AiB publishes its consultation on returning Debt Arrangement Scheme funds to the free advice sector
The Accountant in Bankruptcy (AiB) has published a further consultation which builds upon its response to earlier consultations, and the changes to the Debt Arrangement Scheme (DAS) they proposed. The latest ‘sub-consultation’ is titled ‘Returning Funds to the Free Advice Sector’. Steven Wood looks at some of the detail.
Among the changes to be taken forward from the earlier consultations, most recently ‘Building a Better Debt Arrangement Scheme’, were proposals that all debt payment programmes under DAS should pay the same flat rate fee, and that AiB should be able to be a payment distributor. This raises the possibility of the AiB receiving fee income from debt payment plans in excess of its costs. The earlier consultations backed a proposal that any such surplus should be returned to the free advice sector to help offset the sector’s costs in helping people access DAS. The latest ‘sub-consultation’ considers how this might work in practice.
Proposed changes to DAS payments distribution
As a result of the previous consultations, the AiB has committed to recommend to Ministers that the Continuing Money Adviser (CMA) role be extended to include payments distribution responsibility. ICAS broadly welcome this change, although reiterate concerns over potentially restricted market competition in view of the requirement for FCA authorisation.
The AiB have also committed to recommend to Ministers that they be allowed to offer a payments distribution service. The debtor will be able to nominate their own payment distributor (PD) where the PD holds the relevant FCA permissions. Where no PD is nominated in a case, AiB will be appointed as PD by default. The AiB will also offer the PD function for cases where an existing PD ceases or is unable to act.
ICAS remain concerned that the additional function of PD creates a further conflict of interest for the AiB, is anti-competitive and without justification in the public interest.
New fee structure
The previous consultations proposed changes to the DAS fee structure, extending the statutory PD fees to cover the full range of services offered by a CMA (by removing all existing CMA fees and instead including initial set up costs, administrative duties and payments distribution services) under one fee. The proposed statutory administration fee being taken forward is 20%.
ICAS again comment that the change in the fee structure further alters the nature of DAS and makes it more explicitly simply an alternative insolvency solution or form of composition. Creditors are now being asked to bear the full cost of the programme in the same way as they would in a trust deed or bankruptcy. Unsurprisingly, the AiB say they disagree with this point of view as the debtor repays their debts in full. This ignores that insolvency can be demonstrated by being unable to pay debts as they fall due.
Returning funds to the free advice sector
Where the AiB is nominated as PD, they will charge the statutory administration fee for this function but will only seek to recover their costs - allocating any surplus to the free advice sector. This is in recognition of the significant money adviser administrative effort in dealing with the application stage through to completion and any changes of circumstances.
The consultation goes on to propose five options for redistribution of the funds back to the sector. These are covered in more detail in the consultation paper, but the options presented are:
- The funds are held by the AiB and allocated to free sector organisations who nominate the AiB as PD.
- A ‘trust fund’ held by AiB with the funds to be disbursed to organisations based on business cases presented by them which demonstrate to AiB how they will use the funds to promote/increase their delivery of DAS.
- Funds held by AiB – decisions made by Independent Panel appointed by the Scottish Government to assess bids for funding and decide how the monies should be allocated.
- Funds held centrally by Scottish Government for DAS use only.
- Funds passed to Scottish Government for general money advice support.
Regardless of the method chosen for redistributing the funds, there is clearly a danger that the free advice sector is being incentivised to put clients into DAS, possibly in favour of other solutions which may be more suitable. The first option provided in the paper, where the funds would be held by AiB and allocated back to the money advice organisation who nominated the AiB as PD, most explicitly creates exposure to this risk. However, all the options listed result in the funds benefitting the free advice sector in some way and therefore create a conflict.
The AiB suggest that in the first year, based on no increase in numbers, around £100,000 would be available to distribute. The methodology for arriving at that figure is not entirely clear from Appendix A of the paper and the AiB admit that there is a large amount of uncertainty.
Clearly the AiB should only become PD as a last resort, with most CMAs handling the payments distribution function themselves. It follows that the level of funds held by the AiB following deduction of their costs could be minimal.
Crucially, the consultation is silent on how the costs of the AiB will be calculated to determine the ‘surplus’ available for redistribution, and nor does it seek to consult on that aspect. As with all such functions there are a huge variety of methods for calculating costs, particularly where an element of overhead apportionment is to be undertaken. These can result in significant variances in outcomes, all of which can appear reasonable in isolation. Appendix 1 of the consultation document concludes that, based on current DAS levels, the total funds generated under the new DAS fee where the AiB becomes PD would be in the region of £316,000 with around £100,000 available to distribute. Simple arithmetic therefore suggests that the AiB’s costs would be £216,000. This equates to just under 70% cost to income ratio. Given the limited role of the PD and what should reasonably be expected to be a highly automated function, the costs attributed seem on the face of it to be highly questionable.
The question needs to be asked whether this is just an alternative method to fund some of the AiB’s running costs and to deal with the unresolved question of a sustainable and transparent framework for setting AiB fees. Despite the Scottish Parliament’s Economy Jobs and Fair Work Committee supporting ICAS’ call for such a review in May 2018, there has been no further work carried out on this.
Whichever method of redistribution is taken forward should ultimately be the most cost-effective, in order to ensure that the funds benefit the free advice sector as intended as opposed to being used in the administration of whichever scheme is chosen to facilitate the process.
Responses to the consultation are invited by 20 August 2019.