The Debt Arrangement Scheme Improving Access

www.abcul.coop

Consultation by the Scottish Government

Submission from the Association of British Credit Unions Limited (ABCUL)

Details

Name Frank McKillop

Job Title Policy Officer (Scotland)

Organisation Association of British Credit Unions Limited (ABCUL) Address Holyoake House

Hanover Street

Manchester

Postcode M60 0AS

Email address frank.mckillop@abcul.org

For the purposes of analysing responses, it would be helpful if you would also indicate the capacity in which you are completing this questionnaire, please tick as appropriate.

Advice Sector  Legal Body 

Creditor  Professional Body 

Individual  Statutory Body 

Insolvency Practitioner  Other (Please Specify) Trade Association 

December 2009

© AB C UL , Holyoake Hous e, Hanover S treet, Manches ter M60 0AS

Introduction

1 The Association of British Credit Unions Limited (ABCUL) is the main trade association for credit unions in Scotland, England and Wales. Like its member credit unions, ABCUL is an Industrial and Provident Society. It is a co-operative formed, owned and controlled by its members.

ABCUL is the Scottish and British member of the World Council of Credit Unions (WOCCU), the worldwide apex body whose members represent 186,000,000 members of 54,000 Credit

Unions in 97 countries. Approximately 85% of Scotland’s 250,000 credit union members are served by ABCUL-member credit unions.

2 There are currently 114 credit unions in Scotland and around 1 in 20 Scots are credit union members. In the city of Glasgow, 1 in 5 people are credit union members. Scotland’s credit unions currently hold over £200m in savings and are lending approximately £170m, often to people on lower incomes who would be unable to access affordable credit from any other source.

3 Although many credit unions have an increasingly diverse membership drawn from all sections of the community and all levels of income, serving the financially excluded remains a key part of credit unions’ business. By law, the maximum interest rate credit unions can charge on a loan is 2% per month on the outstanding balance, or 26.8% APR, and many choose to charge no more than 1% per month, or 12.7% APR. Similarly, as not-for-profit financial co-operatives, credit unions exist to serve the needs of their members and not to extract profit from them. Therefore, even though many credit unions serve people who would be regarded as higher credit risks, they do not charge the massive interest rates that most lenders in the same market do. For example, Provident Personal Credit advertise a loan of £300 at 272.2% APR¹.

4 Credit unions approach the question of improving access to the Debt Arrangement Scheme (DAS) from two perspectives. Firstly, as leading providers of ethical financial services, credit unions are keen to see that fair and appropriate options are available and accessible for members who may be struggling to make payments in full and on time. However, as financial co-operatives, the money borrowed by each member is their fellow members’ money, and the credit union has a responsibility to look after members’ savings. As creditors then, credit unions are keen to ensure that DAS is accessed only when necessary and appropriate and that Debt Payment Programmes (DPPs) are reasonable and fair to creditors.

5 However, credit unions also recognise that when a member is genuinely struggling to repay debt, DAS is a far preferable solution to a Trust Deed or bankruptcy, both for the debtor and the creditor. We are concerned that the take up of DAS has been so low and we welcome the Scottish Government’s intention to increase its use when appropriate. Credit unions are particularly concerned that there seems to be a lucrative market for “selling” Trust Deeds and that people with debt problems are being drawn to this more extreme solution when DAS may actually be more suitable for their circumstances. Not only does signing a Trust Deed harm an individual’s ability to access legal and affordable credit, but when a credit union is forced to write off loans to Trust Deeds or bankruptcy, the credit union’s capacity to lend to other people in the community is also seriously damaged, meaning the impact is felt more widely.

1 http://w w w .providentpersonalcredit.com

© AB C UL , Holyoake Hous e, Hanover S treet, Manches ter M60 0AS

appropriate course of action for the individual concerned. The individual should first seek to agree a restructuring of their payments with their major creditors, something credit unions are usually prepared to consider when justified and required. If this is not possible, we would like to see DAS as the next step, and if the debts are such that a DPP could not be maintained, then it would be necessary for the individual to pursue debt relief through a Trust Deed or bankruptcy.

