Economy, Energy and Fair Work Committee

Meeting date: Tuesday, September 10, 2019

Official Report 660KB pdf

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Subordinate Legislation

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Debt Arrangement Scheme (Scotland) Amendment Regulations 2019 [Draft]

Item 4 is further consideration of the Debt Arrangement Scheme (Scotland) Amendment Regulations 2019, which are before the committee in draft form. Today, representing the office of the Accountant in Bankruptcy, we have Richard Dennis, who is the Accountant in Bankruptcy; Alex Reid, who is the head of policy development; and Kelly Donohoe, who is the head of debt arrangement scheme and trust deeds.

I invite Richard Dennis to make a brief opening statement before we move to members’ questions.

Thank you, convener. We are very grateful for the opportunity to come and give evidence to the committee this morning. DAS is something that we can all be proud of, and you will know that the rest of the United Kingdom is trying to copy it. However, three main concerns are consistently raised with us about it. First, not nearly enough people benefit from the scheme. Secondly, it can be confusing for the debtor to know whom to turn to between us as the regulator, their money adviser and the payment distributor. Thirdly, the current fee system means that how long it takes a person to clear their debts, how much they pay and how much their creditors receive differs depending on who their money adviser and payment distributor are.

The draft regulations target those issues. They have been in preparation for more than two years, with three public consultations. All elements received overwhelming support in the consultation that closed earlier this year and at our annual round of stakeholder events, held in May.

Our first target is to drive up capacity. You might be surprised to learn that Fife and Moray generate far more DAS cases per head than Glasgow. That is surprising, until you look at the number of advisers offering DAS in those areas.

You will have heard last week about the pressures facing the free debt advice sector. Any large increase in provision relies, at least to some extent, on expanding the involvement of the fee-charging sector. One in four of the current DAS case loads is administered by private firms; the figure rises to one in three if you look at cases that have started this year. Those firms charge for their services through a mixture of an up-front fee and a percentage of the monthly payments that are made by the client. On average, that adds around 15 per cent to the payment towards debt, but sometimes the amount can be much higher. In a Glasgow case from a couple of months ago, those fees meant that the client would be making repayments for an extra 77 months.

Draft regulation 4 removes the right for firms to charge any such fees. In the future, clients who enter a DAS could focus on the debt payments. There would be no fees and charges from their adviser alongside the existing protections that stop their creditors adding interest or charges. That would be the same regardless of whether the adviser came from the free or the paid sector.

Removing a source of income is not a good way of encouraging private firms to offer the scheme unless we take other action. Regulation 4 also increases the fee within the DAS to 20 per cent, and brings new opportunities for anyone with the right licences to deliver payment distribution. The 20 per cent—which I know the committee questioned last week—is set at a level that matches the current average adviser fee of 15 per cent, which I have spoken about, and the current average payment distribution fee of between 5 and 6 per cent. That moves the cost of providing both the advice and the on-going service from the debtor to the creditor. From looking at cases from the past three months, we can see that, on average, those who entered a DAS with a private provider would have been debt free at least a year earlier.

Regulation 4 also allows for all organisations that wish to be both a money adviser and a payment distributor to be so, so that most clients will in the future have a single point of contact throughout the life of their plan.

Finally, regulation 4 introduces the power for my agency to act as a payment distributor of last resort to ensure that, if a provider falls over, there is someone who can step in and look after the client to ensure that their plan keeps going.

There are other benefits to the changes. We understand that one of the big constraints in the free sector is that it often takes around six weeks to get an initial face-to-face appointment. That must partly explain why clients still go to private firms and agree to pay fees although they could otherwise get the same product for free from their local citizens advice bureau. Clients who currently choose the free sector because they cannot afford up-front fees will have the choice of going to other firms, because there will no longer be any up-front fees.

By providing a level playing field in that way, there is scope to have the free and private sectors working together and each doing what they are best at without the client facing any difference in fees, whichever route they go down.

Regulation 4 delivers a single point of contact throughout the payment plan. It tackles fees by making them the same, regardless of who the adviser is, and creates the scope for new players to come into the market. It puts the interests of the person in debt front and centre, and it means that more people should be able to access debt relief, more people will be able to get access to the debt payment arrangement scheme, and more people will pay off their debts quicker.

I can expand on any of those points or answer questions on any of the other issues that were raised with the committee last week. The convener asked me to keep my opening remarks brief, so I will stop there, unless members want me to go on to explain the link between regulation 4 and the discussion about funding for the free sector, on which the witnesses who gave evidence last week concentrated.

Thank you for that. We will probably come on to some of those other issues, and you can expand on them then.

Towards the end of your remarks, you mentioned the free money advice sector. Funding is currently a key issue for that sector. I understand that the regulations were laid before a decision was taken about how the free sector’s contribution to DAS would be funded. Can you update us on that issue?

