CONSULTATION RESPONSE

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1 CONSULTATION RESPONSE Bankruptcy law reform May 2012 Introduction The FSB is Scotland s largest direct-member business organisation, representing around 20,000 members. The FSB campaigns for an economic and social environment which allows small businesses to grow and prosper. FSB members may come into contact with personal bankruptcy law either as creditors or debtors (in the case of sole traders or non-limited liability partnerships) and the organisation therefore takes an interest in any changes to the personal bankruptcy arrangements in Scotland. We therefore welcome the opportunity to submit our response. Our priority for the system is that it should help address the problems of debt without discouraging enterprise. Although the current system is fairly well regarded in terms of its efficiency and debtor friendliness, given the prevalence of risk-averse behaviour and Scotland s relatively poor business birth rate 1 it is important that the introduction of further barriers to new start and re-start business in Scotland is avoided at all costs. Add to this the current economic climate, which has brought with it unprecedented challenges to small business in terms of reduced cash flow from late payment 2 and limited access to finance and the importance of getting the right balance in personal bankruptcy and debt management schemes is further highlighted. 1 Global Entrepreneurship Monitor Scotland 2010 University of Strathclyde ned.pdf 2 Our members report a 24% increase in late payment suffered by businesses supplying to the private sector in 2011 compared with FSB Voice of Small Business Member Survey February

2 Principles for reform The FSB supports the principles behind the reform of personal bankruptcy legislation set out in the consultation, namely that: Scots should have access to fair and just processes for debt advice, relief and management; Debtors who can pay should pay their debts; and that Creditors and debtors rights are balanced to ensure the best return for creditors and businesses. We see the balance between creditor return and debtor rights as particularly important. Any changes resulting in an increased delay to discharge a longer repayment period with reduced returns to creditors, and which might lock debtors in to arrangements that prevent them moving on could upset this balance. We therefore believe that any changes to current legislation or arrangements need to be rigorously tested to ensure that a reasonable balance can be achieved. Merely setting out the principles on which change is being sought is insufficient. While the principles for reform are sound, the lack of evidence to support the need for the specific changes or indeed, description of the specific benefits that a change might afford, makes it difficult to assess the likely impact on interested parties. This makes our response rather cautious. As a business organisation our main interest in this consultation is in relation to the high value products aimed at sole traders and non-incorporated partnerships. Our response will therefore concentrate on these areas. Consultation questions Part 6: Advice Question 6.1: Do you think that money advice should be compulsory for those considering any form of statutory debt relief? Yes Question 6.1a: If yes, who should give this money advice? We believe that an appropriately qualified person should provide money advice, ensuring that all the possible options available to the debtor be explained. Question 6.2 Should AiB have a role in the provision of money advice? The FSB does not take a view on this issue per se, but considers that incorporating a money advice into the roles and responsibilities of the AiB is likely to require investment in and increased resources for the AiB. The FSB would seek assurances that any developments would be cost neutral to the debtor and creditor. Question 6.3 Would you support a triage system to signpost individuals to possible debt relief or debt management options available to them? It is not clear from the consultation document or the attached flow chart whether this system will allow debtors the chance to see the full range of options available to 2

