5. IMPROVING ACCESS TO THE DEBT ARRANGEMENT SCHEME
5.1 Access to DAS
The DAS review found significant problems in gaining access to DAS under the current legislation. During the period under review, there were 107 approved money advisers in Scotland, of which 14 were unavailable due to various reasons, such as sickness or maternity leave. There were variations in the number of applications for approval of DPPs submitted by approved money advisers across the country. There are 32 local authority areas in Scotland and in seven of these no DPPs were proposed in the review period. Approved money advisers in just six local authority areas submitted applications for and maintained 61% of all DPPs. 43 approved money advisers did not submit any applications at all during the period under review and only 17 approved money advisers each put forward an average of at least one DPP per month.
Although the number of DPPs is low, a Citizens Advice Scotland report entitled "Restricted Access" published in September 2008, found that 19% of CAB clients were suitable for DAS. Currently it is estimated that less than 5% of CAB clients apply for DPPs.
Some approved money advisers have expressed concerns that the process for being MATRICS approved is very burdensome on the individual money adviser, especially the on-going assessment process. Feedback from advisers has suggested training should still be provided to ensure quality DAS advice, however, the MATRICS certification process may not be required. Some money advisers have also suggested that DAS approval should be granted to the adviser's office, bureau or organisation and not the individual money adviser.
Respondents are asked to consider whether mandatory training from MATRICS should still be a requirement and if the approved money adviser status should be removed altogether. More money advisers, insolvency practitioners, accountants and other financial or money advice providers might engage with DAS and suggest DPPs as an option to manage their clients' debt if the approval requirement was removed.
Question 1a: Should applications for DPPs only be made by approved money advisers?
Question 1b: Should some form of accreditation be required?
Question 1c: Should DAS training remain an essential element of any accreditation process?
Question 1d: If the approved money adviser route is no longer essential, who should be able to submit applications for DPPs?
Respondents are asked to consider whether debtors should be able to make direct applications for approval of DPPs. This would mean that money advice would not be a mandatory requirement before applying for approval of a DPP. Although recommended, there is no mandatory requirement that a debtor should receive money advice prior to applying for their bankruptcy.
Question 1e: Should debtors be able to apply for a DPP without having obtained money advice?
Question 1f: Should debtors be able to make direct applications for a DPP online?
5.2 Administration
Currently approved money advisers have a number of duties in connection with the administration of the DPP. They provide advice to their clients and draw up a DPP proposal. They liaise with creditors on behalf of their client and collate creditor responses prior to submitting the DAS application. Approved money advisers also have ongoing responsibility to review the DPP annually and provide advice to the debtor.
The findings from the DAS review suggested that the work involved in the on-going administration of DPPs might mean that some approved money advisers are more reluctant than others to suggest DAS to their clients. Some approved money advisers considered that reducing the administrative burden of DAS, especially the on-going maintenance of DPPs, would allow them to focus their activity on the provision of advice for existing and new clients. Ready access to money advice is especially important in the current economic climate.
The 2009 Regulations, which did not come into force, transferred other administrative functions from approved money advisers to the DAS administrator. The Regulations allowed the debtor, or a money adviser on behalf of the debtor, to submit a DAS application to the DAS administrator without seeking the consent of creditors. The duty to seek creditors' consent and to liaise with the debtor would have become part of the DAS administrator's role.
The practical implication of this change, as well as minimising administrative work for money advisers, was that money advisers would have more time to invest in providing advice to their clients rather than completing paperwork. Creditors would have benefited from the proposed change as they would have dealt with a central point of contact, the DAS administrator, rather than the 104 approved money advisers based throughout Scotland. The correspondence process would have been simplified for all parties.
Question 2a: Should the DAS administrator take on more of the administration duties currently carried out by the approved money advisers?
Question 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?
Currently all DPPs are reviewed annually by the approved money adviser. If the DAS administrator takes on more of the administration of DPPs is the review still required or would it be sufficient to respond to specific events such as default or creditor intervention?
Question 2c: Should there continue to be annual reviews of DPPs?
Question 2d: If yes, should the DAS administrator take responsibility for this function?