I believe that the committee received a letter from the Minister for Business, Fair Work and Skills last night. Have all members of the committee seen that letter, or would they like me to read the relevant extract?

It might have been circulated, and I might not have read the details if it arrived very late last night. Perhaps you could simply summarise in two sentences—or even three—the position that is set out if you are familiar with it.

I am familiar with it, and I want to ensure that I get the minister’s words exactly as he put them. I will just quote the two most relevant sentences:

“It will not surprise you that the recent consultation produced a divergence of view within the sector, with one third going for an option that would see funds returning directly to those organisations generating DAS cases, and one third going for an option that would see the money added to our general funding for debt advice. I have been considering the views expressed and I propose to allow individual organisations the choice between these two options to promote flexibility, ensuring that the arrangements put in place meet the requirements of each individual organisation by placing that decision in their hands.”

What is your view of that? Will it assist the free money advice sector? Will that work?

It certainly will work. The committee might not be aware that, under the current DAS regulations, no funding goes to the free advice sector specifically for DAS related to the cases that it generates.

I underline the fact that we are talking about very small amounts of money. Our estimates suggest that we might be talking about less than £100,000 in the first year. It will not make a sea change in the provision of free advice for DAS, but it is a recognition of all the valuable work that advisers do in this area. It is a first toe in the water to see whether this type of approach can deliver real benefits.

Do you think that it will mean a resolution at this stage, but that it is not necessarily a final solution to the issue?

As a resolution to the issue of funding for the free sector more generally, I do not think that there is anything that we can do by looking at formal statutory debt repayment tools. That is because, as every committee member will know, the hot topic in money advice is universal credit. Most people who come to talk to a money adviser are having problems with the benefits system. I do not want to undermine the importance of what we are doing with the debt arrangement scheme and the valuable work that money and debt advisers do in putting clients into statutory solutions, but that is a very small part of their remit.

The committee will also know—the minister refers to it in his letter—that part of the Scottish Government is now focused on delivering debt policy. It will shortly publish a route map that looks at the funding for debt advice across Scotland as part of the devolution of new powers that has brought part of the Financial Conduct Authority levy funding to Scotland for the first time.

Alan McIntosh, with whom you will be familiar, has made submissions to the committee, one of which relates to the idea of having a certain percentage of all funds returned to creditors through statutory debt solutions being used as a source of funding for the free money advice sector. Might that solution work? Why is the current solution better, or worse, or of equal validity?

Most of that is a question for ministers rather than us as the administrators of statutory debt products. However, I will make a few comments.

I suspect that members are aware of the fair share funding model that underpins charities such as StepChange Debt Charity and PayPlan. In DAS, for the first time, we are looking at experimenting with a statutory form of fair share. You could see this as a toe in the water before going down that route.

As I have said, most money advice is not to do with statutory debt solutions, so the generic question about the funding for money advice probably cannot be coming from this sector. Members are probably also aware that most bankruptcies produce no dividend whatsoever, and the average return to creditors from trust deeds is well under 20 per cent. Creditors also pay towards the FCA levy that is entirely for the funding of money advice, so there are quite a lot of issues that would need to be worked through and consulted on before we could go any further down this route.

In your opening remarks, you said that there was a consultation on the proposals contained within the regulations, and you talked about regulation 4 in particular. Last week’s committee witnesses all called for a wholesale review of debt management and debt relief options. Is that call consistent with the proposals in regulation 4 that you outlined a wee while ago?

There is no conflict between the regulations that are in front of the committee now and the call for a general review of statutory debt solutions. I will quote the minister’s letter again, because, as you might expect, I need to ensure that I stay in line with what the minister said. In section 4 of the letter, he said:

“I agree that there is a case for a more fundamental and wide-ranging review. I will revert back to you in due course with more detail as to how that can be taken forward and will be very happy to discuss this matter further with your committee.”

10:00  

You mentioned the proposals in regulation 4 for having a single point of contact, tackling the fees and the possibility of paying a year early. Those proposals must have received general approval during the consultation, so, if they are on the table, why are folk still calling for a full and wholesale review?

Are you asking about a general review of regulation 4 or of debt solutions?

It would be a general review of debt solutions—the big picture.

A general review of debt solutions would take time. The regulations that are in front of the committee now will bring immediate benefits to a large number of debtors. Those debtors will be debt-free more quickly, and more people will have access to the scheme. Any wider review will take time and, almost certainly, will require primary legislation to implement, which cannot be done in the short term. There is no conflict between making progress with these regulations and making progress on the general debt landscape. I am sure that the committee will want to talk to me about trustees, even though they are not central to the regulations.

Last week’s witnesses were very much focused on the bit of regulation 4 that deals with the funding of the free advice sector. It might help the committee if I set out how what regulation 4 will actually do will lead on to that small return of funds to the free sector. I am happy to try to do that if it would help.

I am sure that it would help us.

