Blog

Increased protection for home owners required under DAS

2012-12-11T13:23:18Z

By Alan McIntosh

Despite our #Repo2012 conferences being a huge success with over 150 attending, I have to make a confession. On reflection, I think we missed an opportunity: an opportunity to discuss the thorny issue of the Debt Arrangement Scheme (DAS) and secured debts.

I am not going to beat myself up over it: there was only so much possible within the time available and when you are trying to accommodate a variety of issues and perspectives, something has to give.

However, picking it up now, I would argue addressing this issue is long overdue and would argue there is now a powerful case for the DAS being strengthened to provide more protection for home owners who have arrears on secured debts.

It has always been a feature of the DAS Regulations that the definition of debt in regulation 3 included arrears on secured debts and therefore, logically, these can be included into programmes. This regulation has gone unchanged since 2004, when the original regulations were introduced and essentially was duplicated in the 2011 regulations.

However, the inclusion of such debts into programmes has never become established good practice and, as an aside, if anything, supports the argument that not all debts have to be included into a programme.

The main problem is neither the Debt Arrangement and Attachment (Scotland) Act 2002 or the Debt Arrangement Scheme (Scotland) Regulations 2011 prevent the holder of a standard security calling up a debt under S19(1) of the Conveyancing and Feudal Reform (Scotland ) Act 1970.

Therefore, if a debtor enters a programme and includes the arrears from a secured debt into the programme, the programme may be approved, either with the lenders consent (implied or expressed) or the DAS Administrator’s determination that it is fair and reasonable. The lender, however, is then at liberty to call up the debt, meaning the full amount becomes due.

Whether a lender doing this would be in compliance with other regulatory requirements is debateable. In relation to first charges they should comply with chapter 13 of the Financial Service Authority’s Mortgage Code of Business Handbook, which under paragraph 13.3.2A (6) requires them to not repossess a property unless all other reasonable attempts to resolve the position have failed; and in relation to second charges regulated by the Consumer Credit Act 1974, similar guidance is provided in paragraph 6.3 of the OFT’s Guidance for Second Charge Lenders.

The problem, however, is if a calling up notice is served the whole debt can becomes due and a variation of the programme may then become necessary meaning a programme that was previously deemed to be fair and reasonable, as it could be repaid in 6-7 years, could become unreasonable once a calling up notice is served if it would then take 15-20 years.

Also if a lender does call up a debt, either before or after a debt payment programme is established, the question needs to be asked whether it’s reasonable for a lender then to raise an action to obtain a warrant to exercise their rights under the standard security under S24(1B) of the Conveyancing and Feudal Reform (Scotland) Act 1970.

Section 24(1C) requires them to satisfy the pre-action requirements and S24A (4) (a) states that the creditor must not make an application under S24 (1B) where a debtor is taking steps which are likely to result in the payment to the creditor within a reasonable time any arrears, or the whole amount, due to the creditor under the standard security.

The problem is it is not clear what the effect an approved debt payment programme has on the rights of secured creditors. The DAS Administrator may find such a programme is fair and reasonable, but there is no guarantee that the Financial Service Ombudsman or the Office of Fair Trading will agree, or even a sheriff in deciding if the pre action requirements have been satisfied under S24(1C) under the 1970 Act.

However, this problem is not insurmountable. It has been clear from the outset the Debt Arrangement Scheme was aimed at tackling the problem of multiple debts and creditors competing for a debtors’ attention or money. It is already well accepted that in order to provide debtors with a manageable solution to such problems the rights of the creditors to enforce or recover debts may be restricted, even where they have legally constituted debts.

In principle there is no reason to argue that the rights of a secured creditor should not equally be restricted, particularly if the DAS Administrator was legally required to have regard to leading case law on what is reasonable for repaying secured debt arrears and the guidance that is provided by the Financial Service Authority and the Office of Fair Trading.

There is no reason to believe legally that such amendments would prove too difficult either. Currently, S7(1)(c) of the Debt Arrangement and Attachment (Scotland) Act 2002 allows the Scottish Government to make regulations as to the effect the approval of a debt payment programme has, so arguable the provisions already exist which would allow them to make regulations that would prevent a calling up notice being served for arrears; also the existing Pre Action Requirement Order (Scotland) 2010 could be amended to prevent creditors raising an action where a debt payment programme has been approved.