5.3 Consent Rules & Fair and Reasonableness
The current rules provide that all creditors are requested to consent to a DPP. However, if creditors do not respond to a request for consent within 21 days, they are deemed to have given consent. This means that DPPs are approved unless at least one creditor actively objects to the application within that period. .
Respondents are asked to consider whether the 21 days allowed for creditors to consent is adequate. The time limit for creditors to respond to proposals for protected trust deeds is currently 35 days. Creditors may benefit from harmonising the response time for the DPPs and trust deeds.
Question 3a: Should the timescale for creditors' response be increased from 21 days to 35 days?
If any creditor objects to a DPP, the programme may still be approved if the DAS administrator considers that it would be fair and reasonable to do so. The factors the DAS administrator must take into account when considering whether a proposal is fair and reasonable are listed in regulation 26 of the Debt Arrangement Scheme (Scotland) Regulations 2004. Factors include the amount of the debt included in the programme, the duration of the DPP and the method and frequency of payments, amongst others.
However, where no creditors respond, perhaps because the request for consent was not received, the DPP will be automatically approved even if the programme would not have met the fair and reasonable criteria. This can result in an approved DPP that is very long or has very low monthly payments.
Question 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?
Currently the DAS administrator only considers the fair and reasonable criteria after creditors have seen the proposals. However, if the Regulations were amended to allow the DAS administrator to accept an application from the debtor, or a money adviser on behalf of the debtor, prior to any contact with the debtor's creditors, then entry criteria could be defined to try to make the proposals meet the fair and reasonable criteria at the application stage.
Question 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?
Question 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?
5.4 Debt Payment Programmes
Duration and Payment Amounts
Currently, if all creditors agree to a proposed DPP, it will be approved without any further assessment. However, where creditors have objected, the DAS administrator will consider whether or not it is fair and reasonable to approve a programme.
As a general rule, the DAS administrator is likely to approve any DPP of up to 5 years in duration and refuse to approve anything over 10 years. DPPs falling between these periods will be a matter of individual assessment. One of the most important factors will be the level of creditor agreement. The greater the number of non-consenting creditors, the less likely it is that a programme will be approved if it will extend for more than 5 years.
In the DAS review, 23% of approved DPPs were due to last for more than 10 years, mostly because of deemed creditor consent. The longest DPP was expected to last for over 40 years.
There is concern about whether DPPs expected to run for long durations are a reasonable and sustainable prospect for debtors, and whether these DPPs provide a realistic rate of return for creditors because of low monthly distribution and payment processing costs. During the lifetime of the DPP, debtor's access to additional credit is restricted and should the DPP fail for whatever reason, all the interest and charges, frozen while the DPP is in place, once again become payable.
The 2009 Regulations were designed to introduce a minimum monthly amount of £100 or 1% of the total value of the debt included in a DPP, which results in a maximum payment period of 100 months (eight years and four months). Concerns were expressed by some stakeholders that these provisions would preclude access to DAS for some debtors.
Question 4a: Should there be a limit on the duration of a DPP?
Question 4b: If yes, what do you consider to be a reasonable maximum period for a DPP?
Often, a DPP is proposed for more than 10 years because the approved money adviser is aware of future expected changes to their client's circumstances. They may know, for example that the debtor's disposable income will increase, because their mortgage is due to be paid off within the lifespan of the DPP. If programmes in excess of 10 years are sometimes appropriate, respondents are invited to consider whether the application should provide creditors and the DAS administrator with additional information to explain why a period of longer than 10 years is justified.
Question 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)?
Currently some DPPs are approved with very low monthly payments. Payments can be distributed either on a pro rata basis or on the basis of an equal payment amount per creditor. This means, in practice, that under the equal payment amount method of distribution, creditors with smaller debts will be paid off more quickly than creditors with larger ones.
In the large majority of DPPs, payments are currently distributed on a pro rata basis. This sometimes results in individual creditors receiving very small monthly contributions over the lifetime of the DPP. For example, depending on the number of creditors included in the programme, a DPP with payments of £10 per month could result in an individual creditor receiving as little as 20p each month towards the amount they are owed. Of the four payments distributors currently approved for DAS, three will not accept payments of less than £1.00 per creditor per payment instalment.
The DAS administrator has concerns about the cost effectiveness of those DPPs which involve very low monthly payments. It may be possible to limit the duration of low value DPPs by setting a statutory minimum monthly payment or maximum duration.