I thought that it would be one of the committee’s questions, so I have prepared the answer to this one.

I talked about how regulation 4 will make delivering DAS more attractive to firms and big charities. That is largely because we are bringing together the role of money adviser and payment distributor. It is good for the client, who gets a single point of contact; good for private companies that are frozen out of the payment distribution function by the current arrangements, which we can explain in more detail, if that would be useful; and attractive for voluntary bodies such as Christians Against Poverty that want to take their client the whole way through the journey. They do not want to put somebody into a solution and hand them over to a private firm to do the payment distribution.

I have talked about one in three new DAS cases being done by private firms and 40 per cent of new cases being done by StepChange, so the vast majority now fall into that category and even more will do so in the future. We have created a solution that will allow smaller bodies, when they have a client in front of them who they have assessed as being suitable for DAS, to simply say, “Go down the road, see my friend who will deliver this and there will be no extra fees for you”. They cannot do that now, because if they pass the client on, the client will have fees to pay.

There will be some smaller bodies, including those such as the one that Mr McIntosh represents, that do not want to set up their own payment distribution facilities and do not want to hand over their clients, but want to keep offering DAS. We do not want to freeze out such bodies, because we all want to increase capacity. In those cases, we have said that we will handle the payment distribution on their behalf. Originally, we thought that we would be there just as a last resort to pick up cases if the payment distribution fell over, but for the bodies that cannot set up payment distribution of their own and do not want to hand over their clients, we are happy to do it. The downside is that the client will lose their single point of contact, but the advantage for the body is that they will know that they are keeping their client entirely in the public sector.

We have also said that the fees will be the same regardless of who does that work. When I act as payment distributor, I will still collect 20 per cent, so it will be the same fee for the client regardless of who does it. That is as far as regulation 4 goes. It says that I have to charge 20 per cent and there it stops.

My agency does not want to make a profit, which means that we will have the opportunity to return to the free sector the difference between our costs and what we bring in from the 20 per cent. That is the little element that the witnesses at last week’s committee meeting focused on. I said that it will be very small—it will be about £100,000 in the first year, taking the most optimistic estimates—so it is a small step to recognising the valuable work that free advisers do.

We have consulted separately on how to return the money, because we want to maintain maximum flexibility.

In reality, we have to suck this and see how it works in practice. We want to maintain the scope to do that. For the first three years, I have said that I will fix my costs at five per cent and return at 15 per cent to give people clear understanding of what is going on. The minister has now made the decision that each individual organisation will have to say either that it wants all the money that is generated from its cases to go back to it, or that it wants it to go into the pot for general debt advice funding.

That is a great benefit for citizens advice bureaux, which were concerned that people would perceive them as having a conflict of interests, in that they might be recommending people into a DAS purely so that they could get their 15 per cent back. Now they can say that they do not want that 15 per cent, which hugely reduces that perceived conflict of interests.

It is really helpful for me, as a new member of the committee, to get that level of information.

Is there also a case for improving public awareness of what is a very complex area? Last week, in one way or another, our witnesses said that it is a very complicated area, and that changes that occur in debt legislation can sometimes lead to the development of unforeseen circumstances. Is the issue of providing the public with improved, clear and simple information of concern or interest to us?

Yes, it is. I am sure that the point was made to the committee that, although you will see large adverts for protected trust deeds—no doubt on your Facebook feeds or if you have driven over the Kingston bridge—you will struggle to see large adverts for the debt arrangement scheme.

I do not know whether anybody on the committee remembers our “12 days of Debtmas” campaign, but it is no surprise that an agency such as mine does not have the advertising budget of some of those firms. Generating the possibility for them to get active in the sector might readjust that balance slightly. Nonetheless, I completely agree that we need to do more to promote DAS.

In the interests of clarity, will you say whether it is correct that your regulations—in particular regulation 4—make provision for payments to the payment distributors and not directly to the money advisors?

Yes, that is right. In most cases, the payment distributor and adviser will be the same organisation, and the payment distributor will take the money so that they are in the right place to collect the fee.

When you say “in most cases”, it is really only StepChange and other private providers that we are talking about, is it not?

Yes.

But free money advice providers are not really payment distributors, are they?

At present, the citizens advice service is not a payment distributor. However, bodies such as Christians Against Poverty do their own payment distribution work.

Nonetheless, is it accurate to say that the majority of advice providers are not currently payment distributors?

That is accurate in terms of the number of organisations, but not the number of cases. The massive majority of cases are dealt with by payment distributors.

Okay.

Last week, we took evidence from a number of organisations from the money advice sector that give free advice. You read out the sentence from the minister’s letter about there being a choice for payment distributors who receive that money. However, that is not a choice that can be directly exercised by money advisers, because they do not receive the payments.

