Debt Management

DM 09

Written evidence submitted by R3

As President of R3 - the insolvency trade body, I am delighted to submit our evidence to the Committee’s inquiry into Debt Management. As you suggested as part of your meeting with R3 on the 8th November, we would welcome the opportunity to give oral evidence in due course.

R3 represents 97% of licensed Insolvency Practitioners and insolvency lawyers. We have focused our submission on Section 5 of the Government’s response to the Consumer Credit and Personal Insolvency Review - Debt Advice and Collective Solutions for the Debtor.

Insolvency Practitioners are experts in personal insolvency and debt advice, working with financially distressed individuals on a daily basis. They provide the full range of debt and insolvency solutions, including acting as Trustees in Bankruptcy and Supervisors of Individual Voluntary Arrangements. As such, they have a unique perspective on the UK’s personal insolvency regime.

We welcome certain outcomes of the Review but are concerned that the Government’s proposals fail to tackle some key ‘problem areas’ - e.g. bad practice in the Debt Management Plan industry. We also believe there are proposals put forward by stakeholders that have been dismissed, though there would be benefit in exploring them - e.g. proposals to improve the quality of debt advice.

I very much hope to be called for evidence so that I can share our members’ first-hand experience of debt and insolvency in the UK and offer our views on the adequacy of the Government’s response to the recent Review. In the meantime, if you would like any further information from us, please just let me know.

Frances Coulson

R3 President

Response by R3, the insolvency trade body

R3 is the trade body that represents 97% of licensed Insolvency Practitioners (IPs). IPs are accountants and lawyers who specialise in insolvency. They provide the full range of debt and insolvency solutions, including acting as Trustees in Bankruptcy and Supervisors of Individual Voluntary Arrangements.

Our members work with financially distressed individuals on a daily basis so we have focused our response on Section 5 of the Government’s response to the Consumer Credit and Personal Insolvency Review - Debt Advice and Collective Solutions for the Debtor.

Executive summary

1. We welcome certain outcomes of the Review but are concerned that the Government’s proposals fail to tackle some key ‘problem areas’.

2. While there is much good practice in the Debt Management Plan (DMP) industry, particularly from providers operating under the voluntary codes, there remains considerable bad practice that must be addressed. A DMP Protocol is a step in the right direction, but it is a muted response. A Protocol is simply not capable of tackling the ‘bad guys’ operating outside voluntary codes.

3. The Government response suggests that legislative change is needed so that the banks can provide basic banks accounts for bankrupts; yet it is possible for banks to offer these under existing legislation - as some currently do.

4. The Government response concedes that there is widespread support for a ‘gatekeeper’ to address concerns about the quality of debt advice. We would like to see the Government consult on various models to tackle the problem of ‘bad advice’.

5. The response recognises the disproportionate power of lenders in Individual Voluntary Arrangements (IVAs) through the IVA Protocol. We are disappointed that the Government does not intend to resolve the imbalance between debtor and creditor by introducing Simplified IVAs.

6. It is counter-intuitive that people who are hugely indebted have to find £700 ‘upfront’ to apply for bankruptcy. Although this issue was not addressed in the Government’s response, a subsequent consultation is exploring whether this cost could be paid in instalments, which we welcome. We also believe there is merit in the Government considering raising debt and asset levels in Debt Relief Orders (DROs) to widen access to debt relief for those who cannot afford to go bankrupt.

KEY TERMS

7. Debt Management Plans: DMPs are formal but non-statutory repayment plans agreed between debtors and creditors, often by a third party (who may or may not take a fee). DMPs are not binding on creditors or debtors. Some may involve a degree of debt write-off.

8. Individual Voluntary Arrangements: Introduced in 1986, IVAs are a binding statutory contract between debtors and creditors. It is usually a five year repayment plan involving some debt write off. Once approved by creditors, the IVA will be supervised by an Insolvency Practitioner.

9. Bankruptcy: Bankruptcy is a formal court procedure. It is usually entered into when an individual cannot pay their debts and does not have sufficient income to enter a repayment plan. Assets are liquidated; the individual is subject to a number of restrictions (e.g. limited access to credit), usually for a year; and surplus income is used to repay creditors for up to three years. Remaining debts are written off.

