense, we would say to debtors, "If you can do it, do it." It is better for them and better for the creditors. Sadly, however, a lot of people simply do not have the money.
I too want to pursue the issue of the debt arrangement scheme and protected trust deeds. To simplify matters, it seems that the debt arrangement scheme gives no relief from debt. Debtors are still liable for the whole debt and for any interest charges that might accrue as they pay the money off. DAS is therefore good for creditors, who get a greater benefit, but not so good for the debtor and the cost of administering it falls on the public purse. Protected trust deeds, and IVAs, to some extent, give a dividend to the creditor, who also bears quite a large part of the cost of administering them.
Some witnesses have said that there should be an element of interest relief under the debt arrangement scheme to make it more attractive to debtors. We have listened to those concerns, and our review is addressing the issue to determine whether it is right to add some element of interest relief, perhaps just freezing interest or charges. There should be clear distinctions between the different tools. There should be clear distinctions between DAS, trust deeds and sequestration, so that creditors and debtors understand what they are doing. We think that those distinctions are not clear at the moment. We are trying to look at those different tools in the round, as you have suggested, to ensure that they work well together. That is certainly one of our policy objectives.
I agree. As I have said, one size does not fit all. Part of the aim is to ensure that we have a process that does not distinguish between one or other form of debt relief, debt management, sequestration or bankruptcy, but which provides realistic, competitive options at the end of the legislative process. That would be the policy intent. We are open to suggestions and arguments on the merits and demerits of different approaches.
We will consider that in detail at stage 2.
I agree that that is an issue and I am open to arguments. When we set up the debt relief working group, we asked it to take an independent look at apparent insolvency and other barriers to debtor access to insolvency. The working group subsequently made recommendations for reforms. We are considering those recommendations and further changes will be introduced at stage 2.
Yes, I completely agree, but I will clarify one point. The issue of how much debt a person has to be in to be in bankruptcy, and the issue of apparent insolvency, are not necessarily the same. They are two different barriers and we might need to consider them separately.
I have asked the clerks to circulate a summary of the recommendations of the debt relief working group. That summary will be helpful. If members want further details of the full report, we can provide those as well.
There are implications for the definition of "small debt", for example, and I am genuinely interested in the committee's views.
Michael Matheson asked about entrepreneurship and we would all concur with the ambition of creating a more entrepreneurial culture. However, this afternoon's witnesses from south of the border highlighted a problem: there is little evidence that changes to the Enterprise Act 2002 have made any impact at all in creating an entrepreneurial culture down south.
I take the point—although access to credit is obviously a reserved issue. Perhaps credit unions or something of that ilk would be a positive way of responding to such a situation.
Mr Fraser raises a difficult question, and a fair one. We come back to the general point of considering how much difference the changes in the bill will make to entrepreneurial and business activity. As the minister said, if the bill does nothing else, it sends a message that the Executive values what the business community is doing. As the committee knows, the bill has been welcomed on that basis by the business community.
It is interesting that I was asked the question from the opposite perspective at a conference on the matter that was held last week. I was asked whether the bill will prevent people from getting into more debt, whether it will result in more personal insolvency and therefore whether it will act as a restriction on lenders who give out easy credit. That is not what we envisage and we do not believe that that will happen. People's ability to get credit will not necessarily be affected. It is interesting that the question was asked from the other perspective by those who are involved in giving money advice. They ask how we prevent people from getting into bad debt in the first place, which is something that we all want to do.
I wonder whether the answer is to find a way of distinguishing between those who become bankrupt due to business and entrepreneurial activity and those who become bankrupt due to consumer debt. Perhaps the Executive considered that and found that it was impossible.
We considered that. It sounds like a good idea, but when one tries to separate the sheep from the goats it is not easy. If we are too prescriptive, we create an incentive for people to say, "I'm a sheep, not a goat." Also, administering such a system would involve a lot of time, trouble and cost. Our view—and the view of the Insolvency Service—is that bankruptcy restrictions orders are a better and more flexible approach. In that way, we can take a policy view and weigh up the various factors, which might include the fact that someone has failed as a result of trying to run a business rather than as a result of running up a debt of £150,000 on their credit cards.