My contention is that you are conflating two things. According to regulation 4, only a payment distributor can get that money. Some payment distributors—including StepChange—provide money advice, so they can use that money to fund their debt advisors, as I expect they would. However, the free money advice sector is not a payment distributor and therefore cannot benefit from the option that you read out from the minister’s letter, because regulation 4 does not give it the power to receive money directly. Is that correct?

Regulation 4 sets a single fee for payment distribution. However, in cases such as you are talking about, either they will have appointed us and we will return the money—obviously, we will have our annual accounts externally audited to demonstrate that we return that money and will have taken only an element to cover our costs—or they will come to an arrangement with a firm to hand over those cases. The payment distributor will not get those cases until they come to an arrangement.

Why are you not adopting the approach that is taken down south, which recognises that the overwhelming percentage of the fee should go to money advice?

You will be aware that the UK Government is consulting on the breathing space scheme, which has two elements that are akin to a statutory moratorium and a statutory debt repayment plan. The initial proposal is that funding for the statutory debt repayment plan will be a total of 10 per cent, of which 1 per cent will go to the Insolvency Service for administration—currently, 2 per cent goes to administration, here. The Insolvency Service will do all the payment distribution, and 8 per cent will be returned to the money adviser.

We have set up a system in which we think, on average, payment distribution is around 5 per cent. If a private firm cannot beat 5 per cent, the free sector will choose us, so the money adviser will get 15 per cent back. That is significantly higher than 8 per cent, so I am not quite sure where the question is coming from.

It is recognised that there is a crisis in the free money advice sector. We heard that from witnesses across the board. We could spend ages discussing why that crisis has arisen, but it exists. The regulations are an opportunity to incentivise the debt arrangement scheme for the private sector—I understand why you would do that—but there is no recompense for the free money advice sector, which generates a lot of the cases. I think that you have been slightly disingenuous in how you quoted the minister, because that is not what regulation 4 will actually do: that choice is not available to the free money advice sector.

I do not accept that. We consulted on whether we should merge the fee or have a separate fee—which I think is what is behind Jackie Baillie’s question—and 50 out of 65 responses said that we should merge the fee. Are we right to call it a payment distribution fee? In reality, it is a single fee that is collected at the most convenient point. I do not see how a payment distributor could get that fee in a way that would exclude the money adviser, so I do not accept that the money adviser does not have a way to get that recognition.

I hope that I have been clear with the committee. We are not trying to meet fully the costs of the free debt advice sector through the new regulations; it is only a small recognition of the work of the advisers, who get nothing at all under the current regulations. Is this a step in the right direction? Can we expand on it? It is only meant to test the water.

I worked in the debt collection trade for 30 years and I welcome the proposals. However, I am a bit confused, so can you clarify something for me?

Money advice centres and citizens advice bureaux do a lot of this type of work. Are you suggesting that they will do the work but will not get a fee, while companies that currently charge people will still get a fee because they will charge the creditor? Will the money advice centres be able to tap into the fee side of the regulations so that they can get—quite rightly—a return on the work that they currently do for free? Yes or no?

Yes. Do you want me to clarify how?

Yes—please do.

Let us say that you are sitting in a citizens advice bureau and a client comes to you. You go through their income and expenditure and you determine that DAS is the right solution for them. You then have three choices. You can ask us to be the payment distributor, and we will return 15 per cent of the commission direct to you, if that is what you choose; you can reach an agreement with any other payment distributor, who might be able to do things more cheaply than us, and you might get a higher return; or you can simply say that you do not want to deal with the on-going administration from the case—there is an annual review, variations and emergency payment breaks to deal with, which are covered in the regulations. You might say to the client that you do not have time to deal with the administration and need to deal with other clients, so you pass the client on to another organisation at no detriment to the client, because you have identified that that is the right solution. Someone else will run the administration and the client will not pay a single penny for that. In that case, the organisation that does the work will get the fee.

That is what I wanted to get at. If the citizens advice bureau passes the case on to someone else, it does not get a fee. The “someone else” gets the fee.

10:15  

That is the case if someone else is doing the work. If the citizens advice bureau is doing the on-going work, it gets the on-going fee.

If it does the on-going work and passes it to you, it gets the fee.

Yes.

Do you not think that your organisation will take on a lot of work? It is not easy.

We are entirely confident that we are ready to take on the work. As I said, the large increases in volume that we expect will largely be for organisations that will act as a single point for the client and take the client the whole way through.

You talked about capacity in the free sector. Has the free sector the capacity to deal with a huge increase in DAS clients? That is an open question.

How much will it cost for a computer system to do that?

The system is already in place. We are putting in a new computer system anyway, to deal with the debt arrangement scheme. That was needed, because the previous one had reached the end of its life. The extra cost of the payment distribution functionality was around £50,000.

Thank you.

I will follow up the two previous questions.

You talked about the options that the money adviser has in relation to payment distribution. In respect of the free money advice sector, the suggestion was that the regulations provide for a minimum fee from the payment distributor, rather than something to be negotiated.