3 them. It is also unclear what relationship this triage system has to the AiB s proposed advice role or the advice provided by other money advisors. Moreover, it is unclear the extent to which the current system is inadequate and in need of change. Are there serious inefficiencies inherent in current arrangements which necessitate this? What particular benefits are possible? The FSB supports moves to streamline processes and improve efficiency in principle, but would seek assurances that any triage system would not limit individuals access to the full range of options. Personal debt solutions, particularly those relating to sole traders and partners are often complex in nature, and the individual circumstances surrounding the debt may require more guidance and in-depth assessment than a simple flow chart could provide. Part 9: the Application process Question 9.1 If money advice should be sought prior to entering any statutory debt relief or debt management product, should applications only be made to AiB through an electronic web portal? The FSB position on web-based interactions is that, while online facilities can increase efficiency and should be developed where possible, a paper option should still be made available. Question 9.1a If yes, should an electronic application web portal be accessed only by authorised money advisers? Yes. The application process is complex. If we understand it correctly, it requires submission of proof of financial viability/repayment capabilities, assessment of debt etc. It would make more sense that an authorised money adviser complete the process on behalf of the applicant. It would not ensure without doubt that the applicant has received comprehensive advice on their situation as is their right, but it would greatly increase the probability. An additional factor is the objectivity afforded by the application being made by a third party, given the pressures under which an individual requiring debt relief is likely to be. Part 10 Solutions for individuals Question 10.1 Where it is assessed that an individual could repay their debts within a fixed period (such as 8 years), should DAS be the default option for the individual? Eight years is a long time to repay debts. Depending on the amount of debt requiring repayment and the individual circumstances of the debtor, can it be guaranteed that this option would always lead to the best outcome? Creditors return is an additional factor in the idea of defaulting to DAS. Question 10.2 Should the mechanism for charging for a DAS application be aligned to other statutory debt relief options and an up-front fee charged? While we recognise the merit in the principle of bringing payment procedures of all debt products into line, the consultation document does not set out the degree to which the current 2% share of the monthly repayment covers the AiB s costs in administering the application process. It is also unclear from the consultation the extent to which the introduction of an up-front payment would a) deprioritise 3

4 repayment to creditors, or b) remove a valued feature of the DAS for the debtor in terms of manageable repayment terms. Question 10.3 Should AiB be able to charge any other fees for the administration of the debt payment programme? Given that current charges do not cover the operational costs the AiB incurs with regard to administration of the debt payment programme, it could be argued that any additional costs incurred by the AiB following introduction of any new arrangements or responsibility should be covered by grant in aid. If the funding source and methodology were to change, we would expect that comprehensive analysis of the estimated additional cost to the AiB and the potential impact of making additional charges to applicants would be carried out and fully scrutinised before this were implemented, to ensure transparency and fairness. Question 10.9 Where an individual is in employment, should provision be made for a statutory notice to be issued to their employer allowing the deduction of the agreed contribution direct from the individual s salary? The FSB opposes this proposal. From an employer s point of view the FSB would be concerned about the additional burden to employers in setting up and managing such a deduction, which the employer might only encounter rarely. From an individual debtor s point of view, since a protected trust deed is a voluntary arrangement between the debtor, the creditors and the administrator, we are concerned that provisions for a statutory notice to employers might represent a breach of the Data Protection Act 1998 and might prejudice employers views of their employees. Question Should there be a fixed term for completion of a protected trust deed? We are unable to offer an opinion but question whether introduction of a fixed term of 5 years might close an opportunity for return to creditors in some rare cases? Question Should the current process that deems consent to a trust deed becoming protected continue? The FSB sees no reason for the current process to change. There is already provision within the current legislation for creditors to object and, potentially, to have the full debt reinstated. Changing the presumption also risks delaying any repayment period, which is detrimental to creditors and debtors alike. Question Where a trustee in a protected trust deed applies to make an individual bankrupt as a result of their non-compliance, should the trustee in the bankruptcy take the non-compliance into consideration when agreeing the individual s discharge from debt? The FSB has insufficient information on which to base a response to this question. However, we would seek assurances that sufficient flexibility were maintained within the system to allow it to cope with different individual circumstances that might arise. Question If the protected trust deed fails due to an individual s refusal to comply with the terms, should it be mandatory that the trustee applies to make the individual bankrupt? See above. 4

