Personal Insolvency Act 2012 A changing landscape for banks in Ireland

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1 Personal Insolvency Act 2012 A changing landscape for banks in Ireland We ve identified the implications of the changing landscape for banks. This document will help banks to assess their readiness to respond to the associated challenges. 1

2 Contents 2

3 Overview & challenges The Personal Insolvency Act 2012 (the Act ) came into effect in December The purposes of the Act are to: To successfully recover debts due, consideration should be given to the challenges regarding: Modernise personal insolvency law in Ireland to stimulate economic activity; Introduce a tiered regime of new insolvency arrangements to enable insolvent debtors to resolve their indebtedness in an orderly manner without recourse to bankruptcy; and Provide for the establishment of the Insolvency Service of Ireland ( ISI ). What does this mean for banks as creditors? Understanding the customer circumstances to which the new insolvency arrangements may apply; Defining the correct strategy for processing proposals for insolvency arrangements; Aligning this strategy with the bank s Mortgage Arrears Resolution Strategy ( MARS ) and other restructuring strategies to ensure appropriate decisions for whole of customer circumstances; Defining an appropriate engagement model for internal and external stakeholders and the organisational changes required to support this; Updating policies and procedures to fulfil obligations under the Act; Defining operational and technical requirements to support the bank s end-to-end insolvency arrangement journey; Resourcing adequately to efficiently and effectively satisfy these requirements; Understanding the implications of the reforms to the Bankruptcy Law; and Delivering the management information and metrics required to monitor progress and impact. This brochure can be used to progress a bank s thinking with regard to the challenges associated with recovering debts. We ve included a 12 point readiness assessment for a bank, as creditor, to determine how prepared it is for the changes ahead and a list of FAQs to understand what questions Irish banks are asking about personal insolvency. Common Acronyms Explained: AI Approved Intermediary DSA Debt Settlement Arrangement DRN Debt Relief Notice ISI Insolvency Service of Ireland PC Protective Certificate PIA Personal Insolvency Arrangement PIP Personal Insolvency Practitioner PFS Prescribed Financial Statement 3

4 What do non-judicial insolvency arrangements involve? The Personal Insolvency Bill completed its passage through both Houses of the Oireachtas on 19 December 2012 and was signed into law as the Personal Insolvency Act 2012 by the President of Ireland on 26 December The Act introduces three non-judicial insolvency arrangements. Debt Relief Notice ( DRN ) Debt Settlement Arrangement ( DSA ) Personal Insolvency Arrangement ( PIA ) Debts Covered Unsecured Debt =< 20,000 Unsecured Debt > 20,000 Unsecured debt no limit Secured Debt < 3,000,000 (may be extended) Income Net monthly disposable income of =< 60 N/A N/A Intermediary Approved Intermediary ( AI ) PIP PIP Duration Prescribed Financial Statement ( PFS ) Repayment plan with creditors over 3 years (can be extended to 4) Repayment plan with creditors over 5 years (can be extended to 6) Yes Yes Yes Repayment plan with creditors over 6 years (can be extended to 7) Creditors consent N/A 65% of total 65% of total, including min 50% of secured and min 50% of unsecured. Retention of family home Protection from creditors N/A Yes, where practical Yes, where practical Yes Yes Yes Examples of debts Credit Union loan, credit card debt, overdraft Personal guarantees Home loans, buy-to-let loans, Small and medium enterprise (SME) personal loans Outcome Residual debts legally written off by unsecured creditors. Residual debts legally written off by unsecured creditors. Similar to DSA and secured debts can also be written down. What are the implications of the Bankruptcy reforms? The Act also introduces specific reforms and further softening of Bankruptcy Law which raise additional considerations for banks as creditors: Automatic discharge from bankruptcy, subject to certain conditions, after 3 years, as opposed to 12 years. In circumstances where the bankrupt has been non-cooperative, or has not disclosed income or assets, the bankruptcy period may be extended to a maximum period of eight years. The Court is empowered to order the bankrupt to make payments to creditors for up to five years. If a petition is presented by a creditor, the Court shall consider whether a DSA or a PIA would be a more appropriate solution. If a petition is presented by a debtor, the debtor must provide an affidavit that he has made reasonable efforts to reach an arrangement with his creditors by proposing a DSA or a PIA. Certain pension assets may be carved-out of the bankruptcy estate and may be unavailable to creditors. 4

