Enterprise and Culture Committee, 18 Apr 2006

Meeting date: Tuesday, April 18, 2006

Official Report 235KB pdf

---

Bankruptcy and Diligence etc (Scotland) Bill: Stage 1

Item 2 is on the Bankruptcy and Diligence etc (Scotland) Bill. I ask Nicholas Grier to advise us.

I hope that members all have the new pink papers, which should have just arrived. I shall try to talk members through my briefing note. I do not want to be too long about this, although the area of law that we are considering is rather complicated. I will try to do this reasonably intelligibly.

I start by telling the committee about diligence against earnings. I refer to the process whereby sheriff officers come to an employee's place of employment and ensure that money is taken out of the employee's wages and paid to the various creditors, to family creditors, or to the sheriff clerk, who will divide up the various sums among the creditors. The system seems to work reasonably well on the whole, although it is obviously not very popular with employees whose wages suffer the diligence. However, I have indicated in the briefing that there are some difficulties.

One difficulty is that historically it was thought that ordinary creditors should do better than family creditors, but that is no longer seen as acceptable. Under the proposals in the bill, creditors will be treated equally. The family therefore stands as good a chance of getting money from the employee as ordinary commercial creditors do.

The second difficulty is that the Debtors (Scotland) Act 1987 was not perfectly drafted. It appears that what is happening in practice is what was intended to happen, but the wording in the 1987 act does not reflect what was intended to happen. By some happy chance, people are deducting the money in the way that was intended, even though the wording of the legislation does not reflect the intention. The bill tidies up the legislation to make what happens—

Legal.

Legal, as it were, since you put it that way. I would hesitate to say that people have been acting illegally, but the legislation was not perfectly drafted.

The third improvement proposed in the bill is to ensure that more information is disclosed so that creditors, debtors and employers will have a much better idea of what is going on. Although that may incur costs in its own right, it will do no harm for people to have more idea of what money is due, to whom it is due and how much is outstanding.

That is not to say that everything has been sorted out. I highlight some remaining problems in the part of the briefing that deals with other controversial aspects of the proposals. An issue arises with the equivalent English orders, but the Executive and the Department for Constitutional Affairs have not yet worked out a procedure that creates parity with the Scottish system. Other difficulties that have yet to be worked out relate to pension schemes and student debt. Those problems will not be easy to resolve, but the idea is that they should be left until we have slightly more information.

I move on to arrestments in execution and actions of furthcoming. The phrase "action of furthcoming" is wonderful and very old. It has led to much confusion—the "furthcoming" is commonly produced on computers as "forthcoming".

With an arrestment in execution, sheriff officers go to a place where the debtor has assets—commonly money in a bank account or, in perhaps unlikely circumstances, furniture in a repository and so on—that are being held in the hands of a third party and arrest the assets. That means that the bank, the repository or whatever is not to release the assets to the original owner without the consent of the creditor, who is unlikely to give that consent. Arrestments in execution are certainly very effective. If someone has money in a bank account that is arrested, the creditor is placed in a strong position. An arrestment in execution is very inconvenient for the debtor, as it means that, in the case of the bank account, the account is frozen, or, in the case of furniture, they cannot get their furniture back.

If the creditor wants to get the money, furniture or whatever, they can do two things. They can ask the debtor to sign a mandate, which is a document that authorises the release of the furniture or money to the creditor. That is an informal process, which has been going on for a long time and is hallowed by use, but there are one or two questions about its legality. It is proposed that the rules as to its legality should be made clearer by the setting up of a statutory form of mandate. Everyone would then know where they stood.

The second step that a creditor can take, rather than have a mandate, is to go to court for a decree of furthcoming. Of course, applying to the court incurs further costs in its own right. It is sometimes necessary to have a decree of furthcoming, because otherwise the creditor will not know the result of the arrestment of any bank accounts.

The proposal is to replace the antiquated action of furthcoming with an automatic release of arrested assets to the creditor within 14 weeks, subject to certain rights that protect the debtor and the arrestee, by which I mean the bank, furniture store or whatever organisation holds the assets. The fact that the creditor will not have to go to court to secure a decree of furthcoming ought to save everyone time and money—well, I say that it will save everyone time, but that will not necessarily be the case. For example, questions have been raised about the 14-week period; after all, interest will run on the debt during that time. In that respect, the action of furthcoming is quicker than the proposed process.

Another difficulty with the current arrestment system is that the entire bank account can be frozen, which can pretty well leave the debtor penniless. The bill proposes a safety net of money—I believe that the figure of £304 has been mentioned—that will remain protected in the bank account; however, that will not apply to business bank accounts. If a business is run through a limited company or if someone holds a trading account, the safety net money will be arrestable.

Because it is not always easy to find out whether the arrestment has successfully arrested anything, new proposals in the bill require a statement to be issued within three weeks of arrestment to make it clear whether anything has been arrested. At the moment, the proposals do not impose a requirement to disclose a nil return. That might cause some difficulty, because people might not know whether anything has been done or whether the arrestment has been fully carried out. The measure should be looked at again.

Because arrestment orders and actions of furthcoming can be unintelligible—sometimes they are written in rather old-fashioned Scots—it has been suggested that such orders should take a nice, new, intelligible form. Finally, one misfortune that can befall a debtor is the double whammy of having to suffer the diligence against earnings and the arrestment of his bank account, and we need to examine whether he should be put in such an awkward position.

Subject to any comments that we might hear today, the general feeling is that arrestment can be a useful form of diligence and that diligence against earnings can be relatively successful. However, as I have pointed out, there are difficulties with execution of arrestment orders and actions of furthcoming.

One further problem that must be examined is that, if a certain amount of money is protected in an individual's bank account, some statutory bodies—known as involuntary creditors because they cannot withhold services in the same way that other creditors can—might decide simply to go to sequestration. That might or might not happen, but those bodies have said that it is certainly a possibility. I should also point out that local authorities think that the 14-week automatic release period is too long.