However, any restriction on the terms of DPPs might effectively exclude some debtors who are currently able to access DAS.
Question 4d: Should there be a required minimum total payment per month in a DPP?
Question 4e: If yes, what should the minimum total payment per month be?
Question 4f: Should all payments in DPPs be distributed to creditors on a pro rata basis?
To address small monthly distributions to individual creditors, payment distribution could be subject to a minimum monthly payment, for example, £5.00 per month, per creditor. If a minimum payment of £5.00 per month per creditor was introduced, this could result in a monthly payment of only £10.00 where a debtor has only two creditors or, in contrast, a payment of £100 per month where the debtor has 20 creditors. Creditors who are owed small debts would be repaid quicker than creditors who are owed larger debts. This could be seen as unfairly preferential.
Question 4g: Should there be a prescribed minimum payment per month, per creditor?
Question 4h: If yes, what amount should be required per creditor, per month?
Question 4i: Should there be both a minimum monthly payment and a maximum period for a DPP to combat low payments in excessively long DPPs?
Discretionary Conditions
All DPPs are subject to standard conditions. These include maintaining payments under the DPP, paying continuing liabilities as they become due, not applying for credit (except in certain circumstances) and notifying any material change in circumstances to the approved money adviser.
The DAS administrator may also make approval of a DPP subject to one or more discretionary conditions, whether or not creditors have consented or have been deemed to do so, or whether the application has been subject to consideration of whether it is fair and reasonable.
Regulation 30 of the 2004 DAS Regulations specifies a number of discretionary conditions, and also allows the DAS administrator to impose any reasonable condition to secure completion of the programme. This could, for example, be the requirement to notify the DAS administrator of any change in financial circumstances, for example receipt of a lump sum or the completion of a mortgage, so that an application for variation can be made. Currently discretionary conditions are only applied in a minority of cases.
Question 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.
5.5 Joint and Several Liability
Where two or more debtors have a joint obligation for any debt, the lender or creditor can recover the whole indebtedness from either, or any, of them. Currently this means that each person must enter into a separate DPP and make separate payments to the payments distributor for distribution to that creditor.
If a requirement for a minimum payment per month, as discussed in section 5.4 of this document, was introduced, this might affect the ability of couples with joint debts to access the scheme. For example, a couple who have a joint disposable monthly income of £180 could not both have DPPs if the minimum payment was set at £100.
If DAS was extended to allow couples with joint debt to apply for a joint DPP, this could reduce the administrative burden from the process. It may be possible for a joint DPP to include joint debts as well the individual debts of each person.
Question 5a: Should joint DPPs for debtors with joint obligations for at least one debt be introduced?
5.6 Single Debts
Most people want to pay what they owe, but some can only do so if given time to pay. A modern system of debt enforcement recognises that debtors should be protected from further action by their creditors and from the threat of bankruptcy if they need time to pay.
The Debt Arrangement Scheme provides protection but under current legislation, is not available to a debtor unless they have more than one debt.
The Debtors (Scotland) Act 1987 introduced two mechanisms which protect debtors from enforcement action by individual creditors. These mechanisms, often referred to as 'diligence stoppers', are time to pay directions and time to pay orders. Both of these only apply to single debts. These formal time to pay arrangements are not available unless the creditor is actively pursuing what they are owed through legal processes.
There are therefore some debtors who currently cannot arrange to pay a single debt because their creditor is not taking action against them, yet are not able to manage their debt because they are not eligible for DAS.
Question 6a: Should debtors be able to propose a DPP that includes only one debt?
5.7 Payment Distribution
Only payment distributors who have been approved by the DAS administrator can currently be used to distribute payments made through a DPP to creditors. Payment distributors may also, if the programme proposal so requests, agree to make payments for ongoing liabilities such as council tax and utility bills.
Whilst the debtor aims to repay all that they owe through their DPP, the payments distributor can deduct up to 10% from the amount distributed to creditors for their service. This amount has not been varied since the scheme was introduced.
Question 7a: Should the DAS administrator invite applications to tender for this role with a view to achieving best value and improve returns for creditors?
Question 7b: Should the DAS administrator take on the role of payments distributor with a view to achieving best value and improve returns for creditors?