Interim Response to Debt Arrangement Scheme consultation published
The Accountant in Bankruptcy has published an interim response to the Debt Arrangement Scheme (DAS) consultation which was undertaken over a year ago. David Menzies considers the amendments proposed which aim to enhance DAS.
The Accountant in Bankruptcy has published an interim response to the DAS consultation which was carried out in 2016.
Given the limited and largely non-controversial proposals it is perhaps surprising that it has taken more than 14 months after the consultation closed for the response to be issued – and even then, it is only an interim response with one area to be further consulted upon.
The response concludes that amendments should be made to the current requirements that all debts must be included in a Debt Payment Plan (DPP) proposal. Not really a surprise given that the proposal to include all debts was largely opposed when introduced in 2014. The response indicates however that only rent and mortgage arrears will be able to be excluded from a DPP and will still have to be disclosed as part of the proposals to creditors. While a welcome move, there appears to be little rationale behind the limitation. We would encourage further reflection on this to allow other priority debts and connected party debts to be excluded from a proposal.
Despite a ‘mixed response’ the AiB are pushing forward with plans to allow debtors to include a future lump sum payment into the DPP following the sale or re-mortgage of the debtor’s residential property. While this will undoubtedly make a DPP possible to achieve in some situations there will need to be safeguards introduced to ensure that the proposals are manageable and realistic to achieve. This may include limiting the period to which the lump sum may be contributed to the first 12 months.
It is disappointing that the AiB have not taken the opportunity to launch a consultation on the wider issue of equity in debt or insolvency situations.
Money Adviser regulation
The proposals seek to place additional regulation on money advisers. The interim response states that the AiB will require money advisers to ‘meet FCA requirements’ and for continuing money advisors to disclose their fee for setting up and administering the DPP.
It remains unclear what is meant by requiring money advisers to ‘meet FCA requirements’. It is a rather strange wording as FCA requirements can only be applied to firms that are FCA regulated. This perhaps implies that a money adviser (who is an individual) will in future have to be part of a FCA regulated firm. If that is the intention then this will be robustly opposed. What is concerning is that the interim consultation response comes up with this conclusion when it didn’t form part of the consultation.
Several proposals are made to amend ‘Business DAS’, however the fear from reading the consultation response is that the proposed amendments are simply targeted in the wrong areas and will be unworkable.
It is proposed that Business DAS will no longer be restricted to those who have 2 or more debts. While perhaps welcome, I don’t think this change will make DAS more attractive to many businesses. I suspect this move will also be vigorously opposed by HMRC who is likely to be the affected creditor.
The AiB are also proposing to allow flexibility in contributions through the introduction of a payment break of up to 6 months during the DPP. The DPP will however still have to be completed within a maximum 5 year period. This simply doesn’t make a lot of sense – the restriction on the 5 year period already limits access and this will simply add a further barrier.
The AiB also propose to fix what they call an ‘anomaly’ that business debts can be included in a personal DAS. Being cynical, this is simply a measure to increase numbers of ‘Business DAS’ which since inception has had minimal take up. More importantly however is how personal debts and business debts are separated. A sole trader doesn’t have separate personal debts and business debts and invariably credit cards, overdrafts and other finance will be a mix of personal and business debt.
A range of other measures are also proposed. These include allowing early completion of a DPP. This will allow possible changes in circumstances to be taken account of such as where an inheritance is received or an early settlement is negotiated with a creditor.
The AiB also propose to align the further credit restrictions for a debtor under DAS with those in bankruptcy. In essence, a DAS debtor will be able to apply for credit while subject to a DPP but will have to inform the prospective lender that they are subject to a DPP if the credit requested is over £2,000 or where the debtor already has over £1,000 credit. Failure to pay the new debt would result in the DPP being revoked.
The AiB have decided to consult further on one aspect. That is in relation to the calculation of the DPP contribution. Presently the contribution is calculated at 100% of surplus income as calculated by the Common Financial Tool (Common Financial Statement).
Analysis of completed DPPs by the AiB indicates that successfully completed DPPs tend to be of shorter duration, the average duration of successful DPPs being 3 years. This conclusion is probably not a surprise to anyone in the profession!
There is a widespread believe that, given the debtor is paying 100p in the £ in to the DPP, that there should be additional flexibility in the calculation of the contribution. The AiB therefore wish to seek further views on whether the mandatory use of the Common Financial Tool should be excluded in DAS, or whether the 100% surplus should be relaxed (subject to a maximum period of DPP) or whether the status quo should be maintained while promoting the use of the savings provision.
As always, the devil is in the detail which isn’t available yet. Some of the proposed changes are cautiously welcomed. Attending various events and speaking to stakeholders there appears to be broad agreement on how DAS should change. Unfortunately, the interim consultation response doesn’t reflect closely enough those discussions. The proposals seem in some areas to be starkly contrasted with the flavour of consultation responses published in July 2016.
Many of the changes proposed are a nod to the issues highlighted by the sector as consequences of previous DAS changes. Unless the proposals are amended prior to being brought into legislation, I suspect that a further set of amendment regulations can be envisaged in the not too distant future.