There is another issue worth mentioning; however, because it is covered in part 12, we have not been asked to discuss it. Following a charge, local authorities, HM Revenue and Customs and so on can obtain a summary warrant and start exercising diligence against debtors and arresting things. The bill proposes to introduce an intervening period after a charge to give the debtor a bit more time to produce some money and pay his taxes or whatever the debt might be. However, some statutory bodies have expressed concern about this extra stage, saying that debtors have been told many times that they need to pay the money.

To change the focus, perhaps I could mention the role of the banks. Banks have to deal with arrestments; it is to them that the sheriff officers will turn. They do not particularly like having to deal with them because it is inconvenient and time-consuming and they get no financial benefit. There was talk of the banks being paid some money, but the Executive has rejected that. At the moment, banks are being co-operative, but given that it costs them money to deal with arrestments and that there are more than 100,000 arrestments per year, I can understand why they might not necessarily feel so enthusiastic about the procedure in the long run.

Action groups for less advantaged people have made the point that, even if there is a safety net, if a bank account is arrested there might be difficulties with funds such as tax credits or housing and other benefits being paid into that bank account. Citizens Advice Scotland and other bodies are worried that those extra funds that are paid into bank accounts could be arrested before the benefits are used for their proper purposes. The debtor would then be in the unfortunate position of expecting money that could be used for a child's nursery care, for example, but which is arrested by the creditor. That would put everyone in a very difficult position.

I am sure that Citizens Advice Scotland will speak to this issue more eloquently than I, but it has tentatively suggested that banks should separate the money that comes in for particular purposes. For example, if tax credit or housing benefit money comes in, it should be removed and put into a separate account that will not be arrestable. The money could then be used for the purpose for which it was given. However, banks might have difficulty with that idea. First, they would have to set up the separate accounts and they are hardly likely to do that for nothing—well, they might, but I think that it would incur a cost. Secondly, a bank would normally have the right to seize whatever money is paid into an overdrawn account at the best of times. There are some difficulties with the idea, but Citizens Advice Scotland will no doubt be able to provide more information.

I have a few more issues to mention. There is a problem when a sheriff officer carries out an arrestment, because they do not necessarily find any money in the bank account. If there is no money, they might need to try again on another day. Therefore, sheriff officers might have to carry out several arrestments for one debt, which does not seem very efficient. Although the proposed provisions suggest that information is going to be made available about whether an arrestment has been successful, arrestments might have to be made day after day until some wages or something else comes in, which is not very productive. That problem has not been fully addressed.

If a debtor is smart enough, they will not keep any money in a Scottish bank anyway. It would be far more prudent to keep in it a building society because there are lots of them, and an even more astute debtor would keep it in a building society south of the border. There would then be a great deal more confusion about where their money is. A really astute debtor would not have their money in a place where it could be arrested or seized by money attachment, as we discussed the other week.

Sometimes, when a creditor does not know whether the debtor has a bank account or where it is, the banks have to suffer what is known as a fishing expedition, in which all the major Scottish banks and sometimes English banks that have places of business in Scotland are served with arrestments. Five or six arrestments could all take place at once, which is expensive for the creditor and might also be expensive for the debtor. Banks do not really like having to waste their time on such things. Although a debtor could, in theory, raise an action for wrongful arrestment of his bank account, it is unlikely that he would want to go down that path as it would be expensive; he would probably have to get legal aid, and the whole thing would take a great deal of time and trouble.

Perhaps I have presented a rather negative view. However, although arrestment is not particularly effective for the can't pays, there is no doubt that it is extremely effective for the won't pays. It might not be my place to say this, but I think that many creditors would say that arrestment is well worth retaining.

You highlighted the cross-border problems that arise when English companies have bases in Scotland. Would there be a problem if a company was French, German or American?

Wages could still be arrested. Difficulties with the English system of earnings arrestment do not seem to have been resolved and, similarly, it is not clear what would happen if someone wanted to levy a Scottish earnings arrestment in England; it could be done but it would not be easy. There would be no automatic approach whereby someone ticked a box or filled in a form; it would take more effort than one might expect.

Should the matter be resolved before the bill is passed?

The matter should be given further consideration, although it should not preclude the passing of the bill. It might simply need to be revisited.

I am not sure whether my question is for Nicholas Grier or for Rob Beattie, who will give evidence later in the meeting. I want to understand in practical and technical terms the fishing expedition to which Nicholas Grier referred. How would banks use technology to track down accounts in the circumstances that the adviser described? We all know that technology has moved on dramatically in recent years, but I am not up to speed on how the system would work.

I defer to Mr Beattie, but I imagine that it is not difficult to check whether a debtor has a bank account. However, such checks are inconvenient and are just one more thing that must be done. A certain amount of running around would be necessary just to establish that a debtor was not on the books. If many banks had to do that every day, a lot of time and money would be wasted without benefit to anyone, except perhaps the creditor, who might at least establish that the debtor did not have an account with a particular bank.

I will bring in Rob Beattie when we move on to item 3.

Nicholas Grier discusses pensions in his paper and suggests that public sector workers would be "at a considerable advantage". Is that because public sector pensions are more generous than are private sector pensions?

No. Perhaps I did not phrase that as well as I should have. My point was that public sector worker's pensions are not normally arrestable, whereas private companies' employees' pensions are.

Could we receive a short briefing on why that is the case?

I imagine that there is a historical reason, but I do not know what it is.

I would be interested in finding out the reason.

Perhaps it is a benefit of working for the Government.

Maybe.

That means that none of us can have our pensions arrested.

I am sure that the news comes as a relief to members.

It does.

We move on to item 3, for which I welcome witnesses who are here to discuss the bill. There are some familiar faces. Susan McPhee is head of social policy and public affairs at Citizens Advice Scotland; Brenda Tamburrini is from the Easterhouse citizens advice bureau; Rob Beattie—who was mentioned by Nicholas Grier—is from the Committee of Scottish Clearing Bankers; Dawson Lamont is the head of exchequer in the Highland Council; David Mair is a senior solicitor in the chief executive's department of Glasgow City Council; and Lesley Pryde is a senior revenues officer in the financial services department of Glasgow City Council.

A question was put to Rob Beattie, so I invite him to respond. How does a bank go on a fishing expedition?

The fishing exercises to which Mr Grier referred are quite a common experience for Scottish banks. When a creditor wants payment from Donald Macdonald and does not know where he has an account—if he has one—it is easy to serve four arrestments on the four Scottish banks, which give them an obligation to search every branch in Scotland to find out whether Donald Macdonald has an account with their banks.

Sometimes an arrestment specifies just a name and address. Technology allows us to search for a name and find out whether we can identify the right Donald Macdonald. We also need to check whether the name has a capital or small D and starts with Mc or Mac, for example. If an exact match is made with the name and address, it is picked up relatively quickly once the names have been entered into the computer. In the past, we have discussed with sheriff officers the prospect of serving arrestments electronically so that name searches could be undertaken more efficiently. However, concern was expressed about the law on that topic and on whether an arrestment would be properly served if it were served electronically rather than on paper. That concern is why we still receive paper arrestments most days.

If we find numerous Donald Macdonalds but we do not find an exact address match, the problem is whether we attach an account with a creditor balance that looks as though it belongs to the debtor for whom the creditor is searching. If we make a mistake, our customer will sue us for wrongfully freezing his account. Invariably, each bank's arrestment team asks the sheriff officer for further details, such as other addresses, a date of birth or other identifying information. We can search postcodes, so if the postcode on the address that we have been given is wrong, we will not find the debtor.

If we still cannot find a particular Donald Macdonald, even with additional information such as his date of birth, we issue a circular that asks our branches in Scotland to search their accounts to try to identify that person. They might think that an address is not right; the person perhaps used to live at that address but moved three months ago to a new address, so the records had been changed. Sometimes, that can be picked up. We must try to pick up such information, because we are subject to court orders and are obliged to arrest funds.

Of course technology should allow us to key in a name and address and find somebody relatively quickly, but unfortunately the process is not as simple as that. We receive a large volume of arrestments, some of which relate to people who do not have accounts with any of the four Scottish banks. That is quite a process. We have staff who do nothing else full time but deal with the volume of arrestments.

That answer was given because a specific question on the subject was asked. Each organisation can now make a brief opening statement in support of the papers that have been circulated, after which I will open the meeting to broader discussion. We might want to pursue the issues that Rob Beattie raised, as well as other issues.

I will start with Glasgow City Council's representatives, as this is the first time that we have heard from that council.

We are so enthusiastic that two of us have come through to Edinburgh. David Mair is the lead officer.

I trust that everybody has a copy of our submission. I apologise for its being late; I am afraid that we were in pre-Easter chaos at the end of last week.

That is okay. You will understand that, as members received the paper only this afternoon, they have probably not had the chance to read it in detail. Once we have done that, we might have to send you written questions.

I have nothing to add to what the submission says, so it might be easier if I read out what I have written about parts 9 and 10 of the bill.

Our submission says:

"PART 9: DILIGENCE AGAINST EARNINGS

Glasgow City Council notes the changes to the diligence against earnings.

The only concern for Glasgow City Council as an employer is in the implementation of the requirement to intimate on the debtor, the creditor and possibly also the Sheriff Clerk. This may result in increased resources being necessary to comply with this requirement."

Part 10 is on arrestment in execution and action of furthcoming.

That bit is missing from our copy of the submission. We will sort that out afterwards. Please tell us briefly what it contains.

Part 10 states:

"Glasgow City Council is concerned to note that arrestment and action of furthcoming or sale in execution of a Summary Warrant shall be competent only if the debtor has first been charged to pay the debt due by virtue of the Summary Warrant. Please see Part 12 below.

Glasgow City Council is pleased to note that, subject to certain conditions, the sum arrested will be automatically released after a period of fourteen weeks. This should substantially reduce both the amount of time and the expense it takes to recover all sums arrested."

Thank you for the opportunity to address the committee. My responsibilities in the Highland Council include dealing with council tax as well as non-domestic rates. Another part of the portfolio is delivery of the benefits service. I accept that there is a need to take an approach that balances the interests of the debtor and the creditor. I believe that local authorities such as the Highland Council try to help debtors who find themselves in difficult circumstances.

We welcome many of the measures in the bill; I have set out in our submission many of the fairly obvious plus points. On the negative side—I should put the word "negative" in inverted commas because I understand that there is a contrary view on this—is an issue that relates to the requirement to serve a charge for payment prior to instructing an arrestment. I am sure that the committee is aware that many local authorities consider that that will create an increase in both time and cost. In the Highland Council, which covers the largest rural area in the country, there is the statutory bank arrestment fee, which is £43.25. In addition, if a charge is served, the act of sederunt adds a further £80.75. We would increase the costs again for a joint and several liability. To increase the costs that could fall on the creditor if the debtor does not pay will bear most heavily on authorities such as the Highland Council.

It is important that we recover the moneys, because they go straight into services via the council tax. We welcome the proposal for the protected minimum balance to be left in a debtor's bank account, but given the impact of all the costs, we could go from having what is currently a relatively—I use the word advisedly—efficient way of recovering moneys, to a process that takes longer and is less worth while. If there is not a lot of money to begin with, how successfully will money be recovered?

I managed to pull out figures about the Highland Council's success rate in arrestments lodged, which is something like 5 per cent for non-domestic rates. I was surprised at the figure of 32 per cent for council tax, which is quite a lot of money in council tax. We lodged 9,145 bank arrestments in the financial year 2005-06, which is significant in terms of the impact on the creditor, although I appreciate that there is a contrary view on that.