10. Debt Relief Orders: Similar to bankruptcy, these are only available for individuals with low assets and little disposable income. They were brought in during 2009 to provide wider access to debt relief for those who cannot afford to enter an arrangement with creditors or go bankrupt. The key difference between bankruptcy and a DRO is that there is no debtor's estate in a DRO - i.e. the OR does not realise assets or pay creditors.

11. The IVA Protocol: This is a voluntary code of conduct designed by a working group of IVA providers, creditors, consumer representatives and the Insolvency Service. It outlines the simple process to be followed on straightforward IVA cases.

12. Deed of Arrangement: A non-binding repayment plan brought into being when agreed by a simple majority of creditors. Unlike an IVA, creditors who did not vote in favour are not bound - i.e. they can take action against the debtor to recover what they are owed. Provisions for Deeds are contained in the Deed of Arrangement Act 1914.

13. County Court Administration Order: A CCAO is a repayment plan administered by the Court. Individuals can only apply if they owe less than £5,000 and have a County Court Judgement against them. Provisions for Deeds are contained in the Tribunals, Courts and Enforcement Act 2007.

GOVERNMENT ACTION

DMP Protocol

14. The Government response to the Consumer Credit and Personal Insolvency Review states that ‘DMPs caused concern amongst all respondents’. As a result, they will ‘continue to monitor’ practice in the DMP industry and introduce a DMP protocol. This muted response shows a disappointing failure to understand stakeholder concerns.

15. While a Protocol is an improvement on the status quo, it is not sufficient to tackle the ‘bad guys’ who could operate comfortably outside it. R3 believes bad practice in the DMP industry should be tackled by more stringent regulation. Those providing DMPs should be regulated to the same high standard as those who provide formal insolvency procedures.

16. DMPs have an important role to play in the debt landscape and a DMP can be the right option in certain circumstances. DMPs are provided by private sector organisations, not-for-profit organisations and a small number of Insolvency Practitioners. It is critical that wherever a DMP is recommended, it is done so on the basis of full and impartial advice. While many DMP providers consider a range of solutions and only offer DMPs in the right circumstances, there is evidence to suggest bad practice and mis-selling in parts of the industry.

17. Despite the Government’s assertion that there was a ‘paucity of evidence stakeholders were able to provide’ in relation to DMPs, research provided by R3 [1] among individuals in a DMP finds that:

· 35% say that other options for dealing with their debts, such as an IVA or bankruptcy, were not discussed before they started their DMP;

· 10% of individuals in a fee-charging DMP say they were not told that they would be charged until after their plan began;

· 22% say the organisation that set up their DMP did not ask for proof of income and expenditure before the plan began;

· 15% say their DMP provider made late payments to their creditors even though they had made the agreed payments at the right time.

18. A survey of 300 Insolvency Practitioners [2] shows that 57% have seen individuals whose DMP had failed because the amount of debt they were in was simply too high to make a DMP a feasible option in the first place; while 46% have seen DMPs fail because the monthly payments were simply unaffordable; and 40% have seen DMPs fail because the repayment timescale was too unrealistic.

19. The most recent OFT report on compliance with debt management guidance found widespread non-compliance. This suggests that the OFT’s regulation and enforcement activity is insufficient to tackle bad practice, mainly because the bulk of investigatory work is reactive rather than proactive.

20. We believe regulation of DMPs should lie with the Insolvency Service (IS), which currently has responsibility for the regulatory framework surrounding formal insolvency. The similarities between DMPs and formal processes such as Individual Voluntary Arrangements ought to result in similar regulatory regimes. A good starting point would be the registration of DMPs to elucidate more information about them. Moving regulatory responsibility to the IS would also address concerns that too many arms of Government are involved in debt and insolvency regulation.

21. The Government has proposed a DMP protocol, akin to the existing IVA protocol. Although the IVA Protocol has had some success, it leaves much to be desired - mainly because lenders exert disproportionately more influence than debtors or intermediaries. While protocols designed and implemented by Government, creditors, providers and consumer groups have their uses, they are generally incapable of tackling the ‘bad guys’ who can continue to operate comfortably outside their reach. In a recent court case [3] , the Judge reiterated that the IVA Protocol is no more than a voluntary code of practice.