7 Many credit unions are concerned that in some examples where members have signed Trust Deeds, the member did not seem to have received the best advice or was not aware that other options, such as DAS, were available and may have been more appropriate. We are concerned that a number of Insolvency Practitioners (IPs) seem to be advertising Trust Deeds and

collecting very substantial fees from the assets of the clients they attract, which does not seem to fit with a duty to ensure the individual chooses the best option. The Cross-Party Group on Credit Unions discussed these issues at the Scottish Parliament at its meeting of 10^th November 2009, with excellent input not only from the credit union movement, but also from the

Accountant in Bankruptcy and Citizens Advice Scotland. We hope there will be an opportunity to pursue these concerns in a further consultation in the near future.

8 Below, we have addressed the consultation questions which apply to credit unions and we hope this submission will help inform the Scottish Government’s efforts to reform and improve access to DAS.

1 Access to DAS

1a Should applications for DPPs only be made by approved money advisers?

1b Should some form of accreditation be required?

1c Should DAS training remain an essential element of any accreditation process?

1d If the approved money adviser route is no longer essential, who should be able to submit applications for DPPs?

9 ABCUL is concerned by the low number of approved money advisers operating in Scotland and the low number of DPP applications reported in the DAS review. However, we believe that access to money advice is very important for people with debt problems, and we would rather see an increase in the number of approved money advisers and greater use of DAS when appropriate rather than a removal of this requirement.

10 We feel there should be some form of accreditation and that DAS training should be a part of this, but if this can be achieved to a sufficiently high standard with a less onerous process than the current requirements, then we would support that. To widen access, we would not object to DAS approval being granted to an adviser’s office or bureau, provided appropriate training for all staff and quality controls were in place. ABCUL supports the Financial Services Authority (FSA)’s Moneymadeclear programme and we are one of the delivery partners for the Money Guidance Pathfinder project. Following successful pilot projects in the North of England, the programme is to be rolled out across Scotland in 2010, and it may be worth exploring the viability of allowing money guides to submit applications for DPPs.

© AB C UL , Holyoake Hous e, Hanover S treet, Manches ter M60 0AS

lucrative market in “selling” Trust Deeds. We would therefore question whether extending the ability to submit applications for DPPs to professionals such as accountants or IPs or any practitioner who would charge a fee for their services would in fact improve access to DAS.

Many credit unions have experience of cases where members do not appear to have chosen the most appropriate debt solution for their circumstances, so we would need reassurances that giving this power to professionals would make them more likely to recommend DPPs rather than options such as Trust Deeds which might prove more profitable.

1e Should debtors be able to apply for a DPP without having obtained money advice?

1f Should debtors be able to make direct applications for a DPP online?

1g Please make any other comments about access to DAS below.

12 While we recognise that innovative ways of applying for a DPP may help increase access to DAS, we would, as discussed, have concerns about individuals seeking any form of debt arrangement or debt relief without first receiving independent money advice. In recognition of the current difficulties around access and the opportunities which the internet offers, an option could perhaps be offered to register an interest online in applying for a DPP, and an

appointment with a money adviser could then be arranged from that. It is the view of many credit unions that receiving money advice should be mandatory prior to applying for DAS, a Trust Deed or bankruptcy.

2 Administration

2a Should the DAS administrator take on more of the administration duties currently carried out by the approved money advisers?

2b If the DAS administrator takes on more of the administration of DPPs, at what point in the process should the DAS administrator take on this function?

13 Given the current demands placed upon money advisers and the likelihood of that demand increasing in the present economic climate, we believe the DAS administrator should take on the administration of DPPs from the application stage, including the notification to creditors of the proposal. This would not only free up money advisers to offer their services to a larger number of clients, but a single point of contact for all credit unions dealing with DPP proposals would also be a welcome reform.

2c Should there continue to be annual reviews of DPPs?

2d If yes, should the DAS administrator take responsibility for this function?

2e Please make any other comments about the administration of DPPs below.

14 While annual reviews would be welcome, we recognise that increasing the duties and workload of the DAS administrator may make this an additional burden. The DAS administrator should respond immediately to events such as default, and an annual letter from the DAS administrator could be sent asking the debtor to contact the approved money adviser who originally submitted their application if there have been significant changes in their circumstances. This should limit the demands on both the DAS administrator and advisers where payments are up to date.

© AB C UL , Holyoake Hous e, Hanover S treet, Manches ter M60 0AS

3 Consent Rules and Fair and Reasonableness

3a Should the timescale for creditors’ response be increased from 21 days to 35 days?

