Bankruptcy and Diligence etc (Scotland) Bill: Stage 1
We will now have a briefing on the Bankruptcy and Diligence etc (Scotland) Bill from our special adviser, Nicholas Grier.
Nicholas Grier (Adviser):
I ask members to find the paper that I have prepared. I will try to keep my comments brief. The first three matters about which I have been asked to speak are small, technical amendments to the Debt Arrangement and Attachment (Scotland) Act 2002. They concern electronic signatures, the removal by sheriff officers of perishable items and a tidying-up amendment to deal with the valuation of attached assets.
No one should take exception to any of the amendments, which should make the 2002 act more effective. One or two of the provisions that they propose were omitted by oversight, and when the 2002 act was passed, there was no awareness of the possibility of having an electronic link between money advisers and the Accountant in Bankruptcy.
Wider questions about the debt arrangement scheme arise from the 2002 act, and I have tried to summarise them in my paper. I do not propose to go through the way in which the DAS works because members will have had the opportunity to look at that information. It might be more useful to the committee if I were to highlight some of the elements of the scheme that are not working terribly well.
It seems that the debt arrangement scheme works, but only for a restricted group of people, such as debtors with multiple debts who might not be very good at handling their money but who are willing to let somebody else do so and are sufficiently motivated to go and see someone who can help them. Without that motivation, it is arguable that the scheme is not terribly helpful.
Other criticisms can be made of the debt arrangement scheme, as has been discussed in committee previously. The scheme is not of much use to no income, no assets debtors; there is some overlap with protected trust deeds; interest continues to run; a scheme could last forever, as there is no cut-off point; and difficulties can arise if the debtor ceases to have an income, because the scheme depends on continuing income.
On a more technical point, the debt arrangement scheme is not available if someone has a large number of debts to a single creditor, such as someone who owes money to HM Revenue and Customs that has built up over a long time. On top of that, the scheme does not give any debt relief, so people might not want to enter into it. All those problems need to be addressed.
There seem to be further problems with money advisers. There is no doubt that they are extremely well trained and that good training has been organised for them, but there has not been a large take-up by people who want to be money advisers. Although the major reason for that could be that it is early days yet, another reason could be that the job is seen as rather arduous and that it is hard work to become a money adviser. Perhaps it is cynical of me to say that there are easier ways of earning a living, but there might be something in that. There are questions about how useful it is to train as a money adviser in some communities where there might not be many people who can get to the point of advice, know about the scheme or even would accept advice if it were offered.
There is a practical point, too. Sometimes when money advisers dole out money to the creditors, they hand over small sums of money that are uneconomic for the creditors to receive—it is scarcely worth processing cheques for £2 or £3, and it is also expensive for the money adviser to send them out.
Therefore, there are specific problems, and I have also tried to indicate certain problems with the wider perception of the debt arrangement scheme. I hope that this will not cause any offence, but the scheme does not seem to offer help to those who most need it, it does not seem very popular yet to become a money adviser and the system does not seem to be very well known. I know that people talk about the scheme, but it has not achieved the publicity that one might have hoped for.
However, one good thing about the debt arrangement scheme is that it is free for the debtor, which is an immense benefit for them. People do not have to pay large sums of money to the questionable debt consolidation agencies that bundle up all people's debts and then charge a large sum of money to pay them off, which is sometimes a great deal more than the debtor would have paid otherwise. Another virtue of the debt arrangement scheme is that money advisers seem to be doing their work extremely well.
Suggestions have been made, including by people present, about how the debt arrangement scheme could be improved. I have listed some of those suggestions on page 4 of my paper. A common theme is that there should be freezing of interest. That sounds attractive, but it has a lot of practical problems, because, for example, for some loans, all the interest is payable at the front or at the end. We would need a pretty clever system if we wanted to take that approach. That is not beyond the wit of man, but it would take a good deal of consideration.
There seems to be agreement that a scheme should not last more than 10 years but, equally, we would not want people to pay absolutely nothing or very small amounts for 10 years and then have their debts just written off. Another suggestion is that creditors should be deemed to consent to a scheme if they fail to respond. Another is that it should be possible to have any action of sequestration sisted—which means delayed—once a form 4, which is one of the forms that are sent out under the scheme, has been issued. Those are big questions that tie into the issues that we considered previously about New Zealand and England. The issues should be considered together. I hope that I have said enough for the time being about the debt arrangement scheme.
The provisions on the disclosure of information will run parallel with the proposed legislation in England. The issue is the provision of pooled information to creditors about the likely success of trying to get money out of debtors who have not paid their debts. The aim is to make the business slightly more effective and to be kinder to debtors. If creditors know more about debtors' financial circumstances, they will not waste their time trying to effect diligence against debtors when that will clearly be of no benefit. Creditors will also be able to target effective diligence against those who clearly can pay. The disclosure of information should be a good tool, or so the Executive believes, for the won't pays, although it probably will not be terribly helpful for the could pays or the can't pays, except to the extent that they might not receive a totally inappropriate burden of diligence.
There are problems with the disclosure of information, such as human rights and privacy issues. Not everyone will necessarily want all their financial information to be displayed. It is suggested that such matters should go to the court, which would try to balance the interests of creditors and debtors. Obviously, the system needs to be worked out, but that will be difficult because it is being done in tandem with the Department for Constitutional Affairs, which is running a similar exercise. The idea is that the English and Scottish systems should broadly go together so that neither country is disadvantaged. There have been suggestions that we should have a different system in Scotland, but having a different system, or no system, here could result in Scottish creditors being at an informational disadvantage, given that some creditors, such as HM Revenue and Customs, are based predominantly in the south. The Executive thinks that we ought to have a system that is similar to the English one.
We do not really know how such a system will happen—it is early days yet. Under the bill, the Executive proposes that ministers be given the power to implement regulations—which we have not yet seen—on how that will be done. As we do not know what the regulations will be like, questions could be asked about approving the concept of allowing them to be drawn up without necessarily knowing the finer detail. Of course, people cannot know the finer detail until the Department for Constitutional Affairs has worked it out. Under the bill, the Executive wants the opportunity to make regulations, should they be judged necessary at a later date.
I hope that that did not go on for too long.
That was very good, Nicholas. Thank you very much.
I apologise to our witnesses. The previous evidence-taking sessions went on much longer than we anticipated. I know that some members have to leave within the next half hour or so. If we do not get through everything now, we might need to have a further session, although we should try to avoid that for reasons of time.
Our witnesses are: Susan McPhee and Beccy Reilly, who are both from Citizens Advice Scotland—I think that they are well known to the committee by now; Yvonne Gallacher, who is from Money Advice Scotland; John Campbell, who is from the Society of Messengers-at-Arms and Sheriff Officers; and Hillary Wilson, who is from Midlothian Council, but is here today in her capacity as vice-president of the Institute of Revenues, Rating and Valuation (Scottish Association). Thank you all very much for coming. I invite the witnesses to say a few quick words of introduction. I will then open up the discussion to members.
Susan McPhee (Citizens Advice Scotland):
We are very pleased to be given this opportunity to give evidence on the debt arrangement scheme. CAS has long been a supporter of the debt arrangement scheme, from as far back as 1992. In 2000, we produced our own version of how we thought the scheme could work. We remain firmly committed to the concept of the scheme. As the system operates now, it includes some of the elements that we originally proposed, in particular voluntary participation, deemed creditor consent and the DAS register.
However, we have always maintained that, to make the DAS effective for our clients, there is a need to freeze interest rates and on-going default charges; to introduce some kind of composition of debts; to introduce a fixed time period; and to allow for full discharge at the end of the scheme. As it runs now, the DAS does not incorporate any of those provisions. As a result, it does not, in the main, have an impact on our client group, and there is a shortfall in accredited money advisers. The DAS does not affect our client group because they have an average debt to income ratio of 22:1—that is, for every £1 of income, they owe nearly £22 of debt. Interest and charges continue to be imposed on clients who cannot pay their debts, so their debts can spiral further, which prevents repayment.
We know that the Scottish Executive is undertaking a review of the DAS. We are very pleased about that, and we hope that substantial changes will be introduced shortly. Unless all four of the elements that we have outlined are in place, we do not think that the scheme will work for our clients. If all the elements are implemented and have a clear impact on our debtor client group, we anticipate a huge increase in the number of money advisers.
As it operates now, the DAS works for debtors who have surplus income. They are able to repay their debts, although they might need a bit more time to do so, as they could be juggling four or five debts. When the debtor enters a scheme, they get protection from formal diligence and, in theory at least, they will not be harassed informally by creditors. The downside is that, even if interest is frozen by the creditors—which can happen voluntarily now—the scheme will still not be of any use to citizens advice bureau debt clients without composition of debts. Typically, our clients have a monthly income of £801; a quarter of them have an income of less than £400 a month. They owe an average of five debts, totalling just under £13,500. The freezing of interest will not in itself solve the problem for our clients.
