What the Insolvency Service’s new proposals have been learning from Scotland
The Insolvency Service has announced plans to introduce a statutory moratorium for individual debtors – a breathing space – and a statutory debt repayment plan (SDRP) in England & Wales. Both provisions draw heavily from their Scottish cousins – the moratorium provisions of the Bankruptcy (Scotland) Act 2016 and debt payment plans (DPP) under the Debt Arrangement Scheme (DAS) – but are distinct in key aspects, not least the role of the IP in DAS, which is not replicated in SDRP.
The role of the IP as money adviser
Following its introduction in 2004, DAS was provided solely by the money advice community. Money advisers were trained to provide DAS, but with no personal financial incentive to reflect their enhanced skills or responsibilities, after an initial flurry of interest and qualifications, the number of DAS-approved money advisers in the free sector levelled off. As a result, it was difficult to access the programme and, where DAS was available in the free sector, it could (and still does) mean a much longer wait for an appointment. DPP numbers in the initial years were disappointing, and it was only following substantial revision to the DAS Regulations in 2011 allowing IPs to set up and run DPPs, that numbers increased. It’s perhaps therefore disappointing (depending on your view!) to see that the SDRP doesn’t envisage a role for IPs.
The Scottish government is looking to extend the ability to be a debt payment distributor (currently restricted to four firms appointed following public tender) to all money advisers, including IPs, with a view to making the procedure more attractive to IPs generally and less complicated from a debtor’s perspective. The role of the IP is generally viewed in Scotland as a positive enabler of DAS and one that relieves the pressure on the money advice sector. To have any chance of success, SDRP will have to see the money advice sector adequately and routinely funded.
Role of the FCA
Any IP doing DAS has to be registered with the Financial Conduct Authority (FCA). Leaving aside the cost implications and the double regulation of FCA/RPB oversight, an IP who is not FCA registered cannot advise on DAS. The insolvency exemption doesn’t cover us, since if we can’t do a DAS, we can’t advise on it. IPs will therefore have to signpost debtors looking for SDRP to the money advice sector.
Impact on IVAs
The big question for IPs will be what impact SDRP will have on the number of IVAs. Similar concerns about the impact of DAS on protected trust deeds (PTDs) were expressed, but the anticipated reduction in PTDs didn’t happen. Arguably that’s because the products provide different solutions and meet the distinct needs of different sectors of the market, and SDRP and IVA will do the same. There’s a further argument that the focus on money advice and breathing spaces will see an increase in individuals generally seeking debt advice.
Breathing space as a ‘blocker’ and DAS as preferred solution
What will be interesting is the extent to which the breathing space will be used, and if so, to what extent it will be used to block action by a creditor. In Scotland, the moratorium provisions have been used far less than expected. It’s often creditor action that propels the debtor to the money adviser, and a moratorium after the event is of no consequence. A bigger problem is DAS being used as a blocker to bankruptcy, given the court’s discretion to allow an attempted DAS as a defence to the award of sequestration. DAS as a solution is therefore prioritised, and the interaction of SDRP and English bankruptcy law will determine whether SDRP is to be given the same ‘preferred’ status.
Debtor’s property, rent or mortgage arrears
A Scottish moratorium doesn’t prevent action against a debtor by their landlord or secured lender in respect of their property, and there is still the risk that a debtor could lose their tenancy or face repossession. DAS has always struggled with rent or secured lender arrears, and it’s only very recently that mortgage and rent arrears can be excluded from the DPP. This allows creditors to accept or reject the proposal on full disclosure, but partial inclusion. The plans for SDRP specifically include such arrears as priority debts. Coupled with the proposed ban on no-fault eviction in England & Wales, it will be interesting to see that practical effect these have on protecting debtors in leasehold property.
Another key differential is the option to include the sale proceeds or a lump sum released on the re-mortgaging of the property in DAS whereas in SDRP, the property will not be included in any way. The option to include as a discretionary condition in DAS has again only recently been introduced, to assist debtors who wanted the ability to offer a lump sum sourced from a future sale or re-mortgage of the house. That more closely mirrors IVA provisions, and where property is part of a debt solution, an IVA may well be the most appropriate option
CFS v. SFS
Scotland is attempting to replace the Common Financial Statement with the Standard Financial Statement, and it is the SFS which will underpin the SDRP. The aim is the same: there should be a common platform against which everyone is assessed and their contribution fixed. In theory, when introduced in Scotland, this was to ensure that there was no ‘contribution shopping’, there was consistency of assessment wherever the debtor sought advice, and certainty of contribution on entry into the solution of choice. Of course, the reality has been somewhat different, and most criticism seems aimed at the DAS Administrator’s assessment of and fixing of contributions. Insolvency Service take note!
First published in the May 2019 edition of RECOVERY News and reproduced with the permission of R3 and GTI Media.