You talked about regulation 4 testing the water. Is there merit in giving more guarantees of the minimum percentage that a free adviser might expect to receive from a payment distributor, rather than leaving it purely to negotiation?

We think that we have done that by saying that we will return 15 per cent.

You will do that, but the option of going to another party is subject to negotiation.

Yes.

Therefore, the suggestion is that that negotiation could be constrained by, perhaps, a guarantee that advisers get a minimum sum or percentage fee. Effectively, are you suggesting that, if they do not get a decent deal—

They will come to us.

They will come to you.

That is a good backstop. We want to build in as much flexibility as possible, rather than straitjacket the process into a particular form. That is partly because the roles of payment distributor and money adviser are not necessarily as separate as you might think. You might think that a payment distributor is simply managing the monthly payments. However, what if a client misses a payment? The payment distributor gets in touch and says, “You missed your payment. Where is it?” The client has had a life shock and needs money advice. Where would they go for that?

Okay. That is fine.

The prospect has also been raised that the new regulations could apply to existing cases as well as to new ones. What is your view on that?

The first thing that I want to say on that is that that is complicated and we have not tested it in consultation. What you say is legally and technically possible. We would need to overcome a lot of difficulties. For example, the payment distributors that have that existing case load have all been appointed under contractual arrangements, with varying fees. Some are below 5 per cent; StepChange takes 8 per cent. What would happen to those fees? Would StepChange’s 8 per cent be written down to 5 per cent, with 15 per cent going back? Would that push the overall cost of creditors up to 23 per cent?

What would happen to the private firms that have cases going with existing Competition and Markets Authority fees, which are based on a percentage of the contribution by the debtor? If those fees suddenly fall, and the private firm says, “We don’t want to keep the plan going,” what would happen to such cases?

There are a lot of questions, as well as the general one about whether to do things retrospectively.

Could it be made a choice, rather than a mandatory thing? In cases in which doing so would be beneficial to the debtor, they could switch to the new arrangements.

In all the cases that are handled by CMA, it would be beneficial to the debtor.

So, in those cases, people could have the choice.

Theoretically, that could be the case. However, what would happen if all the debtors who are currently paying on-going commissions were to choose to stop paying those commissions? Who would look after those cases? Creditors have all had proposals put to them and have agreed them on one particular basis, which we are now changing. There is scope for a huge range of variations to come in for those cases. It is technically quite complicated, and it is not something that I would like to get into active consideration of until I had had enough time to consult people and understand those technical difficulties. However, what you suggest is theoretically possible.

Last week, I asked the free debt advice sector organisations about the additional work that is necessary to support clients in choosing a payment distributor, because at the end of the day, it is the client who makes that choice. Do you agree that that will cause considerable extra work?

Perhaps unsurprisingly, I do not agree that there will be considerable extra work—particularly not for the debtor.

First, building in flexibility and choice for the individual seems to me to be a good thing that we should want to do. We have provided a default, which involves the AIB acting as payment distributor for other organisations.

Until 2011, an individual had the right to choose their payment distributor. That system worked relatively well. We know that debtors were heavily dependent on their money advisers for advice on whom to choose, and we know that, when the system first started, money advisers did not really have much of a feel for whom to recommend. However, by the time the system had matured, money advisers knew that, and debtors fell into line with that.

It is worth saying that there is absolutely no downside for the debtor, regardless of the choice of payment distributor.

Do you think that the debtor is well equipped to choose?

No, debtors are not well equipped without the advice of their money adviser. However, neither are many debtors well equipped to make the choice between a protected trust deed and a debt arrangement scheme without the advice of their money adviser.

So, you agree that the money adviser would have to give information on the choice of payment distributor sufficient that the client could make an informed decision.

I will outline how I envisage the process working. Someone comes to me—“R Dennis Money Advice Services”—and I say, “Would you like to do a DAS with me? If you do, the payment distributor will be the AIB. If you would like the payment distributor to be StepChange, you can go down the road and see my friend.”

So, you are saying that the individual money adviser would have a formal link-up with one particular distributor, but the client would have the choice of going with that or seeking their own option.

The client could do that, or go to another money adviser. We know that what I described is what citizens advice bureaux already do with protected trust deeds. Lots of individual bureaux have relationships with a panel of insolvency practitioners, so if they have a client in front of them who needs a protected trust deed, they know to whom to refer them.

Does that provide an adequate choice for the client? Given that choice exists, who will give them the informed analysis of which distribution agent is the right one for them?

The money adviser will fairly quickly come to know whether they have a link-up with a good firm. If they have a link-up with a firm that they do not think particularly highly of, they will change it.

That seems to be a remarkably weak explanation, to be honest. It seems to leave the client either accepting a linked distributor or having to go out and make his or her own decisions.