If the DAS was amended to introduce our four key elements, it would still not be appropriate for all our debt clients, particularly those with no income and no assets. We know from our research that about a third to a half of CAB debt clients fall into the no income, no assets category. Benefits are the sole income of about two thirds of them, and they have an average of five debts, amounting to around £11,000. We would really like amendments to the DAS to be made, as I have outlined, as well as further assistance for people in the NINA category.
Yvonne Gallacher (Money Advice Scotland):
Thank you very much for the opportunity to come before the committee once again. To endorse some of the points on which Susan McPhee has reflected with regard to the DAS, I thought that it would be helpful if I talked about how we at Money Advice Scotland, together with Citizens Advice Scotland, are involved in providing the certification scheme.
There has been much debate about the lack of effectiveness of the debt arrangement scheme, but I regard the glass as half full, rather than half empty. Many people who use the scheme have found it effective, because entering a scheme stays diligence and gives them the opportunity to make regular payments through a payment distributor.
I want to correct a point in Nicholas Grier's briefing. Money advisers do not collect the money; they merely set up and administer the programme. The payment distributor makes the payments. Money advisers never deal with the money; that is not their role.
It is unfair to say that the debt arrangement scheme has been a complete failure, because people have benefited greatly from it. However, I endorse what Susan McPhee said. The scheme needs other characteristics. We welcome the Executive's review of the scheme and we support the approach that Susan McPhee described, which would include the freezing of interest rates and composition of debts.
When the Bankruptcy (Scotland) Acts of 1985 and 1993 came into effect, they were not very successful. However, perhaps we are considering alternative approaches because aspects of that legislation became very successful—I am thinking in particular about the cost to the public purse of the administration of protected trust deeds. There are many benefits to be gained from amending the DAS, which would be ideal for the people who currently go to fee chargers—mention was made of the money that fee chargers make. I agree that there should be publicity about the DAS in places where fee chargers and debt consolidators advertise, which would offer a way of addressing the apparent low take-up of the scheme. A balance needs to be struck and there should be better, or at least different, publicity for the DAS.
Like Citizens Advice Scotland, Money Advice Scotland was involved in the working group that produced the consultation document, "Striking the Balance—a new approach to debt management". We considered many aspects of debt management and regarded money advice as central to the issue. That has not changed; money advisers are integral to the system. There are many reasons why people do not come forward to train as money advisers, not least because the work is arduous, time-consuming and administrative in nature, as Nicholas Grier said in his briefing. Many money advisers do a job that is similar to the job that is done by CAB staff, but there is a particular issue for local authority money advisers because they are regulated and receive no additional pay when they administer a debt arrangement scheme. There is an issue about local authorities' implementation of single status and equal pay, and we discussed the need for salary scales that reflect the added responsibilities. The problem is therefore much bigger than the fact that the job is arduous; it is to do with how people are remunerated for their work.
It is much less expensive to keep money advisers in their role than it would be to hive off the work to the fee-charging sector. We know how much it costs to administer protected trust deeds and how much creditors get back. The debt arrangement scheme could fall into the same category as protected trust deeds, with some exceptions to do with the minor adjustments that would be made to reflect individual circumstances.
Take-up of the debt arrangement scheme has been slow, but it is early days and there is a long way to go before we can say that it will not work for people in Scotland. I think that it will work, and that is the position of Money Advice Scotland.
Mr John Campbell (Society of Messengers-at-Arms and Sheriff Officers):
The society has no comment on the proposed amendments to the debt arrangement scheme or on the system itself.
The society supports information disclosure orders, which should significantly reduce the number of unnecessary, abortive and unsuccessful diligences. Many debtors experience diligences in which creditors are clearly engaging in fishing expeditions to obtain information to instruct a more targeted diligence thereafter. The introduction of the orders will therefore significantly reduce the number of unnecessary diligences.
Hillary Wilson (Institute of Revenues, Rating and Valuation (Scottish Association)):
The Institute of Revenues, Rating and Valuation is pleased to have been asked to participate in today's meeting. Broadly speaking, we welcome all the proposals in the bill, although we acknowledge that they are mainly minor and include no significant changes to the current process.
The institute is pleased to see the proposals to allow the introduction of the disclosure of information provisions, which would be useful to us only as long as the process is administratively effective and not cumbersome or too costly.