Is it so unreasonable to argue that where a decision is made that a programme is fair and reasonable that those creditors should have their rights restricted, possibly preventing them from serving a calling up notice or raising an action to obtain a warrant to exercise their rights under any security? Arguably secured creditors would not have their rights restricted any more than they currently are under FSA and OFT guidance and under the current pre-action requirements.

However, greater clarity would be provided to advisers and home owners as to the effect including arrears on secured debts into debt payment programmes would have and arguably unnecessary expensive legal and court proceedings could be avoided.

The Debtors Imprisonment (Scotland) Act 2012

2012-06-13T10:18:02Z

The decision of the Office of Fair Trading (OFT) to censure Wonga for aggressive and misleading debt collection practices is long overdue.

It was found in January 2010 to be using tactics of accusing customers of fraud and threatening to report them to the police. This was even when the customer had entered into debt management plans because of financial hardship.

But not wanting to disappoint, Wonga has decided to appeal the decision as the incidents were historic and didn’t occur after January 2010.

So there you have it, the proverbial dummy has been spat out and the OFT are not playing fair!

Since the practices were never denied, however, you would have hoped Wonga would just have held up their hands and taken their punishment, but what do you expect from a company that has no shame in charging over 4,000% APR on short term loans?

These shabby practices, however, don’t surprise me. The level of compliance amongst some of the UK’s debt recovery firms is truly shocking. It’s not exactly a rogue’s gallery, but sometimes it feels like that.

My all time favourite would have to include the large credit card company who claimed Scots Law didn’t apply to them as their parent company was American; or the border raiders who come up from England, equipped with black leather jackets and bovver boots and forcibly try and steal sorry repossess cars, despite only officers of the court having such powers in Scotland; or the debt recovery agent who told me my client would be jailed under The Debtors Imprisonment (Scotland) Act, which I never did find, but that was okay as I was able to inform him it had been repealed by the You’re Talking Rubbish (Scotland) Act.

But putting such extreme and entertaining examples aside, there are far more worrying practices being used widely by pay day lenders that are of more concern. Take for example the Continuing Payment Authorities that they make their customer grant when they take out a loan. Perfectly legal, these allow the bank accounts of borrowers to be accessed as if they are making a switch payment, with funds taken out when they are due. They are not direct debits or standing orders and are significantly more difficult to stop: which is of course the point.

Many customers have to “lose” their banks cards when they realise they cannot afford to make the payment, in order to be issued with a new card and a new three digit security number. Even many of the banks are telling customers that is what they must do as they are powerless to help.

But this is untrue. These types of agreements are governed by the Payment Service Regulations 2009 and Regulation 55 makes it quite clear that the consumer can cancel these agreements whenever they want with their bank. This is reinforced by the Financial Services Authority, which in their leaflet Bank Accounts: Know Your Rights, states:

In most cases, regular payments can be cancelled by telling the company taking the payments. However, you have the right to cancel them directly with your bank or card issuer by telling it that you have stopped permission for the payments. Your bank or card issuer must then stop them – it has no right to insist that you agree this first with the company taking the payments.

I have already drafted two template letters that a consumer can send to their lender and bank, where they need to stop such payments because of financial hardship and hopefully if more advisers like me start using them we will see an improvement in practice by both lenders and banks.

It is easy to believe sometimes that its futile doing anything and that nothing will change, but that isn’t the case. The bank charges campaign and the PPI mis-selling campaign have shown consumers can make a difference and consumer power, when informed and organised can stop even the worst of practices.

That failing, we could always resort to the We Will Name and Shame You (Scotland) Act.

If any advisers would like a copy of the draft letters, please do not hesitate to contact me at alanmcintosh@carringtondean.com.

…AND JESUS WEPT!

2012-04-21T08:49:01Z

The Accountant in Bankruptcy has laid before the Scottish Parliament The Bankruptcy Fees Etc (Scotland) Regulations 2012. These regulations will double the cost of a debtor’s application for bankruptcy from the 1st of June 2012 by 100% from £100 to £200.