The views of my authority and, I am sure, of many others are coloured by the fact that we are involuntary creditors—I know that Mr Grier explained that earlier—which means that we cannot withhold goods or services. Basically, we are there to provide services and must do that, so we cannot withhold credit. However, there is a second part to that; the local authority does not have access to full disclosure of all the circumstances that relate to the individual. Therefore, a finance company or bank, for example, will be in a much stronger position as far as being able to take action when it comes to default is concerned. It is important to recognise those issues.

I finish by saying that we always use diligence as a last resort. We genuinely try to make arrangements with debtors—particularly debtors who are in difficulty—and we try to deal personally with them whenever we can, rather than refer the matter to the sheriff officer.

Thank you for inviting me along to address the committee. I am here on behalf of the banks, to represent the banks as the recipients of arrestments. We receive many thousands of arrestments each year.

I would like to comment on the point that Mr Lamont made in his note to the committee, which states that there is a

"statutory Bank Arrestment fee of £43.25".

I do not know who gets it, but it is not the banks.

I agree entirely that arrestments are a useful form of diligence, and there are clearly occasions on which the banks are seeking repayment of a doubtful debt and would use arrestments, although not in the same numbers as they are used by local authorities and Government departments.

I am happy to assist the committee in its deliberations in any way I can.

As members may know, Citizens Advice Scotland has been campaigning for changes to bank arrestments for years, so we are pleased by the proposals in the bill. Bank arrestments are the most commonly used type of diligence—about 155,000 were carried out in 2003. It is a peculiarly Scottish issue, because in England the equivalent—third-party debt orders—are hardly ever used; only about 6,000 were used in the past year.

Unlike the local authority representatives, we are pleased to see that service of a charge will be required, because that will provide debtors with a formal notice period. For some of our clients—particularly the no-income, no-assets clients—that could provide the route to sequestration that does not currently exist. We also believe that the protected amount of £304—which is shortly to be uprated to £370—will make a big difference to many of our clients, because at the moment we have examples of many cases in which people have been left penniless as a result of arrestment of all the moneys in their bank accounts.

We do not consider, however, that the changes go far enough because the bill will not give protection from arrestment of state benefits or tax credits. Under the existing social security and tax credits legislation, those payments are meant to be unarrestable. In practice, however, because of the way in which banking practice operates, they are arrestable. Fifty per cent of our debt clients are in employment of some sort but, even so, their average monthly income is only £801. The remainder of our clients are unemployed, retired or sick and disabled, which means that most of our debt clients will be receiving some form of benefit or tax credits.

We are concerned that problems will remain for our clients unless account is taken of that. There are three groups in particular for which we envisage such problems. The first is people who get housing benefit or local housing allowance, which is often paid directly into a bank account and can be well in excess of £370. Arrestment of those payments could lead to rent arrears. The second group is disabled clients, who often receive high levels of income comprising various benefits and premiums. Arrestment of those payments could leave a disabled person unable to pay a carer's wages. Some of those payments are made specifically to help people cope with a specific disability and for no other purpose, so to arrest such moneys would cause those people problems. The final group is people who receive tax credits. The child care element of tax credits can be for nursery fees or a child minder, so arrestment of those benefits could jeopardise child care arrangements and might cause the recipient to forfeit his or her employment.

I hand over to my colleague, Brenda Tamburrini from Easterhouse citizens advice bureau, who will give you some case examples from her experience.

I, too, thank the committee for giving us the opportunity to come along today and provide examples. In Easterhouse, our concern is for the majority of clients who wish to pay but are unable to do so. Our experience is that the vast majority of people want to pay their debts, but they just simply do not have sufficient income to do so.

As Susan McPhee said, we are concerned about particular groups, such as people on disability benefits. A single person who receives a disability allowance can often have an income of over £200 per week. Obviously, the £304 that would be preserved in their bank account would be insufficient to meet their mobility needs.

Clients who receive child tax credits must often pay nursery fees. They get assistance for up to 70 per cent of the cost, which is paid directly into their bank accounts. If they were unable to access their accounts, they would simply not be able to pay nursery fees for that month. We had a recent example of that situation. A client came into the bureau and told us that she had recently separated from her husband. She had been working only a couple of days per week and had numerous debts after the husband left, so she decided that she would have to increase the number of hours that she was working. She approached her child's nursery about that and was told that it would be no problem and that they would give her additional child care. She could not pay for it, but the nursery said that she could settle up once her tax credits and so on had been sorted out.

There was a delay with her tax credits, however, and she found herself with numerous debts, including council tax arrears. She had believed previously that her husband had been paying the council tax, but she discovered that there were a couple of years of tax outstanding. The council was taking action against her and she was concerned that she would not be able to continue to pay her child care costs. She had not been served with an arrestment notice, but the threat of that being done was causing her extreme distress. She came into the bureau and we managed to contact the local authority on her behalf. When the client had approached the local authority, they had been unable to assist her—she was told that she simply had to pay the full amount of council tax arrears.

We find that a problem is that clients who are not given the opportunity to pay council tax arrears by installments often decide not to pay. I am sure that the local authority would say that it gives clients numerous chances to pay their arrears, to which they do not respond, but that is because when clients approach the council to offer repayment, they are told that they must pay in full. They cannot do that, so they simply ignore the debt and wait for something to happen. That is why we welcome the proposed charge. We feel that receiving the charge following a summary warrant would cause clients to take action. Currently, councils do not act if there have been council tax arrears for a year or so. Our experience is that it is perhaps six or seven years before the council serves a bank arrestment, so steps could be taken before that to recover the arrears.