The client would not make their own decision; they would go to another money adviser.

So, the client would go from money adviser to money adviser, seeing whom they are linked to. That does not make sense.

Why would the client not accept the choice of the original money adviser? There is no detriment to the client with regard to the choice of payment distributor.

But it is the client who has to make the decision: that decision should be the result of an informed exchange of information.

I agree that, by that stage, many clients are not in a terribly good position to make that sort of informed decision, which is why the money advisor should be explaining the choices that are available in a form that is simple and easily understood. Will not that cause extra work? To say simply that if the client goes to this money advisor they will be dealing with that distributor, and if they go to another money adviser they will be dealing with that other distributor, is not in the spirit of the law.

All I can say is that the system already works in the protected trust deed market, in which local money advisors cannot deliver protected trust deeds. At least the regulations would allow the client the choice to stay with a particular money advisor.

That sounds fairly weak. The payment distributor is not compelled to take on cases. Is there a risk that they would refuse to deal with clients who have very little income that they could contribute to the debt—cases that the distributor might regard as unprofitable?

Yes—we expect that to happen and we would expect those cases to come to us.

The AIB is the backstop.

I will make a point on payment distribution and the process of selection. The option to move away from the current procured and contractual arrangements for payment distribution has been pretty well supported—it will provide resilience in the system and create a fallback position. There is support for moving away from the current arrangements.

The key in moving to new arrangements is to retain flexibility in availability of payment distribution services and the firms that can offer those services, and to provide the fallback that the AIB can offer the services. Given that the payment distributor works on behalf of the debtor, and given that there is a move away from the current arrangements to wider arrangements for options for payment distribution, the view is that the proposed arrangements are the most effective parameters within that context.

Let me summarise the process. The client goes to the money advisor, and the money advisor says that it has links with a certain distributor and that the client can take that option or go to another money advisor, and then, if the payment distributor decides that the client’s case is not one that it can take on for economic reasons, the case ends up with the AIB.

That would depend on the arrangement that the advisor has with the payment distributor. We would not expect case-by-case negotiation, which would be hugely bureaucratic. We expect the individual advisor to have a relationship with a firm, which would say that it would take all the adviser’s cases for payment distribution—the ones that it can make a big profit on, the ones that it can make no profit on and the ones that it will make a loss on. We expect such firms to take the whole basket.

You are making a lot of assumptions about what the money advisors will do. It is a good thing for the AIB to be a backstop, but you are not actually saying that. Are you guaranteeing that you will take on any cases that other payment distributors will not take on, possibly because they consider them to be unprofitable?

Absolutely—yes.

Are you guaranteeing that no one will be left swinging in the wind?

Yes. We will do payment distribution for any case in which someone wants us to do that.

I still think that there are a lot of weaknesses and assumptions in what you have said, but I will move on.

Some witnesses have been concerned about the possibility of a conflict of interests for the AIB if it takes on the role of payment distributor. There are other perceived conflicts in respect of developing policy and so on. What do you say to that?

I will say several things. The points that were made in the committee the other week were, perhaps, based on a misunderstanding. The work of the other payment distributors is regulated by the Financial Conduct Authority—not by the AIB. The matter of the AIB applying to our payment distribution work different standards to what we would apply to the payment distribution of others does not arise.

I can see a potential conflict in that we might think, “Yippee! We’re making money on our 5 per cent! Let’s generate lots more DAS cases in any way we can, to get more income.” However, as I have said, we have given a commitment that we will only cover our costs; that will be externally audited. If the committee would like an annual extract from my accounts showing our costs and income in that respect, I will be very happy to provide it.

There is a lot of discussion about a potential conflict of interests in respect of our role in bankruptcy. The Institute of Chartered Accountants of Scotland might have raised that with the committee. In bankruptcy, in many cases we are both the trustee and the supervisor of other trustees. Extensive mechanisms are in place to handle such conflicts. I am confident that we could, if similar conflicts were to arise with the DAS, put the same arrangements in place.

10:30  

Can you confirm that in effect you supervise other payment distributors?

As I said, the direct regulation lies with the Financial Conduct Authority. However, I will pass over to my colleague Kelly Donohoe, who oversees the team that checks the work of other payment distributors, to set out what we do to keep that under review.

At the moment, we have a current payment distributor panel in place and the team has quarterly meetings with the payment distributors. We manage performance and we look at complaints and any correspondence from creditors that comes in. At the moment, we have oversight of the payment distribution process. However, as Richard Dennis said, we pass complaints to the FCA—the regulatory body of the payment distributors—because it is the FCA that gives them the permissions to do payment distribution. We have oversight of performance and making payments. We contact creditors on an ad hoc basis to make sure, for example, that payments are being made on time and are of the correct amount.

The Financial Conduct Authority clicks in only if there are complaints. As you said, the Accountant in Bankruptcy supervises the day-to-day operations of the organisations. If you are providing the same services—some people might say competitive services—surely, that is a conflict of interest. Money advisers might make agreements—formalised contracts—with you or with other distributors. Therefore, the Accountant in Bankruptcy has a financial interest in the whole process.

As Richard Dennis said, in relation to a financial interest, any moneys that are gathered from the payment distribution process for the AIB as payment distributor would transparently go back to the money advisers who generated the cases.

That is not the point. The point is that you are competing with the other distributors.

The idea is not for the AIB to be competing with anyone. We do not want to compete. It is a backstop. We would act as a payment distributor where appointed to do so by the debtor or the money adviser who is advising the client.

You would not seek to have agreements with money advisers, so that you have exclusive distribution.

No. I would be extremely happy if no one chose us as payment distributor. We will maintain the capability, because what happens if a big provider falls over and somebody has to pick up the case load? A few years ago, we came close to that situation and it started us thinking, “Heavens! We need the capacity to step in if we have to.” That is what the capacity is for.

If people do not want to come to an arrangement with the payment distributor and they choose us, that is fine. However, from my discussions, I am confident that the 5 per cent that we have set will not be a competitive barrier and will not compete others out of the market.

There are still a lot of grey areas in there, but I will leave it at that just now.

Debt arrangement schemes have been in place since 2004. Why make the changes now?

Some of your witnesses might have said last week that, as we have learned through experience, we have made regular changes to the debt arrangement scheme since 2004. We have consulted extensively on those changes. We go out to people and ask, “How can we make this better?”, and they come up with a number of ideas, which we consult on. We have a huge amount of support for the proposals. Where we get consensus that proposals would make things better for the debtor, we bring them to you as regulations.

We are introducing the regulations now because it has taken us two and a half years to put the package together. We are now confident that it is the right package. We are confident that the debtor will benefit hugely from this: lots of people will pay less, many people will be debt free more quickly and there will be greater access to the scheme. We have brought forward the regulations as quickly as we could. I would not have been surprised if one of your colleagues had asked me why we had brought them forward so quickly.

You talked about the fees, which are potentially increasing from 8 per cent to 20 per cent. You also mentioned that the average adviser fee is roughly 15 per cent. Does that not skew the advice? If someone is getting a higher than average fee from DAS, rather than protected trust deeds, will that not skew the advice that is given and the direction of travel?

First, the 15 per cent average fee was largely anecdotal and was based on the best evidence that we had. It was not until last October, when the committee very kindly agreed a set of DAS regulations, that we made people declare what their fees were—before that it was simply a matter between the client and the firm. Recent indications are that a 15 per cent fee is lower than average. We believe that the fees will be lower in a large number of cases, so we are not increasing the fee; we are decreasing it.

On perverse incentives, the point that I should have made up front is that the debt arrangement scheme is not for everyone. It is for people who are in debt but who have a significant surplus monthly income. The committee might be surprised to hear that the average monthly payment is more than £400. The vast majority of people in financial difficulties will not have £400 to spare to deal with their debts.

The sort of people we are talking about basically have a choice between the debt arrangement scheme and protected trust deeds. In a protected trust deed, the average fee taken last year was more than 65 per cent. If there was mis-selling—that is a very big if, about which I have things to say, if you would like to ask me about it in a minute—no one would mis-sell someone a DAS for 20 per cent when they could mis-sell them a trust deed for 65 per cent. That is why I do not think that there is a significant danger of perverse incentives for the fee-charging sector.

The return to the free sector might be at most £100,000. Is that enough to make a difference? The free sector is very effectively regulated through the national standards and so on. Moreover, as the committee will know, the free sector organisations are not in it for the money. That is why I am not concerned about the dangers of perverse incentives.

Finally, you mentioned that DAS is not for everyone and that protected trust deeds are sometimes a better way to go, especially as debts are written off after four years rather than 12, as they are under DAS. I know that DAS is aimed at ensuring that all debts are paid off over a period of time. However, if there is a difference in the fee structure, is there a danger that people who have large debts will be pushed down the DAS route, even if they would get greater benefit from a protected trust?

The big difference is that a protected trust deed is a form of sequestration—it is insolvency—so it is in the same market as bankruptcy, whereas DAS is not. DAS is a debt management scheme and is not a debt relief scheme. Do I think that there is any danger that people will be pushed into DAS? It is the debtor’s choice.

My view is that nothing cuts across the basic principle that, following some advice, people should use the product that best suits their circumstances. If debt relief is required and that is the only sustainable solution that provides them with a way out of financial difficulty, that is clearly the route to take. It is not a question of people being corralled into one solution or another. There should be regulation in place to pick up bad practice and people being clearly in the wrong solution for their circumstances.

However, I agree with what Richard Dennis has said: the revision of the structures that the regulations introduce to DAS offer even less scope to create perverse incentives that might already exist because of the fee structures elsewhere.