My colleagues asked about the debt arrangement scheme, so I do not intend to pursue the matter in detail, but it is clear that there are questions about the scheme and that there are possible modifications that would improve it.
We certainly considered the policy in the round. It was not as if, once the bill came in we plucked the idea of trust deed reform out of the air and said, "That sounds good. Let's get up a consultation."
It is not dissimilar to what happened in the land reform legislation, in so far as we used enabling powers to take forward our policy intent by regulation. From the committee's perspective, I would look at it more as an opportunity than a threat, as it means that members are involved in the process of determining the regulatory framework that would underpin the potential power. I would argue that that is a good position to be in.
May I make a point of clarification? I want to make it clear that the trust deed consultation is the end of a long process. The consultation that the committee has seen during the course of its scrutiny of the bill is the fourth consultation on trust deed reform. The reform should not come as a surprise to anyone who works in the sector. The point that I was making is that we would have preferred to get the matter to the committee at an earlier stage. We can say only that we will try to do better next time.
Committee members are grateful to the Executive for reducing our workload and not giving us more legislation to consider at this stage. However, the issue is that we will be asked to pass, as part of the bill, enabling legislation that allows regulations to be made on protected trust deeds, without knowing the detail of the regulations. With the benefit of hindsight, it might have been preferable had we examined the issue in the round.
I will also provide clarification on that point. There are draft regulations in the consultation, so we are providing the committee with the detail of what we plan to do.
We are open to the argument that the regulations should be subject to the affirmative procedure.
The other concern is that more should perhaps be included in the bill. We are always concerned that too much is left to subordinate legislation.
I was a member of the Subordinate Legislation Committee, which is very aware of that concern.
We could come back to you with written evidence that would chart where we are, where we want to get to and how we propose to get there.
Joined-up Government.
Are you concerned about the impact that business bankruptcies could have on creditor businesses?
It depends what you mean by "creditors". Part of the complexity of the issue is that, when you talk about creditors, you are talking about a multitude of kinds of people. We do not think that there will be any effect on the banks, but there could be a significant effect on small traders.
I was talking about small and medium-sized enterprises, which have a restricted cash flow.
The key point in this regard is that bankruptcy is just something that happens as a result of insolvency. People go bust and they need some form of debt relief. Nothing in the bill makes people more or less likely to go bust. If someone is bust and cannot pay their debts, the harm has already been suffered. If the small creditors are going to lose money, they are going to lose money. That is just a sad fact of life. The question is, how do we deal with the consequences of that? Mostly, that is to do with how we deal with the debtors. If they do not have the money, they cannot pay.
The implication behind your question might have been that the bill might lead to an increase in sequestrations or bankruptcies. Is that correct?
There might be a domino effect—
The evidence that we have suggests that that is not the case. As I said, the bill, per se, will not lead to increased pressure on creditors. That pressure is already there.
Do you have any evidence to back up what you are saying? I would be quite interested to see it.
We can provide information that has come from the UK Insolvency Service. You might have heard about that earlier today.
It is going to send us that evidence anyway.
It released the latest quarter's figures for English bankruptcies and IVAs. Those figures are going up, as are the Scottish ones. The Insolvency Service's view is that there is no evidence that the one-year discharge has led to an increase in bankruptcies. Our view is that that makes sense. The bill is about how people who have gone broke can be dealt with, not how they went broke in the first place. That has to do with economic circumstances, their behaviour and a range of other relevant factors.
Can I pursue that because—
We are running out of time. Previously, we gave a lot of time to this issue and, as we are going to get more evidence on it, there will be time to look at it again before we come to our report.
I would favour an evidence-based approach to this legislation. The evidence that I have seen leads me to the conclusion that I have outlined. An exchange of evidence is a good thing.
Absolutely.