We have discussed there being a hierarchy of diligence. We hoped that there could be an earnings arrestment in the first instance and if that was unsuccessful, there would be a bank arrestment. For clients who are on benefits, it is possible for a deduction to be made from their benefit, which would prevent the need for a bank arrestment. However, the possibility of taking that type of action seems to be ignored.

Good afternoon. I have a couple of lines of questioning. I will start with Rob Beattie. You made a point earlier about the cost to the banks of dealing with arrestments, fishing expeditions and so on. You also refer to that to an extent in paragraph 5 of your written submission. Has an assessment been made of the costs to the banks of dealing with arrestments? What increased costs are likely to result from the bill, if it progresses to enactment in its current form?

Calculations have been done on what it costs to deal with an arrestment. The cost varies from bank to bank, depending on the number of arrestments that are served. A fishing diligence will be served on all four Scottish banks, but a creditor might believe that a debtor has an account with one bank or perhaps will decide to put an arrestment into the hands of the two larger banks—the Bank of Scotland and the Royal Bank of Scotland. The volume of arrestments varies from bank to bank and therefore so does the number of people who are involved in processing the arrestments centrally and carrying out name searches. Then again, individual branches are affected by arrestments coming into play because branch staff must remove the money from an account and place it in a separate suspense account, where it is frozen in favour of the arresting creditor. I do not have an up-to-date figure for the administrative cost of an arrestment, but it is likely to be more than £30.

What extra costs would the banks face if the bill was passed in its current form?

Training will be required because quite a few changes are envisaged, including the protected minimum sum, which is an excellent idea. I could take you through the technical details that have occurred to us.

Please do not.

There will be some practical difficulties. For example, the protected sum is £304 rising to £370, but if Mr and Mrs Smith hold a joint account, will the protected sum be £370 for the account or £370 each? If it is the latter, they would be better off having separate accounts because they would both receive protection of £370. If there are two separate accounts and the arrestment is against both parties, we would protect the first £370 in each account. However, how much of the balance of each account would we attach to meet the arresting creditor's needs? How would we decide? Would we attach the whole amount, up to the sum that is being attached? If the sum to be attached is £2,000 and we knock off the first £370, will the balance of both accounts be attached under the arrestment? After 13 weeks the automatic release provision comes into play, but we will have more than we need. How much would we debit from each account? That has not been clarified.

Also, it is not clear what will happen when two arresting creditors lodge arrestments against the same debtor on the same day. The arrestments will rank equally and the protected sum will be retained for the debtor's benefit but, if there is no mandate and no action of furthcoming, how much will we release and to whom? Will money be released pro rata depending on the amounts that are being claimed by the two creditors?

There will be more administration. We will have to explain to staff that, in addition to the usual procedures whereby we work out the position between the bank, the debtor and the creditor and establish whether there is something to be attached, we will have to deduct £370 and then decide whether there is anything else to be attached and what steps we need to take. The need for training on that means that the system will be more expensive to operate initially.

We have evidence that the banks are charging customers £25 for an arrestment on their account. Recently, we had a client who had £46 arrested from her bank account and the charge from the bank for that was £25.

I can well believe that because banks now receive so many arrestments. If an arrestment is a one-off, it will be dealt with, but if a customer regularly receives arrestments against their account, the bank will seek to charge the customer a fee for the work that has been involved on the basis that the creditor does not pay anything for the service. It is the debtor who bears the brunt of the cost.

That is a fair point. We have to be aware of the law of unintended consequences. If the banks have to do a lot of extra work but get no money for it, they will look to recover their costs elsewhere. They might even start to refuse bank accounts to people who they think might be at more risk of arrestment. Is that a possibility?

I do not think so. In the past, we have discussed the basic bank account and the problems that a discharged bankrupt faces in finding another bank account. A discharged bankrupt can apply for a bank account and a basic account will be offered in the first instance. I do not envisage that, through the questionnaire for opening a bank account, banks will seek to find out whether arrestments are likely to be served on the customer. A credit reference search will be carried out on a new customer. Any outstanding judgments against that person might affect the bank's decision about whether to open an account for them. However, the possibility that the potential customer is regularly served arrestments would not be part of the assessment of the account opening process.

Okay—

Are you moving on to another subject?

Not altogether, but I will go off at a tangent, so you might want to bring someone else in before I do so.

I will bring you back in for your tangent later, but I think that Christine May and Karen Gillon have questions that are specific to the current topic.

I want to take that last point a little further, Mr Beattie. If the bill comes into effect, are banks likely to institute tougher credit reference checks before they open accounts for people? Are banks more likely to restrict the facilities that account holders can have if their banking history shows debts and arrestments? The committee has been concerned about the ease with which people with a poor financial record can obtain banking facilities.

Nothing in the bill will affect a bank's process of opening an account or its judgment of whether it should open an account for a particular customer. If somebody has a poor financial record, it would preclude the possibility of any further advances being made to them. The bank would be wary about providing new facilities to a discharged bankrupt but, again, that would depend on the purpose and track record of the individual.

Where somebody has a history of debt and unsatisfied judgments against their name, the chances are that they will be able to open an account, but it will be maintained on a creditor basis with no banking facilities made available. However, the proposed changes to arrestments in the bill will make no difference to the way in which a bank decides to open an account.

I remind the committee that I received evidence from local money advice services that debtors who have significant credit card debts have been offered a further loan and another credit card by banks. I have deep concerns about that. What would it take to make the banks more wary about offering those wider credit facilities to folk?

The CAS submission suggests that money from tax credits and housing benefit should be separated from other money in a bank account. How difficult would that be to administer and would the banks be prepared to do it?

I was interested in that proposal which, on the face of it, seems like an excellent idea. However, millions if not billions of transactions—credits and debits—go through the banks' clearing system in the course of any banking day. Adopting the CAS proposal would mean that every credit that enters a particular bank account would have to be scrutinised to find out its source. The vast majority are presumably normal banking transactions, whatever the credit might be, whether it is salaries or just a payment between individuals. To then have to vet every credit to a customer's account to see whether it refers to a benefit payment or a tax credit would be very difficult.

