Debt Arrangement Scheme (Scotland) Amendment Regulations 2019
The draft legislation for the introduction of The Debt Arrangement Scheme (Scotland) Amendment Regulations 2019 (the regulations) has now been laid in parliament. Steven Wood considers the regulations in more detail.
The regulations follow on from the Accountant in Bankruptcy’s (AiB) response to the ‘Building a Better Debt Arrangement Scheme’ consultation.
The stated purpose of the regulations is “to enhance the Debt Arrangement Scheme by streamlining processes for increased flexibility and sustainability, and making it more accessible to the people of Scotland where it is the best solution to meet their specific needs”. They also aim “to ensure that there is an adequate supply of organisations facilitating entry to DAS where it is the appropriate solution, with the aim of allowing the scheme to reach its full potential”.
The regulations are expected to come into force on 4 November 2019 (subject to Scottish Parliament approval).
The main changes are outlined below:
Functions and duty of a money adviser
The most significant changes are brought about by regulation 4. This amends the Debt Arrangement Scheme (Scotland) Regulations 2011 (as amended) (the 2011 regulations) to allow other entities such as continuing money adviser (CMA) organisations or the AiB to take on payment distribution responsibility. The debtor can nominate their own payment distributor (PD) and the existing requirement for PDs to hold relevant FCA authorisation remains. The AiB will also offer the PD function for cases where an existing PD ceases or is unable to act.
Where the AiB is appointed as PD it will charge the statutory administration fee for this function. The AiB has intimated that they intend to provide this service on a ‘cost only basis’, with any surplus generated from fees being used to support the free debt advice sector. The AiB have published a further consultation seeking views on how this could be best achieved.
Although pleased to note that the AiB will not act as PD in all cases, ICAS remain concerned that this additional function will create a further conflict of interest for the AiB, is anti-competitive and without justification in the public interest.
Regulation 4 also introduces a fixed statutory administration fee for PDs of 20% (including any VAT incurred) of the sum due to be paid to a creditor, to cover the costs of both money advice provision and payment distribution services, and provides that the CMA may not charge the debtor a fee for the adviser’s services.
The fee in relation to Business DAS is no more than 8% of the sum due to be paid to a creditor. It is unclear why there is a different policy approach being adopted for the fee or why the Business DAS fee remains flexible with an upper limit being set as opposed to the fixed fee approach adopted in individual DAS cases.
The 2% fee levied by the AiB for the costs of dealing with DAS applications and variation requests is retained.
ICAS believes that the fee structure change for individuals further alters the nature of DAS and makes it more explicitly simply an alternative insolvency solution or form of composition. The financial effect of the changes brought about by the regulations is a significantly reduced return to creditors through a completed DAS debt payment programme (DPP). Currently creditors receive at least 90% of the original debt through a completed DPP, which will be reduced to 78% in all cases, where the debt payment plan completes fully.
Consent of creditors
Automatic approval for DPP applications is to be introduced where the debt due to objecting creditors is less than 10% by value. This will reduce the administrative burden on the AiB as DAS Administrator, by removing the need to carry out a ‘fair and reasonable’ review in cases where more than 90% of creditors accept the DAS proposal.
This amendment relates to DPPs for individuals only i.e. not Business DAS.
Methods of payment
The regulations will no longer specify permitted payment methods beyond an instruction to an employer to make payment, instead providing for a debtor to make payments under a DPP via “any other payment method agreed between the debtor and the payments distributor”. This also removes an administrative burden from the DAS Administrator who previously had to agree to any other payment method not specified in the legislation and transfers that decision onto the PD.
The change is to take account of and future-proof against technological advances. Whether creditors and payment distributors will be willing to accept Bitcoin or Facebook Libra remains to be seen!
Application for variation
An additional requirement is introduced for a creditor who makes a variation application more than 120 days after the approval of the DPP on the grounds that a debt due at the date of approval of the DPP was omitted from, or was wrongly assessed for the programme, due to a mistake, oversight, or other reasonable cause.
If such a variation application is made, it must be accompanied by a statement from the creditor outlining why the debt was omitted or wrongly assessed and why the application could not have been made on an earlier date.
This provision partially mirrors the ‘120-day rule’ for creditors to submits claims in sequestration, whereby a claim is rejected unless there were exceptional circumstances which prevented its submission within 120 days of the creditor being notified of the sequestration.
Proposal for variation by DAS Administrator
The DAS Administrator will be able to propose a variation, with the debtor’s consent, where the variation is for administrative purposes. Examples include removing a debt which has been cleared, or where the variation will result in a reduced term of the DPP. A variation may not be proposed under this provision on the grounds that there has been a change in the debtor’s financial circumstances.
The circumstances in which a debtor may apply for a payment break are extended to include where the debtor separates from a cohabiting partner. The terminology relating to joint DPPs has also been updated to include cohabiting persons.
Deemed consent to variation and automatic variation where period reduced
Where creditors do not respond to a variation proposal within 21 days, they will now be deemed to have consented, bringing this into line with the initial DPP approval process. Where all creditors consent, or where a variation proposal will lead to a reduction in the duration of a DPP, it will be automatically approved.
Short term financial crisis payment break
Short term payment breaks to address periods of financial crisis will be permitted with the breaks being authorised by the money adviser. The money adviser will be able to authorise the payment breaks without having to consult creditors.
No more than two breaks, each lasting one month, in any rolling one-year period will be permissible. A request may be submitted retrospectively, if the request is made before the next payment is due.