15 Since the time limit for creditors to respond to proposals for Protected Trust Deeds is 35 days, it would make sense to extend the timescale for DPPs to the same period. This would give credit unions more time to consider the proposal, which would be especially valuable for smaller primarily volunteer-run credit unions where the proposal may be considered by a committee or the Board. A longer timescale may also reduce the number of “deemed consents”, which may mean fewer unreasonable proposals going through.

3b Should the DAS administrator be able to consider whether a programme is fair and reasonable where consent or deemed consent is given by ALL of the creditors?

3c Should the entry criteria for DAS be defined to enable the DAS administrator to assess whether the proposal is fair and reasonable prior to seeking the consent of creditors?

3d Where the DAS administrator receives a proposal that is evidently not fair and reasonable, should the debtor be given an opportunity to amend the proposal?

16 The fair and reasonable test should be applied to all DPP proposals. This would help avoid a situation where a late response from creditors or an administrative error could lead to a manifestly unreasonable DPP being approved. Protracted arguments about proposed DPPs could be avoided if the DAS administrator assessed all proposals before seeking the consent of creditors. It would make sense to allow the DAS administrator to liaise with the debtor or

approved money adviser to ensure a fair and reasonable proposal is presented to creditors, so the debtor should have the opportunity to amend a proposal rather than having to re-submit.

4 Debt Payment Programmes

Duration and Payment Amounts

4a Should there be a limit on the duration of a DPP?

4b If yes, what do you consider to be a reasonable maximum period for a DPP?

4c Should the DAS administrator be provided with additional information to explain why a DPP is likely to last for more than 10 years (or some other specified period)?

17 While as creditors, credit unions are keen to recover outstanding loans in DPPs in as short a time frame as possible, we also recognise that imposing a strict maximum duration for a DPP may exclude many more debtors from accessing DAS and push them towards Trust Deeds or bankruptcy, which as discussed previously, would be a negative outcome both for the member and the credit union. However, the duration should be reasonable and proportionate. Therefore, if the DAS administrator is required to apply the fair and reasonableness test to all DPP

proposals, then they should at that stage be assessing whether or not a duration of more than 10 years is justified. In these circumstances, it would be reasonable for the DAS administrator to request and be provided with additional information to explain why such a long period is

required and to confirm that creditors are indeed likely to recover what they are owed.

© AB C UL , Holyoake Hous e, Hanover S treet, Manches ter M60 0AS

4e If yes, what should the minimum total payment per month be?

18 Again, we would be concerned if introducing a minimum monthly payment would result in

excluding people from DAS and drive them towards Trust Deeds. The DAS administrator should judge what a fair and reasonable monthly payment would be on a case by case basis.

4f Should all payments in DPPs be distributed to creditors on a pro rata basis?

4g Should there be a prescribed minimum payment per month, per creditor?

4h If yes, what amount should be required per creditor, per month?

4i Should there be both a minimum monthly payment and a maximum period for a DPP to combat low payments in excessively long DPPs?

19 It seems fairest that payments in DPPs should be distributed to creditors on a pro rata basis.

However, we note that three of the four DAS-approved payments distributors will not accept payments of less than £1 per creditor per payment instalment. It would therefore make sense to set £1 per creditor per month as the prescribed minimum payment for practical reasons, even though this could result in creditors owed smaller amounts being repaid more quickly than creditors owed larger debts.

20 Again, we would expect that such small monthly repayments would only be considered fair and reasonable by the DAS administrator in exceptional circumstances. However, it is important to maintain flexibility in DAS in order to make it accessible to people for whom it is the most

appropriate debt solution, so we would not favour setting a rigid minimum total monthly payment or maximum period.

Discretionary Conditions

4j Should the DAS administrator be required to make more use of discretionary conditions?

For example, where a debtor has an expected future lump sum or anticipated additional income to put towards their DPP.

4k Please make any other comments you may have about debt payment programmes below.

21 It is important that a DPP has the flexibility to reflect changes in circumstances which might put a debtor in a better position to pay off their debts more quickly. Since credit unions are lending out other members’ money, it is an important part of the co-operative ethos that members repay that money so that it can benefit other members of the community. It would therefore be right for discretionary conditions to be used to ensure that future favourable changes in circumstances will be reflected in increased payments to creditors. Similarly however, the flexibility should exist to adjust the DPP if required so that if, for example, an anticipated lump sum does not come to pass for whatever reason, failure of the DPP is avoided.