Brighthouse: Will There Ever Be A Bright Future For Their Customers?

2012-04-18T20:32:19Z

Having recently read an article written by Richard Dyson of the Financial Mail on Sunday, which exposed the true extent of the rip off being perpetrated by Brighthouse, I have to say I am pretty gobsmacked.

Credit Unions: A Special Case?

2012-04-12T16:56:15Z

By Alan McIntosh

One of the most controversial issues in the Scottish Government’s consultation on bankruptcy law reform is the issue of extending the type of debts that should be excluded from bankruptcies and protected trust deeds.

Two specific examples are suggested: debts owed to credit unions and child maintenance arrears.

The problem with excluding debts, however, is it dilutes the protections that personal insolvency offers and can be a slippery slope.

However, is there a case for extending the list?

Child Maintenance Arrears

There are clearly strongly moral reasons why child maintenance arrears should be excluded: others may suffer as a result and there are possibly few more deserving cases than innocent children who are the dependents of their parents.

However, life is rarely simple and often child maintenance isn’t paid because estranged parents are raising other families or relationships have broken down to the extent that access to children is being denied and maintenance is not paid.

Also it doesn’t take long for arrears to accrue to the extent where they cannot be repaid.

There is also no evidence from England, where they are excluded, to suggest giving them special status improves recovery rates.

It is also has to be borne in mind that other children in new families can also suffer where there are no effective methods of relief.

Credit Unions

In relation to Credit Unions, however, there may be a stronger case for special treatment. Other than a few large industrial and city wide credit unions, the vast majority of these organisations are small and particularly vulnerable to debts owed to them being included in insolvencies.

Few debtors will actually become personally insolvent because of a credit union debt and the amounts loaned are normally small. In actual fact, many debtors may prefer not to include credit union debts, feeling a strong responsibility to the other members, who may be neighbours or work colleagues.

Another reason for credit unions to be given special treatment is that, unlike other creditors, they are restricted in how much interest they can charge (which is effectively limited to 2% per month, although in reality most charge 1%). They are, therefore, restricted in what they can do, unlike other consumer creditors, who can just increase interest rates when they suffer significant losses due to insolvencies.

For example, if a Credit union suffers a bad debt of £7,000 they would have to lend £350,000 at 2% within a year to recover the loss. For many small community and workplace based credit unions this is just not feasible.

However, other involuntary creditors, such as HMRC or local authorities can make similar arguments, especially when they use the summary warrant procedure to constitute debts and can only charge a 10% surcharge on the debt, instead of charging the judicial rate of interest at 8% per annum.

That is the slippery slope of excluding debts.

There are other arguments in favour of excluding credit unions, however. They could continue to offer small amounts of credit to debtors during their insolvencies for small emergencies, such as broken washing machines etc. This would remove the risk of debtors failing to make contributions to their bankruptcies and protected trust deeds.

They could also provide a vehicle for debtors to continue having modest savings, although this would possibly require legislative change, but most trustees do permit allowances in debtor’s financial statements for costs that have to be set aside; so logically should we not encourage debtors to set these aside for the purposes intended?

Education

The Accountant in Bankruptcy office is also keen to incorporate some form of education for debtors in Scotland’s debt relief and management remedies and generally support for this principle is supported across the board.

Credit unions could play a pivotal role in this education, by not just making any education a classroom exercise at the end of an insolvency, but by encouraging good practice, such as saving with and borrowing from socially responsible lenders during the operation of the bankruptcy or protected trust deed.

Arguably there is a case for allowing credit unions to have priority during a debt payment plan under the debt arrangement scheme if this approach is taken as most debtors in an 8 year DAS will require some form of credit during that programme.

Alternatives

Even if we don’t accept credit unions deserve to be excluded from bankruptcies and protected trust deeds, this does not mean we cannot give them some form of special treatment.

Changes could be made to the way claims are settled in personal insolvencies. Currently many involuntary and socially responsible lenders are disadvantaged with the current scheme of division, where dividends are paid to ordinary creditors on the basis of what is owed at the time of the insolvency, including interest.

This means the pay day lenders that might charge say 3000% APR and front load interest onto loans, proportionately can claim more in relation to what they loaned than a credit union or a local authority can.

This could be avoided by introducing a system where dividends are initially paid on the original debt, with interest having a deferred ranking. This would mean our bankruptcy system would still treat all creditors equally but also more fairly. It would also mean we don’t reward predatory lending and would remove the requirement for trustees to challenge extortionate credit agreements, which rarely occurs anyway.

Conclusion

There is no clear answer to the question of what debts should be excluded and what should be included. Many creditors have strong cases, but the argument for excluding credit unions is particularly strong, especially in a society where we see the growing scourge of payday lenders.

They also have a strong case as institutions we would wish to encourage Debtors to use.

They are also arguably part of the solution for dealing with the recurring issue of over indebtedness amongst some of the poorest in Society and could help prevent Debtors repeatedly becoming insolvent.

Maybe it’s time to make one last exception.

2012 – A Year for the Diary!

2012-02-29T10:53:17Z

By Alan McIntosh

Most money advisers have only recently pulled themselves off the ropes from changes introduced by the Debt Arrangement Scheme and the new DASH system, after reeling from the one, two jabs of changes to personal insolvency and repossession law, introduced by the Home Owner and Debtor Protection (Scotland) Act 2010.

Staggering from one side to another, most weak at the knees, they have in the last few months been hit with the body blows of the Protected Trust Deed Guidance, then the head shot of the Scottish Law Commissions plans to consolidate Scotland’s Bankruptcy laws; the knockout uppercut blow now threatens to come from the AIB’s new consultation on Bankruptcy Law Reform.

Many of you may be thinking, what’s going on and I am thinking the same. Dizzy with stars and tweety birds dancing around my head, it seems a distant memory to think that only five years ago the largest piece of legislation to pass through the Scottish Parliament, already substantially reformed this area of law.

There can be no denying that one of the benefits of the Scottish Parliament was we got a legislature who could spend more time on our laws and legislate to modernise them, but it feels like we have gone from watching glaciers move, to being in the Hollywood film 2012.

It’s hardly the Mayan calendar’s end of day’s doomsday scenario, but there is a sense throughout the Scottish debt sector that the platelets are beginning to move.

The proposals contained in the new consultation document are far reaching and depending on the form any final bill takes, the changes could be more fundamental than anything to date: no easy feat, after six major acts of parliament in ten years.

The new proposals are:

The creation of a new financial health service;
The introduction of a single financial assessment tool for all remedies (DAS, Protected Trust Deeds and Sequestration);
A single online application hub giving money advisers access to all debt relief and management remedies;
A new role for the AIB to approve the debt relief or management option chosen by debtors;
The creation of new debt relief and management remedies;
A requirement to receive advice before choosing an option and a requirement for financial education before obtaining a discharge; and
The exclusion of child maintenance arrears and credit union debts from debt relief remedies.

As we launch this new Money Advice Community website for Scottish Money Advisers, we will be encouraging discussion and debate on the subject matters that are being consulted on and also publishing more articles that look at the individual topics involved.

We encourage you to contribute to the debate and discussions as they arise and share your experience and knowledge, as there is one thought worth bearing in mind: if we get it wrong this time, we may just have to start again.

Alan MacIntosh

Welcome

2012-02-29T10:52:58Z

Hi, welcome to the Money Advice Community Webpage. This site is intended to be a resource for the wider money advice community in Scotland.

In time, we hope to build up a valuable resource that money advisers in the free sector will be able to access and submit articles, blogs and other material to which can then be shared with other advisers around the country.

We also hope advisers will contribute to the forums once they have logged in.

To launch the site over the next few months we will be running a number of discussion specials focusing on the Accountant in Bankruptcy’s Consultation on Bankruptcy Law Reform. Hopefully, these will stimulate debate and discussion and provide advisers with a forum within which they can discuss the proposals in more detail.

We are also hoping to run a discussion day on the consultation in the next few months which hopefully you can attend.

We sincerely hope you enjoy our website.

Alan and Danna.