5 How has the personal insolvency landscape changed? While each arrangement will have its own unique implications, a common Personal Insolvency Lens can be applied for banks to define their strategy and assess their readiness for the changes ahead. All three non-judicial arrangements have implications for banks in terms of writing down or restructuring secured and/or unsecured debt. Banks will need to define their strategy, policies and procedures to ensure they fulfil their obligations under each insolvency arrangement. Internally, consideration needs to be given to the operations required to support the external stakeholder engagement and the internal assessment and monitoring of insolvency arrangements. Under the Act, banks will be required to engage with PIPs and AIs in addition to attending creditors meetings and the Courts as required. Furthermore, banks will be prevented from making unsanctioned debtor contact and taking measures such as debt enforcement during the period of debtor protection. Consequently, banks will need to define their external engagement model to support their strategy. External Lens Debtor Other Creditors Insolvency Service of Ireland Approved Intermediary / Personal Insolvency Practitioner Court Service The Personal Insolvency Lens Credit Risk / Underwriting Compliance Valuations team Mortgage Arrears Support Unit Change Management SME Personal Debt Insolvency Specialist (Challenge) Internal Lens Securities & Records Mgt Loan Books Buy to Let Debt Operations (Process) Central Insolvency Unit (Control) Unsecured Personal Debt Relationship Manager (Understand) Asset Management/ Recoveries Support Functions Credit card Debt Information Technology Strategy Analytics Legal 5

6 What does a typical Insolvency Arrangement Journey look like? An end-to-end review of the Insolvency Arrangement Journey for banks, as creditors, and their customers, as debtors, offers insights into how the debt resolution landscape is shifting and how each bank s policies, processes, procedures and systems will need to be updated to support this shifting landscape. The illustration includes considerations for the PIA only and as such, should not be viewed as an end-to-end journey for all insolvency arrangements. PIP Engagement PFS Completion PC Application Arrangement Preparation Arrangement Approval Arrangement Implementation Arrangement Variation Arrangement Completion Customer (Debtor) Journey Submit written statement of financial affairs to PIP Meet with potential PIP(s) for advice Appoint PIP Receive written consent of PIP to act on behalf of debtor Complete PFS Receive advice from PIP on how to address financial difficulties. Instruct PIP to propose an arrangement and apply to the ISI for a Protective Certificate ( PC ). Furnish additional information to ISI as required. Consent to amended proposal for insolvency arrangement if required. Submit agreed payments to creditor through the PIP. Assist PIP with ongoing review of personal financial circumstances. Inform PIP of any material changes in financial circumstances. Request information regarding operation of arrangement from PIP. Cooperate fully with duties and obligations associated with arrangement. Request PIP to schedule creditors meeting for variation of arrangement. Provide written consent to vary arrangement. Receive notification of arrangement expiration. Bank (Creditor) Journey Receive notification from PIP that the PC has been issued. Implement controls to flag all customer accounts that PC has been issued Appeal the issuing of the PC to the debtor within 14 days of issue. Receive written notice of PIP appointment, PFS and invitation to submit proposal on how to deal with debts. Submit proposal to PIP for bank s preference on how it wishes for its debts to be dealt with. File a proof of debt as requested by PIP. Furnish estimate of market value of security associated with secured debt. Agree valuation of security with PIP. Receive notice of creditors meeting from PIP and review relevant documentation. Propose modification to the arrangement proposal if required. Vote to approve arrangement proposal.* Lodge notice of objection of arrangement with Court, ISI and PIP within 21 days of receipt of notice. Receive payments from PIP on behalf of debtor. Request information regarding operation of arrangement from PIP. Record changes in debtor s circumstances. Request PIP to schedule creditors meeting for variation of arrangement. Challenge arrangement. Apply to Court for termination of arrangement. Approve/Reject variation request. Receive notification of arrangement expiration. *Where no creditor votes, the proposed arrangement shall be deemed to have been approved. 6