I refer you back to Christine May's question about the potential problems of people obtaining credit or bank accounts. Would the process you describe be costly for a bank to administer?

To vet every credit?

Yes.

It would be very costly.

Would that then make it harder for people to obtain bank accounts if their main source of income is—

Benefit payments of some description?

Yes.

In that case, I think that another solution to the whole problem would have to be found. It has been suggested that, rather than trying to arrest an individual's benefits, one solution would be to allow the individual to pay so much per month to their creditors out of their benefit before they received it. If we were to go down that route, however—and this is a personal opinion—people might have to request a special account called a benefits account, an exempt account or whatever name might be used for it. Any credits that went to an exempt account—the account number would presumably have to be given to the Benefits Agency—would not be attachable by arrestment. That would avoid the need to go through everybody's account at the close of business each day.

It depends on when the arrestment is served. The account would have to be tracked. It would be necessary to go through the account and trace the payments that came into it, establishing where they came from. If there is a benefit payment coming in and if it is the only payment, it is not to be attached. That process would be time consuming, so it would be better to have a special account. I stress that these thoughts are right off the top of my head and have had no consideration from my own bank, never mind from my fellow bankers. It would be one possible solution to have some sort of exempt account.

Benefit payments and tax credits are marked. As most of us here probably know, child benefit comes up as "CB" in our accounts.

I agree that those payments are identifiable—there is no doubt about that. At the moment, money in an account is simply money in an account, which is due by the bank to the account holder. The source of the money is irrelevant. It might be that only benefits will have made up the credits to the account concerned, but it would still be necessary to go through the account and check the credit or balance. There is a rule known as Clayton's case, with which I am sure Mr Grier is familiar, which relates to how the source of the money in an account is calculated. Such a calculation would have to be carried out on each occasion to ensure that the source of the money in an account was a benefit payment, and that it was therefore free from arrestment. That would presumably be in addition to the exempt sum of £370. Carrying out such calculations would certainly create administrative problems.

Is Citizens Advice Scotland suggesting that all benefits should be exempt? If somebody has income support coming in, they would not have to pay any of it back.

Yes.

Michael Matheson has a point to make on this subject next, although I have not forgotten about Murdo Fraser.

Conceivably, a person might be on housing benefit and could also be receiving a direct payment into their account from their local authority for their care provision. They might have accrued debts to the local authority, and the authority could arrest their wages. They might be left with £300 a week or whatever in their bank account. They might be in a private let and might lose their tenancy and end up homeless and unable to pay for their carers.

I understand what Rob Beattie was saying about setting up a separate bank account. However, it seems to me that, in this age of modern technology, with benefits paid into accounts having a reference number or some sort of indicator next to them, if an arrested account is isolated, it should be possible to identify clearly what comes into it. If I go into my bank and ask the teller about anything that has come into my account, they can print off the details there and then. It could be determined that anything else that comes in with the same references is not arrestable.

Yes, but we would then have to make a calculation of what makes up the money in your account.

That could be done easily by referring back to the debits that have come off over the past month.

That is right. If all the credits that ever come into the account are benefits and if all those benefits are non-arrestable, it could be determined that the money in that account, whether it is £1 or £100, is made up of benefits. As soon as another credit comes into that account that is anything other than a benefit, what is the non-attachable balance of the account then? The debits then have to be deducted. The first debit will extinguish the first credit. A calculation has to be made to work it out.

The amounts involved may be below £370 anyway, in which case the calculation would not be required. However, although the bank account would show the source of the credit on the statement, a manual exercise would be required. The programming would have to be amended to say that any credit to a particular account bearing any of the stated identification markers as a benefit is not attachable and is therefore deducted from the balance. We would need a sophisticated program to work out the debits that have come off the account.

I agree that it sounds very straightforward, but I am sure that an information technology person would tell me that it would be difficult to program that particular function into the mainframe. That is my assumption, although that could be done.

I do not dispute the need for a calculation, but we need to find a way to overcome the problem. I am concerned that a local authority that arrested someone's account, purely in order to pursue a debt, could incur more cost because the person ended up homeless, with all the problems that would flow from that. The person's account would be frozen, meaning that they could not be paid their housing benefit. A way needs to be found, under the present mechanisms, to prevent that from happening.

Does that not go back to debt counselling? If someone is in that amount of trouble, that will not be fixed through bank accounts and the like.

If Glasgow City Council was aware that a bank arrestment of that nature would lead to someone becoming homeless—which would suggest that their financial circumstances were dire—it would reassess the situation and, hopefully, come to a payment arrangement with that person. As Dawson Lamont has pointed out, this is a speculative form of diligence. Local authorities will generally do everything that they can before going to such extremes.

The debate has focused exclusively on people who receive benefits, but some of the people whose bank accounts are arrested could be low-paid people who have no benefits coming in. Whatever solution you come up with has to apply to them as well as to people who are in receipt of benefits, whether they are working or not.

Yes, I agree.

Identifying all the benefits could discriminate against people who are on a low income.

But they would probably get tax credits, which are as identifiable as benefits.

Is it not like when pensioners' incomes get to a certain level and the ones who are on the boundary are the ones who always suffer? Those are the people who are most likely to be caught in that situation.

There might be some people in that situation, yes.

Can I go back to an earlier point? The point was made that there is difficulty in working out people's benefits. Having previously worked in a bank for 25 years, I sympathise with the banks and recognise the difficulties that they face. However, Nicholas Grier said that local authority pensions could not be arrested. If local authority pensions can be identified, why can the banks not identify benefits?

I will have to get back to you on the finer points of why local authority pensions cannot be arrested. I am afraid that I cannot give you an answer to that off the top of my head.