As I previously said, I worked as a debt collection manager for the Royal Bank of Scotland—Royscot Financial Services. Do you really know what you are getting yourself into? How many staff do you have to take on this work? Have you personally visited a collection company?

Yes, we have visited lots of collection companies. Kelly Donohoe and her team spent a lot of time with the existing payment distributors. We currently carry out similar functions when we act as trustee in bankruptcy and when we make returns to creditors. How many staff we need for this will depend on how many cases we are appointed payment distributor for. It will not be a huge number in the first few months and we are entirely confident that we can build our capacity as the workload picks up.

You said a few minutes ago that you will not be dealing with clients who pay only a few pounds a week but will be dealing with those who pay, say, £400 a month. Is that correct?

Yes, that is the average payment.

So you will not be solving everyone’s problem—you will solve problems for only a certain few. You will deal with someone at the high end rather than the low end of the market.

Although I was a debt collector, I treated every debtor with respect and I abhorred what some companies did. I wish you well and I agree with you. There were companies that ripped people off left, right and centre with their charges, whereas the company that I worked for collected the debt and only the debt and did not charge people anything more. I have respect for Citizens Advice Scotland and other organisations that deal with people with respect and try to help them, unlike the companies that charge charges and rip people off.

I welcome and wish you well in what you are doing, but I highlight that you will tackle only one end of the market, rather than the whole market, so what we are doing will not solve everyone’s problem.

If there were people who went to a citizens advice bureau and wanted you to handle their debt, would you do it, even if they were paying only £20 a week?

If it was £20 a week for a debt arrangement scheme, we would.

Basically, you are saying that citizen advice bureaux can deal with people as they do—respectfully and honestly—and sort out their problems, then pass the case to you. You can then charge the creditors, which I agree with, and refund money to Citizens Advice Scotland so that, quite rightly, it can get an income from the work that it has been doing for years for free.

Yes, I completely agree with all that. However, to enter a debt arrangement scheme, someone needs to have a reasonable amount of surplus income, because they need to be able to repay their debts in full in a reasonable period of time.

When I visited people as a debt collector, I used to say that, if they paid £5 a week, they were changing it from the red side to the black side. We just have to treat people with respect, and sit down and discuss it with them.

We have all been in debt at some point. If you are paying off a car, it is a debt—except it is not a debt, because you are paying it. If you paying off a house, it is a debt—except it is not, because you are paying it. However, unfortunately, people get made redundant or hit bad times, and they should be helped at those times. That was my watchword and what I said to my staff.

I wish you well in what you are doing and I want to see it work. I also want the people who have been ripping off customers for years to be finally stopped.

Now I will ask the questions that I should be asking. I was not on the committee prior to today. However, I understand that several witnesses have highlighted issues of poor practice in the protected trust deeds sector, in particular. As you said, there has been heavy advertising, which might not have made clear the consequences of entering a PTD. Is there not a risk that those issues will simply be transferred into the DAS sector if the financial incentives for offering DAS are increased?

10:45  

I echo all that you said before your question. However, if one of your constituents genuinely had only £5 a month spare and had large debts, they would almost certainly be better off in bankruptcy. One of the advantages of the debt arrangement scheme is that, once someone enters the scheme and it has been approved, their creditors can no longer apply any charges or charge any extra interest, so they only pay the principal. That is how the scheme works.

I am sorry—I have lost my train of thought. Will you repeat your question?

Witnesses have highlighted issues of poor practice in the protected trust deeds sector. Do you agree that we have to sort that out?

There are widespread concerns about the way in which the trust deed market operates in Scotland. We have been consulting for a number of years, trying to come up with a package to address the issues in a way that will command widespread stakeholder support. I am more than happy to write a note for the committee on the proposals that we have put out for consultation and on the summary response, although it is all published on our website. It is fair to say that we have yet to find a way forward that attracts anything like the consensus that I would need before I could come to the committee with proposals.

Right. I have another question that has always interested me.

Debt companies sell debt to other companies. Before they know it, somebody who owes a company £400 will find that they owe it to a different company. It is like a revolving door. The £400 will go to the second company, but they might get paid only £200 and perhaps £100 will go to another company and so on. Meanwhile, people continually get letters after letters. They get offers, such as that if they only pay off £200 of their £400 debt, it will be settled up. However, it remains on their credit file as a debt owed, so it still affects them even when they have paid off what they believe to be their debt. What do you think about that?

If the debt has been settled, it should—

No, they only partly settle it, so it is down on their credit file as a part payment.

This is going off the topic before us, but if an offer has been made for a part settlement to write off the debt, it should be written off in full when paid.

That is all I want to know. Thank you.

As there are no further questions from members, I suspend the meeting to allow a changeover of witnesses. Thank you very much for coming in.

10:47 Meeting suspended.  

10:51 On resuming—