22. A DMP Protocol does not supplement existing legislation in the way that the IVA Protocol does. While there is nothing in the IVA Protocol to ‘punish’ an Insolvency Practitioner if they breach the Protocol, the Insolvency Act 1986 and its associated rules facilitate this. By comparison, the DMP Protocol does not supplement any existing law. There is nothing to fall back on beyond the Consumer Credit Licence rules, which do not tell a provider how to ‘do’ a DMP.

23. A DMP Protocol is an improvement on the status quo, but we would prefer more stringent regulation by the Insolvency Service. DMPs are a significant part of the debt landscape - they should be regulated as such.

Basic bank accounts for bankrupts

24. We support the Government’s intention to ensure banks provide basic accounts for undischarged bankrupts. The Government states that ‘the banks tell us that they would be willing to offer such facilities were it not for the risk of becoming liable to claims by trustees in bankruptcy relating to property acquired by a debtor during the course of the bankruptcy. In recognition of this, the Government will be issuing in due course a consultation to seek views on amendments to insolvency legislation’.

25. We do not understand why the banks believe they have grounds to fear becoming liable for after-acquired property in this way. There have never been any cases that would lead the banks to develop this conclusion and a number of banks currently offer basic bank accounts to undischarged bankrupts (Barclays and The Co-operative).

Money Advice Service (MAS)

26. We welcome the Government’s commitment to ensuring that the MAS takes ‘a direct role in debt advice’ from 2012-13, recognising the value of the not-for-profit sector in debt advice provision.

27. As budget cuts put pressure on the not-for-profit sector, we would like to see the MAS’s review into debt advice take into account the contribution of the private sector. The National Audit Office (NAO) report into over-indebtedness in 2010 cited that there are 56,000 companies able to provide debt advice; and while the not-for-profit sector provides a considerable amount of debt advice, their survey of indebted individuals reveals that 28% received advice from a bank, 25% from a fee-charging professional adviser, and 21% from a free debt advice service.

28. We do not suggest that the private sector can replace the not-for-profit sector; simply that the contribution of both ought to be taken into account when assessing the provision of debt advice.

Changes to existing procedures

29. We support the Government’s intention to consult on increasing the petition level for creditors [4] and agree that making an individual bankrupt on a £750 debt is disproportionate.

30. The rise of Individual Voluntary Arrangements has rendered Deeds of Arrangement virtually obsolete so we support Government plans to repeal the relevant provisions.

31. As there are only 5,000 County Court Administration Orders each year, the Government is considering abolishing relevant provisions. We do not see any obvious benefit of going to the expense of repealing provisions if 5,000 people find the procedure useful.

MISSED OPPORTUNITIES

Quality advice

32. In relation to the quality of advice, the Government response states that ‘there was significant support for the concept of the role for a gatekeeper to provide a common entry point to all formal insolvency procedures’.

33. In order for the personal insolvency system to operate at its best, financially distressed individuals need to enter the solution best suited to their situation. Widespread support for a gatekeeper stems from concerns about a lack of impartial advice, with suggestions of ‘poor advice’ from both profit and not-for-profit providers and evidence of mis-selling of products by providers offering only a single solution.

34. While it is useful to have a number of debt solutions to suit a range of circumstances, R3 believes individuals should be able to take a decision based on impartial and full advice in an environment in which they can weigh up their options. We have previously suggested that indebted individuals should be able to apply for a moratorium (formal breathing space) from creditor action for four weeks, during which time they are required to seek advice from impartial advisors.

35. A ‘panel’ of advisors could be drawn from a range of backgrounds - not-for-profit agencies such as the CAB, IPs who have a statutory duty to provide full and impartial advice, or other ‘approved intermediaries’. The only requirement should be that all advisors are aware of the range of options and that they offer full and impartial advice.

36. We would like the Government to consult on various models proposed to tackle the problem of ‘bad advice’, including R3’s suggested moratorium and panel of advisors.