7 Are you ready? The end-to-end journey will vary depending on the proposed insolvency arrangement. While the anticipated volume of proposals for arrangements is a matter for debate, banks will be faced with additional responsibilities from the point at which a debtor applies for a PC or DRN through to the completion or termination of an arrangement. Readiness for this involvement can be assessed at a high-level with reference to a 12 Point Readiness Assessment. We are comfortable that we are ready to meet the challenges of the Personal Insolvency Act because we can answer yes to each of these questions Do we understand the implications of the Personal Insolvency reforms? Do we have a vision and strategy for how we will process proposals for, and manage, insolvency arrangements? Do we have set objectives for how we will implement our strategy? Do we have established metrics to measure our performance against our objectives? Do we know how we will interface with internal and external stakeholders? Have we identified the policies that must be created/updated to fulfil our obligations under the Act? Have we identified the processes and procedures that must be created/ updated to support these policies? Have we identified where IT enhancements are required to support new processes? Have we estimated the volume of proposals for insolvency arrangements to be processed per quarter for 2013 and 2014? Have we assessed the need for a Centralised Insolvency Unit with the requisite technical, legal, valuation and operational capabilities? Are we resourced to a sufficient level to manage the anticipated level of proposals and insolvency arrangements? Have we trained resources to effectively process proposals for, and manage, insolvency arrangements?... 7

8 Questions frequently asked by banks in Ireland If uncertainty remains with regard to the bank s readiness for the Personal Insolvency reforms, it can be useful to review some of the questions frequently asked by Irish banks... 8

9 Debtor FAQs FAQ Short Answer Explanation How can banks identify insolvent debtors who may wish to avail of an insolvency arrangement under the Act? Targeted segmentation of loan books. Targeted segmentation of loan books will identify debtors who are not meeting debt repayment obligations and can help to group borrowers into those that will need short-term assistance to become solvent, long-term assistance to become solvent and those that are unlikely to become solvent. Which debtors may avail of the new insolvency arrangements? How can a bank be certain that the financial details being submitted by a debtor on his/her PFS are accurate? In the case of a proposal for a PIA, what should be considered previous co-operation by the debtor. What happens to a debtor s principal private residence under a PIA? Can banks appoint a receiver to assets in advance of a PC being issued to a debtor? Can debtors with secured debts in excess of 3m make a proposal for a personal insolvency arrangement? If creditors vote against a proposal for a PIA, what is the debtor likely to do? What constitutes a material change in debtor s circumstances? Any insolvent debtor. Debtors may avail of a debt settlement arrangement or personal insolvency arrangement once only. It is an offence for debtors to knowingly provide a false account of his/her financial affairs Banks should define their policy with regard to what constitutes co-operation. Where practical, debtor retains his/her principal private residence. Yes. There are various qualifying conditions which determine if a debtor is eligible for an insolvency arrangement. The debtor must be unable to pay his/her debts as they fall due. Other qualifying conditions are specific to each of the three arrangements. The debtors who wish to avail of these arrangements will vary and are likely to span multiple loan books including home loans, buy-to-lets, SME, corporate and unsecured retail debt (e.g. credit card). Any debtor who knowingly or recklessly provides information which is false or misleading will be guilty of an offence under the Act. Any debtor convicted of any such offence shall be liable to a fine or imprisonment. Banks can also reconcile the PFS with any SFS or Statement of Affairs retained on file to ensure completeness and accuracy of the information. The debtor must declare in writing that he or she has co-operated for a period of at least 6 months with respect to his/her principal private residence. However, banks should consider what they determine to be a sufficient level of co-operation. There are also exceptions to this requirement for circumstances where the PIP believes arrangements entered into under any such cooperation would not provide for the debtor becoming solvent within 6 years PIP must, insofar as is practical, formulate the PIA on terms that avoid the debtor being required to sell or vacate his/her principal private residence. Yes. However no enforcement action can be taken by a bank after the PC is issued. The 3m cap can be waived Yes, a PC will be issued to the debtor if all secured creditors consent in writing to waive the cap of 3m The debtor may consider a petition for bankruptcy in Ireland, or abroad. Banks should define their policy with regard to what constitutes a material change If a PIA is not agreed, the process terminates and the debtor or a creditor can petition for the debtor to be adjudicated bankrupt. The debtor will also be exposed to enforcement proceedings from secured creditors. The Act does not define what constitutes a material change. Materiality is something that banks must consider with respect to applications to vary arrangements, as submitted by PIPs on behalf of debtors. PIP FAQs FAQ Short Answer Explanation What is the role of the PIP? Devise proposals, engage with creditors, The PIP s primary functions are to: obtain creditor approval, collect debtor Prepare a proposal for an insolvency arrangement in respect of the debts concerned realisations / payments and distribute payments / realisations to creditors. Request and obtain creditor approval for said proposal Collect monies from debtor payments and realisations Make payments to relevant creditors in accordance with the terms of the insolvency arrangement How can the bank be sure that the PIP has There are various safeguards for There are various safeguards under the Act, which include: given a transparent representation of the creditors envisaged under the Act The Insolvency Service will introduce regulations for PIPs and have responsibility for supervision of PIPS debtor s circumstances? A debtor must sign a statutory declaration in respect of his/her PFS There are clawback provisions when a debtor has not been fully transparent. When can the bank expect applications from PIPs? The second half of The ISI will be launched at the end of Q and is expected to prioritise system readiness and bankruptcy applications. The first proposals can expect to be processed in the latter half of What happens if there is a valuation dispute between the PIP and a secured creditor? An appropriate independent expert will determine the value of the security The PIP, debtor and secured creditor shall in good faith endeavour to agree the market value of security. In the absence of any such agreement, an independent expert will determine the market value of the security. 9

10 Insolvency Arrangement FAQs FAQ Short Answer Explanation What is the opportunity for banks in the Personal Insolvency Act 2012? Is there a PFS template? How do the insolvency arrangements compare to the Individual Voluntary Arrangement ( IVA ) in the UK? Is it safe to assume that there will be little demand for DSAs by comparison to PIAs given current levels of secured debt in the market? If there is no upper limit in a DSA, can debtors use it to deal with personal guarantees? What features can a PIA include? Are there specific tax consequences of DSAs or PIAs? Will some of the arrangements fail post establishment? What happens when arrangements subsequently fail? Minimise losses with insolvent borrowers Not yet (as of March 2013). Format is expected to be similar to the SFS under MARP The IVA is comparable to the DSA and an alternative to bankruptcy in the UK. Personal guarantees will drive DSA numbers Yes. The Act does not prescribe set features for a PIA. The terms of any proposal for a PIA may involve multiple payment options to creditors. Yes, a number of changes to tax law are proposed under the Finance Bill Yes. Banks should decide on their proposed role for engaging with PIPs and the IS. The opportunity for banks is to minimise losses on secured and unsecured debts with insolvent borrowers. The insolvency arrangements are intended to provide a greater return for banks than a bankruptcy alternative. While the Act does not provide a specific template, indications are that the PFS will be similar to the Standard Financial Statement ( SFS ) required under the MARP process. IVAs are a formal insolvency arrangement and an alternative to bankruptcy in the UK. They share similarities with DSAs in that a licensed insolvency practitioner prepares a proposal for unsecured creditors, the creditors vote on the proposal and the insolvency practitioner monitors any repayments to creditors under the proposal. An IVA does not affect the rights of secured creditors. This is difficult to predict. The number of PIAs can reasonably be expected to outnumber DSAs due to the unsustainability of secured debt and the backdrop of falling property values. It would be unwise, however, to underestimate the volume of DSAs given for example the number of personal guarantees on corporate loans. Personal guarantees are considered as unsecured debts under the Act. Examples include corporate borrowings which are personally guaranteed by company directors and investors who are facing calls on personal guarantees in respect of their investments in property syndicates. PIAs can include, for example, any of the following: - Plan to sell assets - Transfer of assets - Restructuring (write down, change in interest rate or maturity) - Change in security treatment The Finance Bill 2013 provides that a DSA or PIA must provide for payment of current tax liabilities of the debtor, and for any tax liabilities of the PIP during the course of such arrangements. It also provides that the transfer of property under a DSA or PIA to a person to be held in trust for the benefit of creditors (i.e. PIP) will not trigger a clawback of capital allowances, and where rental income arises in respect of this property, the debtor will remain liable to income tax in respect of that income. Further changes are also proposed to CGT and CAT under the Finance Bill Yes. In the UK, failure rates for IVAs in excess of 30% were experienced. Some arrangements can be expected to fail in Ireland. Where the debtor is in arrears for a period of 6 months, the DSA/PIA shall be deemed to have failed. The PIP will notify the IS and the debtor of the default. The IS will record the failure of the arrangement in the Register. The role of the creditor is not defined in the Act. Banks should decide on their proposed role for engaging with: PIPs to notify of any debtors at risk of default and The IS for notification of failed arrangements. Bankruptcy FAQs FAQ Short Answer Explanation What is the cost to the bank of a debtor becoming bankrupt? Does a creditor pay for the cost of a bankruptcy petition against a debtor? What happens to secured assets once debtors are declared bankrupt? Dividend in bankruptcy is likely to be less than the dividend under an insolvency arrangement. The Court will determine based on circumstances which gave rise to the petition A secured creditor may realise its security outside of the bankruptcy. This will depend on each individual s circumstance. As a rule of thumb, the dividend for the bank in a bankruptcy scenario will be less than the return for the bank under an insolvency arrangement. The petitioning creditor shall at its own cost present its petition. The Court will consider making an order for the payment of such costs out of the estate of the bankrupt debtor, having regard for whether or not the petitioning creditor unreasonably refused to accept proposals for a DSA or PIA. The Act does not affect the rights of a secured creditor to institute proceedings to realise or otherwise deal with its security. Any balance of debt is treated as unsecured in the bankruptcy. 10

11 Operations FAQs FAQ Short Answer Explanation How can banks help to shape the Proactively engage with key stakeholders. The ISI is tasked with regulating AIs and PIPs as well as considering DRN and PC applications, all of which will have downstream Insolvency landscape? implications for banks. As such banks may look to proactively engage with the ISI to streamline the application process. Should the bank set up a specialist Insolvency Unit to process insolvency arrangements for debtors? How can a bank test the rigour of its procedures to determine the bank s readiness to handle cases efficiently and effectively? Can banks expect an increase in the volumes of debtors entering MARP? What happens if the bank can t provide proof of security? No one size fits all - consider the unique operations of the bank before deciding. Scenario planning should help prepare staff. Volumes could increase if debtors who have previously not cooperated in the MARP process are now seeking an arrangement. The debt is considered unsecured under the proposal for a PIA The centralised model has proven to be effective in the UK. However, it is important to consider the unique operations of the bank prior to deciding on whether to centralise. For instance, a small team of skilled insolvency experts with regular access to the bank s legal team and relevant support units may be a better model than a centralised team of legal, operations, credit and other staff. The intention of any such model is to ensure proposals under each insolvency arrangement are processed efficiently. Detailed scenario planning can help prepare staff. Banks should define test cases to run through their insolvency arrangement processes. It will not be appropriate for debtors to use a personal insolvency arrangement in circumstances where the debtor is solvent or MARP would provide a more appropriate debt restructuring solution. Therefore, volumes of debtors availing of MARP could increase on existing levels. If proof of security is not provided, the debt is considered unsecured under the proposal for a PIA. What constitutes proof of security? Standard mortgage or debenture It is expected that standard mortgages and debentures will constitute proof of security. What happens after a proposal Monitor payments and the debtor s position. While the PIP will be responsible for monitoring the implementation of an arrangement, the bank should continually monitor is approved by creditors? payments and the debtor s financial situation for any changes which could affect the arrangement. Post implementation of each arrangement, how often should each arrangement be reviewed by banks? Annual basis is minimum requirement Under the Act, the PIP is obliged to review a debtor s circumstances at least once a year. Banks should tailor internal reporting to coincide with such reviews. 11

12 How can PwC help you? We have assembled a multi-disciplinary team with expertise in personal insolvency, risk and banking operations that is ready to assist with any of the following: Financial Services Advisory Leader Ciarán Kelly Partner +353 (0) ciaran.kelly@ie.pwc.com Corporate Insolvency & Recovery Ken Tyrrell Director +353 (0) ken.tyrrell@ie.pwc.com Completing an operational readiness assessment for the bank; Defining the bank s strategy for engaging with Personal Insolvency Practitioners ( PIPs ), reviewing proposals, managing insolvency arrangements and stakeholders; and the objectives and Key Performance Indicators ( KPIs ) to support this strategy; Developing and implementing an operating model to support the processing of proposals and management of insolvency arrangements; Consulting Féilim Harvey Director +353 (0) feilim.harvey@ie.pwc.com Risk Assurance Solutions Jane Conroy Director +353 (0) jane.conroy@ie.pwc.com Reviewing policies, processes and procedures to support insolvency arrangements; Defining systems enhancements to support updated processes; and Facilitating workshops on technical aspects of the Act. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors PricewaterhouseCoopers. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details. DS