I want to ask the Citizens Advice Scotland representatives a bit more about the human dimension of this—the psychology, if you like. We have talked an awful lot—today and in other discussions, often quite critically—about the oversupply of credit, but we are all a bit more hesitant to talk about the overdemand for debt. I am anxious about some of what is being suggested today, in terms of the psychology of an individual who may be vulnerable to getting into debt and may be tempted by the availability of credit. In terms of the psychology of the individual in those circumstances, would what you propose not significantly tip the balance towards their seeking to obtain further credit and running up more debt? I realise that the whole debate is about where we draw the line and how we achieve a balance, but you are suggesting a substantial step.

Of the 155,000 bank arrestments in 2003, 150,000 were carried out by local authorities for council tax debt. Our research shows that one in four of our clients had council tax debt. We envisage that our proposals for bank arrestments would impact on council tax debt rather than extend credit. However, we know from our research that about one in six people borrows again to try to get out of other debt problems.

I hear what you are saying, but although the debt that manifests itself might be a result of council tax, the council tax may have gone unpaid because of the individual's spending patterns. That brings us back to the psychology of the situation. If we create the conditions that you suggest for people who are on benefit, will we not create a situation in which the disincentives to getting into debt are sufficiently reduced so that people's spending patterns—let us talk about that rather than about people getting credit—might lead them into further debt? That brings us back to Murdo Fraser's point about the law of unintended consequences. What impact might your proposals have on behaviour?

Research on CAB debt clients shows that there are two streams. First, there are people who are in debt because they are in poverty and simply do not have enough money—they tend to be people who are on benefits. As I said, the average income of our debt clients is £801 a month and more than a quarter have incomes of less than £400 a month. They are in debt because they cannot afford to live on the money that they have. The other stream is people who were earning enough to pay off whatever they were borrowing, but something has happened to them, such as job loss or disability. Our clients are not in debt because they have gone on holidays. People whose circumstances change tend to have borrowed within their limits until then, but something happens to put them in that situation.

The Easterhouse bureau has a different kind of client group altogether.

I understand Susan Deacon's point, because obviously if no diligence is available, bank arrestments will not be possible. However, we do not argue that no diligence should be available. We are happy with earnings arrestment and diligence can be taken against benefits. In Easterhouse, our clients tend to be on benefits or on low pay topped up with tax credits. They want to pay their debts. Very few of our clients go for sequestration—they do not take the easy option. I realise that they have problems getting sequestration, but I find that the people who have very little are the ones who are the most keen to pay.

We will go back to Murdo Fraser's tangential point.

Eventually. I hope that I can remember what it was. It was related to the costs of arrestment, but on the slightly different issue of earnings arrestment, which has not really come up in the evidence. I have had representations from the small business community on earnings arrestment. If I remember correctly, the business that processes the arrestment gets paid the grand sum of £1 for each arrestment. The proposal is to increase that to £1.50. For a small business, the administrative burden of dealing with earnings arrestment is substantial, particularly if it is dealing with two or three creditors. I appreciate that no one on the panel represents small business, but can any of the employers who are present comment on whether the fees that are paid to employers are sufficient to cover the administrative costs or whether it would be fairer to ask creditors to pay more than they currently pay?

Is anybody in a position to answer that?

I thought that the fee was 50p.

You might be right. I thought that it was £1; perhaps it went up from 50p to £1.

It is a token payment; it bears no relation to reality.

I will ask one final question, going back to something that Dawson Lamont mentioned earlier. By the way, is it Lamont or Lamont?

The stress is on the first syllable.

Yes, most Highlanders pronounce it that way.

So you are no relation to Norman?

Oh, absolutely not. [Laughter.]

I asked the question only so I could see how it would be reported in the Official Report.

Dawson, you spoke about the effect of arrestments of bank accounts and said that, in many cases, arrestments could become less effective. Is it therefore more likely that councils such as Highland Council—although perhaps the witnesses from Glasgow will want to answer this as well—will simply bypass arrestment and go straight to sequestration? I am thinking about the law of unintended consequences: if we make the arrestment procedure too difficult, we will simply see a rise in the number of sequestrations.

It is extremely difficult to anticipate what will happen. Obviously, earnings arrestments are more valuable to councils pursuing council tax. The big problem with council tax is that there is no direct benefit on the water and sewerage element, which, of course, is a retained function.

We would need to have experience before we could come to any conclusion on what the consequences could be. Highland Council puts a high premium on the quality of the money advice that we offer. Trained and dedicated advisers deal with our customers. We would not be inclined to go down the sequestration route in any big way, although I cannot give a guarantee on the point that you raise about unintended consequences.

May I put the same question to David Mair?

Yes, but I will answer it as someone who has been a debt recovery solicitor for 20 years, rather than as someone who is an employee of Glasgow City Council.

Arrestments are very effective—both earnings arrestments and bank arrestments. In Glasgow, we instruct 30,000 earnings arrestments and 48,000 bank arrestments each year. They are a very effective tool for debt recovery. If arrestments are lost, an effective method of collection will be lost. That will inevitably lead to the use of other forms of collection and possibly to a greater reliance on sequestration.

We have spoken a lot about people on benefit and people on low incomes. One group that we have not discussed—although David Mair may have touched on it a moment ago—is the can pay, won't pay group. Will the current legislative proposals make it more effective for you to collect from that group? Will there be additional costs? What are the advantages and disadvantages of the proposals, in relation to that group?

Particularly for arrestments, the abolition, in effect, of the concept of an action of furthcoming will make a big difference. Being able to collect funds without having to go to court for a decision, because the bank can hand the funds over—

Even with a 14-week delay?

I am not convinced that a court action would take a much shorter time. By the time that I, as a solicitor—after being instructed by the financial services department to proceed with an action of furthcoming—raise the action, go through court, get my decree, intimate it to the bank, and so on, it will be pretty close to 12 to 14 weeks later anyway. I am therefore not too concerned about the 14-week period; what I am happy about is that I will no longer need an order of court to get the money.

