On 4 November last year, almost 15 years to the day since the commencement of the Debt Arrangement Scheme (DAS), the Scottish Government introduced its latest amendments to the UK’s only statutory repayment plan for multiple debts.
The new measures, it is hoped, will result in a dramatic increase in the numbers of people applying to join DAS, with early indications showing that is likely, the numbers of applications in the fourth quarter of 2019 showing a 24% increase on the third quarter.
It is also hoped that the new regulations, the Debt Arrangement Scheme (Scotland) Amendment Regulations 2019, amending the Debt Arrangement Scheme (Scotland) Regulations 2011, will give consumers an alternative to using protected trust deeds or sequestration to address their overindebtedness.
The changes come against the backdrop of the numbers applying to DAS falling over recent years, with a reduction of 50% being reported between 2015 and 2017, despite rising levels of consumer debt.
The reasons for this reduction are complex, but are understood to be partly related to a 45% reduction in funding for frontline, free money advice services since 2014.
These latest regulations, the sixth since 2011, are also expected to be the most far reaching to date. They follow on from regulations introduced in 2018 which removed the requirement for all debts to be included into debt payment programmes, as well as a requirement for consumers to offer all their disposable income to creditors when making proposals.
The principal changes
The primary changes introduced by the 2019 Regulations:
- abolish all private sector management fees that can be charged to a debtor when entering DAS (reg 4);
- increase the statutory fees that creditors must pay once their debts have been included in a programme (reg 4);
- widen access for firms that wish to become payment distributors (reg 4);
- allow for applications to be automatically approved in certain circumstances (reg 5);
- limit the ability of creditors to request variations to amend the amount owed (reg 7);
- create a new right for the Debt Arrangement Scheme Administrator to apply for programmes to be varied (reg 8);
- introduce automatic approval of certain types of variations (reg 10); and
- introduce monthly crisis payment breaks, that are in addition to existing payment breaks (reg 11).
Changes to payment distributor fees
It is an integral part of entering into a debt payment programme that your debts are paid via a payment distributor, and the cost of paying for this service is one that is borne by the creditors.
Prior to 2011, this fee was up to 10% of everything that a debtor paid, but after 2011 it was reduced to a maximum of 8%, to allow for a 2% application fee to be charged by the Accountant in Bankruptcy (AiB) in its role as Debt Arrangement Scheme Administrator.
After 2011, payment distributors also had to tender competitively for contracts, therefore minimising the cost for creditors, with some payment distributors tendering as low as 4% to win contracts.
However, with the reduction in cases and the gradual trend towards telephone-based debt charities and private firms being the main providers, this has led to an increase in the number of consumers paying private sector fees, and telephone-based debt charities complaining they have no way to fund their services.
In response, the new regulations make two important changes to the scheme.
The first of these is to abolish the ability of private sector firms to charge a fee in relation to debt payment programmes; and the second is that they increase the payment distribution fee from a maximum of 8% to 20%, which is payable in addition to the 2% DAS Administrator’s charge. This means that creditors who now have their debts included in DAS can expect to recover only 78% of the funds owed to them, as opposed to at least 90% under the old fee structure.
Approval of payment distributors
In addition to the changes to the fee structure, the Scottish Government has also amended the process for firms to become payment distributors, with the aim of encouraging more private sector involvement in the market.
As noted above, firms previously applied to become payment distributors by competitively tendering to be included on the DAS Administrator’s panel of approved firms.
Under the new scheme this will no longer be necessary, and instead firms will only have to show they have the appropriate licence from the Financial Conduct Authority that allows them to hold client funds, and the necessary infrastructure to perform the functions required of a payment distributor. If they can satisfy this test, the AiB will approve them.
However, as not all firms or advice agencies are expected to become payment distributors, the regulations also allow the AiB to act as a payment distributor of last resort, where firms or agencies cannot access another payment distribution service.
AiB has also committed to returning 15% of its 20% payment distribution fee to those agencies that use its services as money advisers, leaving itself with only 5% (other providers are now also making a similar commitment).
Approval of debt payment programmes
An additional change introduced means that applications for programmes will now be automatically approved, even where creditors object to them, provided those creditors have no more than 10% of the total debt included in a programme.
Where those creditors who object have more than 10%, proposals will not be automatically approved, but instead the AiB will apply a fair and reasonable test to determine whether the programme should be approved.
It is believed that as 96% of all applications to DAS are approved, these changes will not significantly increase the number of programmes being approved, but instead will streamline the process.
Creditor rights to apply for variations
The right of creditors to apply for a variation to have a debt included in a programme or change the amount that is owed will now also be restricted.
Where such variations are requested more than 120 days after a programme has been approved, creditors will have to show why they did not establish the debt by the date of approval; or why the variation was not applied for earlier.
Further changes also mean that where a variation of a programme is proposed and all the creditors agree to it, it will now be automatically approved. This applies even where a creditor fails to respond to the notification that a variation has been applied for.
Where the effect of a variation is to reduce the duration of a programme, it will also be automatically approved.
The DAS Administrator can, for the first time, apply for a programme to be varied, where the purpose of the variation is administrative or it will reduce the duration of a debt payment programme, provided the variation does not arise from any change in the participant’s financial circumstances.
Short-term payment crisis breaks
In addition to those changes, the regulations introduce new measures that it is hoped will reduce the number of debt payment programmes that fail. It is currently believed that as many as 40% of programmes fail within their first five years, many for missed payments.
The new changes, therefore, introduce short-term, one-month crisis breaks that can be applied for via a money adviser, up to twice in any 12-month rolling period, including for two consecutive months.
These payment breaks are in addition to the existing payment breaks that can be applied for and can last up to six months. The reason behind the new breaks is that large numbers of missed payments were being observed at certain times of the year, including Christmas, so it is hoped that with the introduction of crisis breaks the number of cases being revoked will reduce.
Will we see an increase in debt payment programmes?
It is likely that in 2020 we will see an increase in the number of debt payment programmes being applied for and, as was noted in the introduction to this article, earlier indications are that this is already occurring.
Many insolvency firms, for a start, may begin re-focusing their marketing efforts on promoting the scheme as a solution. The increase in statutory fees to 20% means that an average debt payment programme, lasting between six and seven years and with an average contribution which is already greater than that in sequestrations and protected trust deeds, will commercially be as viable as those other solutions.
And although it may mean creditors will see a drop in returns from the scheme, few will see 78% from any personal insolvency solution, so overall, they are likely to see an increase across poorly performing debt books, as more consumers will now be attracted to the scheme, and also arguably to using professional firms without the fear of incurring management fees.
Alan McIntosh is a money adviser and blogger on debt. He blogs at www.advicescotland.com. The views he expresses are his own.