To date, the majority of local authorities have little or no direct experience of debtors who have entered the DAS, because of the low take-up so far. The main concern for us is that the proposals do nothing to address the main issue, which is that lack of take-up. Local authorities need an administratively effective scheme that meets the needs of both debtors and creditors. Although take-up to date has been low, the institute believes that that can and will be rectified in time.
I have a question for Yvonne Gallacher on what she said about the debt arrangement scheme and money advisers. I have read the written evidence on the DAS certification toolkit, seen all the flowcharts and considered the volumes of documents that must be filled in. Is part of the reason why so few people have wanted to become money advisers the fact that the work that is involved is so onerous? Perhaps the thresholds need to be reduced a little.
Distinguishing between a money adviser who is already operating outside the DAS and an approved adviser is worth while. The scheme that Citizens Advice Scotland and Money Advice Scotland jointly set up took into account what was alleged to be common practice in the field. Therefore, it is not necessarily the case that we have put an additional burden on people. Quality checks are already in place in many organisations.
Our experience is that where quality checks and systems were not in place, people sometimes struggled to meet standards. We have considered making access to certification easier because criticisms were made about the number of cases involved and about how they were to be presented when people who were training had to come up with a range of cases in their six initial cases. We addressed that and changed the mix of cases, rather than the qualitative or quantitative parts of the process, which seems to have gone some way towards addressing some of the issues. We also do spot checks every six months.
The process is new to some organisations, but some may have had systems in place and may have already operated to those standards. Casework recording was a real issue. We have raised standards right across the board in the process, not only in respect of potential DAS cases, but in respect of all cases that money advisers hold. We are aware of the issue that Murdo Fraser has raised and have tried to address it, but at the end of the day, we do not want to dilute the certification process, otherwise it will not be worth the paper that it is written on.
Beccy Reilly (Citizens Advice Scotland):
We must remember that the certification and approval process for money advisers is designed to ensure that they are competent to carry out a statutory function. It is important to ensure that they are well qualified and competent to carry out that function. The toolkit's instructions are quite lengthy, but the criteria for assessment are easily broken down. The toolkit is specifically designed to test competence in the areas of money advice that are covered by schedule 4 to the Debt Arrangement Scheme (Scotland) Regulations 2004 (SSI 2004/468), under which money advisers need to be competent in order to go forward for approval under the scheme.
I have three questions. Vida Gow, who has given evidence to the committee, briefed me in Fife on her experience of how things work. The changes that you are seeking reflect what she said. My first question is, given the experience of accredited money advisers and the comments that they have made, how much sympathy is being given to your attempts to have the debt arrangement scheme modified?
My second question, which is for all the witnesses, is whether there is a role for both an amended debt arrangement scheme and a protected trust deed scheme. Are both schemes still relevant?
My third question is primarily for John Campbell but might well apply to other witnesses. Disclosure orders are, in theory, a good thing—after all, as we have discussed with the Committee of Scottish Clearing Bankers, any means of sharing information is welcome—but I am really concerned about certain personal information issues that they raise, particularly the potential for intrusiveness. What safeguards would you seek in that respect?
On the changes to the debt arrangement scheme, front-line advisers and I have fed into the Scottish Executive's review of the scheme, and we are awaiting an announcement on the matter. I certainly think that significant changes will be made, although if the only change relates to the freezing of interest, I do not think that that will have much impact on our clients. All the matters that we have raised have been discussed and are being examined; we simply have to await the outcome of those deliberations.
I have nothing to add to Susan McPhee's comments on changes to the debt arrangement scheme—we have been lobbying together on the issue—but in answer to your second question I certainly think that there is a role for both a debt arrangement scheme and a protected trust deed scheme, because they are interdependent. We have to see what changes will be made to the debt arrangement scheme before we can think about the changes that need to be made to protected trust deeds—although that might happen the other way round. In any case, the work forms part of the process of putting together the Scottish Executive's integrated debt management framework, and we cannot change one scheme without closely examining the other.
How sympathetic the money adviser field will be to any modifications of the scheme will obviously depend on the extent of such modifications. There are some trailblazers, who want to be the first past the post to become an approved adviser. The picture is not completely bleak, but the success of the amended scheme will depend on what it looks like and whether issues such as the freezing of interest, composition of debts and so on have been taken into account. Moreover, as I pointed out earlier, the scheme must be publicised, because people need to know much more about what is happening. Although there is an excellent website, people unfortunately still do not have access to the internet. There are various leaflets and information packs, but we need more interaction with the public to ensure that they know about the scheme.