For Glasgow City Council, that would free up David Mair as a resource. He would not be needlessly raising actions of furthcoming and we would get the money in much more quickly, we would hope.

To come back to a point that I made earlier, we find that mandates are used to quite an extent. Actions of furthcoming are obviously definitive. With automatic release, there is the problem that if more than one account is attached by a single arrestment against Mr and Mrs Smith, who each have an account, we will require clarification of how much to take from each account—assuming that sums are attached in both—to pay the creditor. If Mr and Mrs Smith are due to pay council tax, how much do we take out of his account and how much out of hers? With an action of furthcoming, that would have been clear because the court would have given us the order to pay out. A mandate from the customers themselves would also have said how much we should pay out. We need to fine tune one or two things in the system.

Does the Committee of Scottish Clearing Bankers have a form of words that could be used to get over that difficulty?

We do not have a form of words. We have discussed that with the bill team in the Scottish Executive. So far, nothing has been agreed with the team, but the points have been raised with it.

Previous evidence has shown that folk are reluctant to go for advice until they are up against the wire—I suspect that our local authority colleagues will say exactly that. Given that the bill might make it more difficult for those on low incomes, will it make it more or less likely that people will go for advice earlier and more willingly, or will it make no difference to that? I am conscious that we cannot make people go.

The service of a charge will have an impact because it is a formal notification. Citizens Advice Scotland's experience is that something formal happening, whether it is a bank arrestment or something earlier, is a trigger for people to go for advice. The service of a charge will definitely have an impact, which I hope will prevent the bank arrestment from happening.

I am not sure that service of a charge will make the debtor act more quickly. In addition, the service of the charge will be more costly for the debtor, or for the local authority if the debtor does not pay the fees.

Why would people respond to the service of a charge rather than to a summary warrant? I would respond to a summary warrant because I would be terrified that someone was going to take me to court.

The service of the charge at the beginning is another formal step that would push people to seek advice.

Why is that more formal than a summary warrant? That is what I cannot understand.

It is just another formal notification.

So it is just another chance; it is nothing new or different.

I am more concerned about the won't pays than the can't pays because the service of a charge will make no difference to them. If they have not paid despite having had three reminders and a notice telling them that a warrant is going to be served, a charge for payment will not make any difference. However, I appreciate Susan McPhee's opinion on the matter.

If the service of a charge was introduced, it might make a difference initially simply because it is new, but it will not make any difference in the long term because, to my mind, a summary warrant is much more severe.

The service of a charge will impact on the can't pays because the costs will be passed on to them. Some of those costs could be considerable, particularly for the service of a charge in a rural area.

Was it a sheriff officer who served a charge or was it just done by notice? My knowledge of debt recovery is a bit suspect these days.

It was a sheriff officer.

Initially, it might have more meaning to have somebody at the door serving a charge, but I agree that after the first 12 months or so of a new procedure, people would probably get used to what was to happen. As Mr Grier said in his paper, before taking advice, the smart debtor, if they have any money, ensures that their money is out of their account before the arrestment is served. They get 14 days' warning.

Clients normally come to us once there has been some court action—once diligence is taken against them. When they get a council tax bill that says "summary warrant" on it they tend to ignore it. I appreciate the problem that Karen Gillon is having with this. If I get a final demand through, I think, "I have to take action," but we quite often deal with clients with mental health issues who are simply unable to deal with their financial situation. However, when someone comes to the door, it prompts them to do something. In most cases, that is when we see clients.

For folk who just do not want to pay, it does not matter whether somebody comes to the door—they will not pay anyway. Rather than introducing a new charge, does the format of the summary warrant need to be amended? If I have £500 of council tax debt, if you add another £100 to that—which is probably what it would be in my constituency—that is 20 per cent on top of what I am already paying. We could set out the summary warrant in a clearer format and make people aware that it is an intimation of court action and not just another council tax bill.

In our submission prior to the bill, we said that as long as some sort of letter was sent out, the process might work. We find in our council that if people look at a letter from our financial services department, they see it as just another letter from financial services. If the letter is from the solicitor to the council, it has more of an impact. On the specific category of won't pays rather than can't pays, we could probably serve a letter like that and it would have as much effect as, if not more effect than, a charge for payment.

For us, the important thing about the charge is that it will allow clients with no income and no assets to be apparently insolvent and to be sequestrated, if their debts are £1,500. That is not the case at the moment—they have to sit and wait. That is one of the reasons why we are so in favour of the charge—it will give people access to sequestration.

On balance, would you say that, overall, the proposals in the bill are an improvement on the present situation or do they make it worse?

They are an improvement.

I agree.

Overall, it will not make much difference to the won't pays; for the can't pays, it will improve their situation.

What do the local authorities think?

With the exception of the service of a charge, which I see as a bit of a retrograde step, the bill is a definite improvement. It introduces protections for the debtor at the same time as maintaining the capability of payment to the creditors.

I agree with Dawson Lamont.

Another point is that it is possible that people will be given a chance to make time to pay applications under summary warrant. That is not really a forward step, but on the whole the bill is an improvement on the current state of affairs.

Thank you for your written and oral evidence. That was extremely helpful. There still seem to be a lot of unanswered questions that need to be resolved at stage 2. We may want to flag those up in our stage 1 report. I am sure that the clerks and Nicholas Grier will have taken note of them.

The convener will recall that the bill team came in to give us an informal briefing prior to our consideration of the bill. Is it worth asking for another short, informal briefing now that the bill team has had the opportunity to consider the evidence that we have taken?

That is a good suggestion. Are members happy with it?

Members indicated agreement.

Okay. We will try to arrange that, bearing in mind the timetable for the committee's consideration of the bill.