The introduction of ‘Simplified IVAs’

37. The Government response states that ‘respondents felt that lenders exercised too much control in IVAs’. We are therefore disappointed that they do not intend to take action in this area, and surprised by their implicit endorsement of the IVA Protocol as a model for the DMP Protocol.

38. The IVA Protocol was intended to remove obstacles to obtaining IVAs by encouraging lenders not to insist on unhelpful modifications in simple consumer debt cases. But a considerable number of IVAs are still refused by the banks or modified so severely that they become unviable. The danger is that the individuals who have viable IVAs refused enter a solution that is less suitable for their circumstances - e.g. bankruptcy or a DMP.

39. According to the IVA Protocol Review in December 2009, 97% of IVA proposals were modified before they were accepted by creditors. Meanwhile a survey of over 300 Insolvency Practitioners found that 30% have seen banks or ABLs refusing a reasonable offer of repayment through an IVA because they have initiated enforcement action, and 42% have seen lenders do so because they are the largest creditor. In view of the high rejection rate and modifications, many IPs no longer advise indebted individuals to propose IVAs, wary that they will be refused.

40. There are two key ‘groups’ that access the personal insolvency system: small, consumer debt cases; and more complex cases, including the consequences of business failure. We believe the system should differentiate between these groups and that simpler cases should be eligible for a simpler solution - best achieved by the introduction of the Simplified IVA (SIVA).

41. SIVAs would require approval by simple majority - removing the power of minority creditors to block the arrangement (IVAs require 75% approval) - and would not allow modifications. In 2008, the Government recognised concerns over access to IVAs and planned to introduce SIVAs. Proposals were withdrawn at the last moment because the Protocol was established and thought capable of solving the problems. However, the Protocol has not resolved concerns around access to IVAs. The arguments for introducing SIVAs holds firm - they are just as relevant today as they were before. The Government should revisit their plans to introduce SIVAs to increase access to IVAs.

Cost of bankruptcy

42. Respondents to the Review commented that there are some cases where debtors cannot access a repayment solution because they do not have sufficient surplus income, but cannot afford the £700 needed to apply for bankruptcy.

43. It is counter-intuitive that people who are hugely indebted have to find £700 to apply for bankruptcy, unless they go further into debt and/or avoid paying other creditors. While charities sometimes offer to cover the cost of bankruptcy, this is unlikely to cover all potential bankruptcies.

44. A recent survey reveals that 29% of Insolvency Practitioners have seen debtors unable to afford to go bankrupt during the last twelve months, even though bankruptcy would have been appropriate. Asked what tends to be the next step for the debtor in this position, 58% said ‘the individual does not address their debts’. This risks debtors accruing more debt, avoiding paying their creditors and being pursued. There are also concerns that these debtors enter other remedies less suitable for their circumstances - e.g. a DMP. One of our members is currently advising an individual in the South West: despite selling her property to pay creditors, she still has unsecured debts of over £140,000; she has pressing creditors that she finds harassing and distressing, but simply cannot find the £700 to go bankrupt.

45. Although the cost of bankruptcy was not addressed in the Government’s response, a subsequent consultation [5] has been announced on whether this cost could be paid in instalments instead, which we welcome. The Government should also consider raising debt and asset levels in Debt Relief Orders (DROs) to widen access to debt relief.

R3 RECOMMENDATIONS

46. Our recommendations are as follows:

· A DMP Protocol is an improvement on the status quo, but is incapable of tackling the ‘bad guys’ operating at the margin of the DMP industry. We believe regulation of the DMP industry should lie with the Insolvency Service (IS) which currently has responsibility for those who provide formal insolvency procedures.

· The MAS review into the provision of debt advice should take into account the contribution of the private sector as well as the not-for-profit sector, as both play a role.

· Given widespread concerns about the quality of debt advice, we would like the Government to consult on various models proposed by respondents to tackle this problem.

· SIVAs should be introduced to address current difficulties over access to IVAs and enable those who want to repay to do so.

· In line with the current consultation on petition reform, individuals who cannot afford to go bankrupt should be able to pay in instalments. The Government should also consider raising debt and asset levels in Debt Relief Orders (DROs) to widen access to debt relief.

14 November 2011