Therefore, as far as sympathy from money advisers is concerned, they are looking to their own position—and for some of them, like the policeman, their lot is not a happy one. Many people out there are very keen to become involved in the scheme, and if we can encourage and cajole them to do so, that will be all the better for debtors in Scotland.
On the question whether there is a role for both the DAS and protected trust deeds, I think that it depends on what the schemes look like. Given their current composition and what they could look like in future, the two schemes could co-exist. They are different beasts, serve different purposes and, as Beccy Reilly has just pointed out, are part of the overall framework that the Executive is reviewing. Indeed, money advisers might well have a role in administering protected trust deeds in future. Who knows? It might be a much cheaper option.
Information disclosure is a hot topic, and we are concerned about certain human rights issues, such as privacy, that Nicholas Grier highlighted. However, the credit industry and credit reference agencies have carried out a lot of work on increasing the level of datasharing that goes on. These things are already happening, and will happen more in future. The current systems are very sophisticated and not only carry out credit scoring but look at people's behaviour. Indeed, with the use of IT, a whole raft of new measures and systems can tell the industry more about people than perhaps they know themselves.
Do you know how many people have entered into a debt arrangement scheme?
It is more than 100. I do not know the exact figure; it changes on a daily basis.
Over what period? A year?
Since the beginning of the scheme. The number is not high.
Can Shiona Baird clarify whether she is talking about the number of approved advisers or the number of debtors who are going through the scheme?
I am talking about the number of debtors.
It is more than 100.
Therefore, a very small number of people are involved in the formal debt arrangement scheme. However, when clients come to you with debt problems, I assume that you involve them in informal debt arrangement schemes. Is that the bulk of your work?
Yes.
Those informal repayment arrangements are known as voluntary repayment programmes.
The difficulty with an informal debt arrangement scheme is the fact that, when we contact creditors, they often do not reply. One of the benefits of the formal DAS is that the creditor is deemed to have consented to it. Also, in an informal scheme, interest is not necessarily frozen, and because some creditors have taken part and others have not, the debtor often has to repay at a higher rate creditors who are outwith the informal scheme. Another factor is that some banks instigate consolidations, which are not always in the best interests of the client. Although the debt is amalgamated into one repayment, our clients may have to make payments over a longer period of time and borrow more money to deal with their debt.
Okay. I just wanted clarification on how such schemes work.
People who are absolutely determined to pay off their debts may agree to debt payment programmes of 25 years, for example, which will not work; something always happens during that period and it will all fall down. The person will have committed themselves to an arrangement that is unpayable.
The other big advantage of the statutory scheme is the protection against diligence, formal debt recovery and bankruptcy during the time that the debtor is in the formal scheme. That is not possible with an informal scheme.
I have one final, quick question on disclosure of information. Does Citizens Advice Scotland have any concerns about human rights and privacy issues?
We discussed the issue some time ago, when we gave evidence on bank arrestments, way back in 2000. We agree in principle with disclosure. It is one way of ensuring that clients do not overborrow.
One of the issues that we have raised elsewhere and with the committee is that of the same creditor continuing to lend to a debtor. Some sort of disclosure provision to prevent them from doing that would be a good thing, although it would, of course, depend on the circumstances. For example, our clients are already obliged to disclose information such as their employment to a local authority. It will depend on the amended scheme; we need to see what it is.
Yes, I can see that that is the problem. I put the question to Hillary Wilson. Do you have concerns about the disclosure of information, or would it be of benefit to your organisation?
It would be of benefit to local authorities to be able to obtain further information. A number of debtors provide the statutory information, but others fail to do so. It would be useful if we could share information that comes from third parties.
I return to a point that Shiona Baird raised earlier. Prior to approaching a CAB or Money Advice Scotland, a number of debtors will already have made informal arrangements with their local authority. Those will either have been maintained for a period before they fail or they may have failed at the outset. A great number of informal arrangements may have been attempted before someone enters a debt arrangement scheme.
Thank you. That is useful.
I think that we have covered all the areas. Indeed, we discussed a lot of the subject matter at the beginning of our evidence taking. I apologise yet again for the delay in starting the session and I thank all our witnesses, whose evidence was extremely helpful.
Everyone will be glad to hear that this is our second-to-last evidence-taking session—we see the minister next week. After that, we will prepare our stage 1 report. I understand that the stage 1 debate on the bill will take place around the last week of May. It is clear that the Executive is still in some detailed discussions with others on proposed amendments to the bill. I have asked Nicholas Grier and Stephen Imrie to prepare a note to summarise the outcome of our deliberations.