5 Question Should the requirement for an individual to prove apparent insolvency be removed as a route into bankruptcy? We have not reached a view on this question. Question Should a new Payment product be developed for individuals who are assessed as able to make a contribution? If there is real potential for creditors to receive a repayment on debts, this might be useful in certain circumstances. Question Should the Payment product be available to individuals who are currently trading or who have traded within the preceding 5 years? We understand that a balance needs to be struck between on the one side ensuring that debtors take responsibility for their debt, thereby securing maximum potential return for creditors and on the other, ensuring that the individual debtor has the best chance to make a fresh start and that creditors are not burdened with arrangements which provide them with very little return. It is not clear from the consultation document whether there has been sufficient analysis of the likely impact of this product on this balance. Question Should this product be unavailable to individuals who have debts exceeding a fixed sum? The FSB believes that locking an individual into contributions relating to their bankruptcy for excessively long periods has no benefit either to the debtor or creditor. At some point there has to be a decision to move on from the debt. We are not experts in assessing at what point a debt becomes unmanageable in terms of repayment contribution. Individual circumstances will doubtless be a key factor in this assessment. We are therefore cautious about setting a fixed sum beyond which a debt management option becomes unsuitable. Question Should a new High Value product be developed for individuals who are currently trading or have traded in the past 5 years or who have debts in excess of a fixed amount? Current or recent past trading does not necessarily equate to high value debt. For example a self-employed person who requires relatively little capital to start up in business might have personal debts that they are unable to manage which are not necessarily high value as the consultation document defines it. We would not want the trading criterion to route individuals automatically towards a business DAS or High Value Bankruptcy, as the flow chart annexed to the consultation suggests, as this takes no account of the individual s circumstances, nor does it fit with the principle that the individual should be advised about the full range of voluntary debt options available to them. While we accept the fact that bankruptcies relating to sole traders and partnerships are likely to involve a heavier administrative burden on trustees and administrators, we are not clear on how a high value product would mitigate any of this, and indeed whether the volume of bankruptcies in the high value category truly require a separate product to be developed. Part 11 Solution for Sole Traders and Partnerships 5

6 Question 11.1 Should a new Business DAS be developed for sole traders and nonlimited liability partnerships where the business is assessed as viable? The FSB welcomes the acknowledgement of the problems that business debt for sole traders and partnerships can cause for individuals. We are also supportive of the attempt to create a product that might separate personal and business debt and allow a viable business to continue to trade. We do however, have some concerns. It is unclear how this option actually differs from existing DAS for personal debt? If the Business DAS is designed to separate out personal from business debt, how is it proposed that this is done? Particularly for micro businesses and self employed people who are sole traders or partnerships we are aware that this is notoriously difficult to do. Moreover, small business people are increasingly turning to personal credit options to mitigate business cash flow problems and personal guarantees are also far more commonly asked for by banks in a credit or finance application, which we can only imagine make this separation even more difficult to achieve. Secondly, we would also caution that assessment of business viability requires more than a review of the accounts, and might include an assessment of the business s markets, customers, adaptability etc. We therefore wonder who might be best qualified to undertake this assessment? Finally, we are already aware that major UK creditors such as the HMRC lack understanding of the existing personal debt management and relief options available in Scotland and their potential benefit to such creditors. Introduction of a Business DAS would require communication and negotiation with such bodies to ensure that its aims might be achieved in practice. Question 11.2 Should Business DAS exclude non-business debts? As above, we are unclear how this might be achieved for the majority of sole traders and partners who might arrive at this option. Question 11.3 Prior to entering a Business DAS, should business advice be compulsory If a Business DAS were to be introduced, compulsory business advice would be consistent with the arrangements for the existing DAS. Question 11.4 Should debt relief or composition be incorporated into Business DAS and agreed with creditors at the proposal stage? We agree that this should be an option but in many cases might not be possible or Part 15 AiB Role and Powers The FSB is in principle extremely cautious about any proposals to introduce new regulation without the setting out of a strong economic and social case to support it. We understand that insolvency practitioners are currently already regulated by their professional body, and that the AiB already has the facility to report to the industry regulator, recommending removal of a licence to practice or to seek investigation into misconduct. Further, we understand that this facility has thus far never been used. Given the lack of evidence we would therefore strongly recommend that proposals for additional regulatory powers be shelved. 6

7 For further information on any of the points raised in this submission, please contact Mary Goodman, Senior Policy Adviser, t: