Scotland’s statutory debt solutions and diligence: policy review response

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Closes 7 Oct 2022

Theme 1 - protections, information and advice prior to debt solutions

What are your views on each of the proposals outlined below?

Proposal 1.1. Design detailed proposals for the introduction of a specific mental health process as part of the statutory moratorium - in collaboration with mental health and debt specialists.

More information

In April 2015, the Bankruptcy and Debt Advice (Scotland) Act 2014 introduced a statutory moratorium on diligence providing protection for those who required time to seek advice and resolve their problems with debt and consider the most appropriate solution.

A moratorium is a period of debt relief during which creditors cannot take any action against you for debts you owe them.

In May 2021, the UK Government introduced a similar form of protection (Debt Respite Scheme or “Breathing Space”) and with it specific additional protection targeted at individuals receiving mental health crisis treatment. The mental health crisis breathing space regulations provides a period of protection for the term of the crisis treatment with an additional 60 days (the standard breathing space period) once the crisis treatment has ended.

There is no limit to the number of times an individual can apply for a mental health crisis breathing space, however, the application must include certification by an approved mental health professional that the applicant is receiving mental health crisis treatment.

The working group’s discussions on this issue reinforced the importance of recognising the clear link between problem debt and mental health and that there is a need for further support and protection. Poor mental health can make managing money much harder and the extreme worry caused by financial issues can have a seriously detrimental effect on mental well-being.

The working group has recommended that options for enhanced protection be investigated – learning from the experience of the operation of the system in England and Wales and considering further how the systems of health care and debt advice delivery in Scotland could provide for this.

Scottish Government proposal

The Scottish Government considers that the introduction of additional moratorium protection for those facing financial difficulties and a mental health crisis should be taken forward.

The Scottish Government proposes to bring together specialists in the provision of debt counselling, delivery of mental health care provision and other key stakeholders to devise a system that would be tailored for Scotland. This would aim to provide efficient access to protection for those that require it, taking account of the challenging circumstances they are facing. This work will consider access to moratorium protection, the operation of a scheme during the period involved and the arrangements for exit.

Additional information on moratorium on diligence

The statutory moratorium on diligence provides a period of protection during which creditors cannot take any formal recovery action (diligence) against a debtor for debts owed.

The working group discussions on the operations of the existing moratorium focussed on two areas – the time period and whether any additional protections or features should be introduced. Although there was no consensus from the group on the moratorium period, there was a suggestion of 60 days - with the potential option of an extension of protections under certain circumstances. There was also a recommendation to freeze interest and charges on debt during the moratorium period.

Having considered the working group and further stakeholder comments the Scottish Government has already made further provision for the moratorium period to be set at six months through the Coronavirus (Recovery and Reform) (Scotland) Act 2022, making permanent the temporary provisions introduced in response to the pandemic. This Act also includes provision to enable the moratorium period to be varied through regulations in the future and a commitment was made by ministers to review this period when the cost of living crisis subsides. 

Scottish Government proposal

The Scottish Government has considered further the views presented by stakeholders at the Ministerial Working Group on Statutory Debt Solutions. While the Scottish Government recognises that introducing further reform to the moratorium, including freezing of interest and charges on debts during the protection period would be welcomed by some stakeholders, it is clear that the current arrangements in Scotland benefit from simplicity of operation and ease of access to protections when they are needed.

The Scottish Government considers that further reform to the moratorium may dilute the benefits of the administratively light and highly effective existing operation. Additional measures on interest and charges would require identification of and communication with all creditors resulting in additional complexity, create additional burden on the advice sector and would require the development of costly IT systems to support the process.

The Scottish Government’s main priority has been and continues to be to ensure the moratorium is set at the appropriate period. This enables clients to seek advice and gather all of the evidence needed to ensure that a fully informed decision can be made on the right solution. We have listened to the evidence from a wide range of stakeholders which indicates the current cost of living crisis will result in an influx of demand on the advice sector, with many people who have previously been able to manage their budgets coming under increased pressure, resulting in their debt potentially becoming unsustainable.

For this reason, the Scottish Government chose to retain the existing enhanced protection on a permanent basis but with a commitment to review and introduce an amended timeframe when the current risks hopefully subside in the months to come. The regulation making power will enable flexible and rapid response to changing economic circumstances. The proposal therefore is to maintain the six months moratorium on diligence until the current economic situation improves.

Proposal 1.2. Introduce a new requirement to provide an individual with a clear and succinct information leaflet for those considering a trust deed. This should form part of the process required for a trust deed to gain protection.

More information relevant to proposals 1.2, 1.3 and 1.4

A number of issues have emerged through working group discussions and the Parliament’s inquiry into Protected Trust Deeds (PTDs) which have highlighted the need for clear information and high quality advice being accessible to everyone, which must consider all the options available to resolve issues of problem debt.

Money advice

The Economy, Energy and Fair Work (EEFW) Committee’s recommendations on PTDs included the consideration of clients receiving free independent money advice before entering any statutory debt solutions - including PTDs. This was in response to concerns heard on the extent to which some individuals with problem debt are being mis-sold PTDs in favour of alternative solutions that would better suit their needs and the interests of the creditors involved.

The working group focussing on PTDs and the EEFW Committee’s recommendations concluded that it was not feasible, at this stage, to have pre-trust deed advice provided by the free money advice sector. This is due to a lack of resources which would be required to meet the envisaged demand.

The group highlighted several recent areas of targeted action aimed at improving the regulation of pre-trust deed advice. The Financial Conduct Authority (FCA) has taken steps to tackle the practices of some advice providers (such as lead generator/debt packager companies) who may be promoting PTDs due to the financial incentives involved.

The working group highlighted the voluntary PTD protocol that has been introduced since the EEFW’s recommendations and, for those who sign up to the protocol, includes an expectation for trustees to consider the professional or regulatory status of any introductory firm. This has followed similar requirements set out by the Recognised Professional Bodies (RPBs) responsible for the oversight of insolvency practitioners.

Information leaflet and cooling off period

The EEFW Committee recommended that the Scottish Government should develop a new leaflet, presented in clear and easily accessible language covering the risks and benefits of solutions, to be provided to clients prior to the granting of a trust deed.

It further recommended a cooling off period allowing reconsideration for a period following an individual receiving this leaflet and signing a trust deed. 

The working group considered the recommendation made on a cooling off period. In considering the point at which a cooling off period would apply, the group noted the existing requirement for clients to be given adequate time to think before granting a trust deed. This is set out in the overarching guidance that all Insolvency Practitioners are required to follow and the working group recommended that the wording within this guidance be strengthened to provide a more definite cooling off period.

The working group contemplated a cooling off period applying after the granting of a trust deed which would reflect the process that applies to other complex financial products. However, the group highlighted the difficulties in implementing this provision in trust law (a trust deed takes effect on signing) and for this reason they recommended that any action on this could only be considered as part of a more strategic review on the appropriateness of existing debt solutions. 

The working group did support the development of a new leaflet designed to cover key information in a clear and accessible manner that would form part of the package of information supplied prior to the granting of the trust deed.

Clear and accessible messages

The Diligence Working Group has recognised the importance of ensuring anyone subject to formal debt recovery action understands the implications and where to get appropriate help and advice.

It highlighted concerns about the extensive content within the existing Debt Advice and Information Package (DAIP) and dangers that the key messages are lost and have recommended that this be streamlined and available to the person with debt at the earliest stage - prior to formal debt recovery action.

It also highlighted concerns about the complexity of the language and terminology used in diligence and asked for this to be simplified, helping to remove the stigmatism associated with debt.  

Scottish Government proposal

The Scottish Government agrees with the working group view that high quality advice by appropriately skilled people in advance of entering any debt solution is of critical importance – irrespective of whether this is provided through the free, charitable or fee charging sector.

The Scottish Government agrees with the working group’s conclusions that it would not be feasible to mandate free money advice sector involvement in advance of the granting of each trust deed. This would place further considerable pressure on the advice sector and create discrepancy between trust deeds and other solutions.

For example, reforms to the Debt Arrangement Scheme (DAS) introduced in 2019 have served to enable more private sector advisers and insolvency professional firms to facilitate clients’ access to that scheme without the requirement for free sector advice.

While the Scottish Government does not propose to introduce the requirement for free sector advice prior to a trust deed, it is committed to working with the FCA and the RPBs to continue the drive for improvements in the operation of PTDs.

The Scottish Government recognises that clarity and transparency in the information that is provided to those seeking a solution to problem debt is extremely important. Consequently it proposes to take forward simplification of language utilised in the DAIP which is a key document and act on the recommendations to introduce a clear and succinct information leaflet for those considering granting a trust deed.

The Scottish Government is grateful to the working group for its work in developing a draft leaflet and the Scottish Government will investigate how this can be embedded into operational practice. The implementation of a cooling off period in relation to trust deeds will be further considered at stage 3 of the strategic review of Scotland’s debt solution landscape.

The Scottish Government will also seek to address the concerns raised by the Diligence Working Group over the complexity of the language and terminology used in relation to diligence on our websites and publications not being generally understood by the public and will take action to simplify this wherever possible.

Proposal 1.3. Take action to streamline the Debt Advice and Information Package to ensure key messages are clear and available to the person with debt at the earliest stage prior to formal debt recovery action.
Proposal 1.4. Simplify the language and terminology used in relation to diligence on our websites and publications wherever possible.
1b. In general, what do you like about the proposals set out in theme 1?
1c. Do you have any other comments or suggestions for improvement for the proposals set out in theme 1?