© AB C UL , Holyoake Hous e, Hanover S treet, Manches ter M60 0AS

5 Joint and Several Liability

5a Should joint DPPs for debtors with joint obligations for at least one debt be introduced?

22 At present, the overwhelming majority of credit union loans are made to individuals. Credit unions would therefore mainly be affected by joint DPPs if one or both debtors had an

outstanding credit union loan which was included in it. There would be some concern if a joint DPP was pursued when in fact the majority of the debt was the individual debt of one person.

While recognising the arguments for their introduction, credit unions would also need some assurance that a joint DPP would not simply result in smaller monthly payments if it included both the joint and individual debts of each person.

6 Single Debts

6a Should debtors be able to propose a DPP that includes only one debt?

23 As ethical member-focused providers of financial services, many credit unions pride themselves on being approachable and reassuring members that they are “here to help”. Accordingly, if a member is struggling to repay a credit union loan, many credit unions will be happy to discuss various options with them, such as freezing interest, reducing monthly payments, payment holidays, etc. It is often frustrating for credit unions when they are notified that a member has signed a Trust Deed when their largest debt was to the credit union, yet they never contacted the credit union to discuss any of these possible solutions.

24 Therefore, while we recognise the extra legal protection DAS would give a debtor, in

circumstances where the one creditor was a credit union, it would be preferable if the debtor sought an agreement with their credit union before considering the formal option of a DPP.

7 Payment Distribution

7a Should the DAS administrator invite applications to tender for this role with a view to achieving best value and improve returns for creditors?

7b Should the DAS administrator take on the role of payments distributor with a view to achieving best value and improve returns for creditors?

25 As creditors, credit unions wish to see the highest possible returns from DPPs. We would certainly be concerned if the payments distributor was allowed to charge more than 10% from the amount distributed to creditors for their service, and we would welcome the exploration by the DAS administrator of the best way to provide value and maximise returns for creditors. We are pragmatic about whether this is best achieved through a competitive tendering process or by the DAS administrator itself and would welcome whichever option provides the best deal for creditors.

© AB C UL , Holyoake Hous e, Hanover S treet, Manches ter M60 0AS

Conclusion

26 ABCUL regards DAS as an important and valuable option for people who are struggling to repay debts, and we welcome the Scottish Government’s intention to improve access to the scheme. In particular, it is preferable that someone for whom DAS is an option should propose a DPP rather than entering a Trust Deed.

27 We believe money advice is very important for anyone facing debt problems to ensure that they are aware of all the options available to them and the full implications of pursuing those options, as well as receiving some independent guidance as to what the most appropriate solution for their circumstances might be. Many credit unions feel money advice should be mandatory before applying for a DPP, Trust Deed or bankruptcy.

28 To free up money advisers to assist more people, we feel the DAS administrator should take on more of the administrative duties for DPPs at an earlier stage, and we feel that the DAS

administrator should apply the fair and reasonableness test to every DPP proposal at the application stage so that this is established before creditors are contacted. At this stage, the DAS administrator could also judge whether the proposed monthly payments and total duration of the DPP are reasonable and justified.

29 Beyond a minimum payment per creditor per month of around £1 for the practical purposes of payments distribution, we would be cautious about calling for any minimum total monthly payment or maximum duration in case this excluded more people from DAS and simply drove them towards Trust Deeds, something credit unions would be keen to avoid.

30 Following on from this, it is also important that credit unions have access to the DAS Register to ensure that a member who may be applying for a loan is not in fact likely to make themselves bankrupt by doing so, harming both themselves and the credit unions. As smaller-scale financial co-operatives running on a member-focused, not-for-profit model, it is expensive for credit unions to access the DAS Register. Access to the DAS Register for all 114 Scottish credit unions would currently cost the movement £57,000 per year. In recognition of the service credit unions provide to their communities as ethical providers of affordable credit, we would urge the Scottish Government to allow credit unions free access to the DAS Register on the same terms as the money advice sector, or to at least allow some sort of “group licence” whereby all ABCUL credit unions could access the DAS Register through the Association paying a single £500 annual fee.

31 We hope this submission will help the Scottish Government’s efforts to improve access to DAS and we look forward to contributing to future consultations on Trust Deeds and relevant

insolvency issues.