Page 2 Contents

Page 3 Introduction / About the Money Advice Trust

Page 4 Summary of our response

Page 7 High level aims and principles

Page 8 Proposed design

Page 9 Proposed breathing space workflow

Page 10 Responses to questions: Breathing space

Page 23 Responses to questions: Statutory repayment plans

Page 33 Contact details

The Money Advice Trust is a charity founded in 1991 to help people across the UK tackle their debts and manage their money with confidence. The Trust’s main activities are giving advice, supporting advisers and improving the UK’s money and debt environment. In 2017, our National Debtline and Business Debtline advisers provided help to more than 220,000 people by phone and webchat, with 1.5 million visits to our advice websites. In addition to these frontline services, our Wiseradviser service provides training to free-to-client advice organisations across the UK, and we have now delivered training and consultancy to more than 160 creditor organisations on identifying and supporting customers in vulnerable circumstances. We use the intelligence and insight gained from these activities to improve the UK’s money and debt environment by contributing to policy developments and public debate around these issues.

Please note that we consent to public disclosure of this response.

We welcome the opportunity to contribute to the Treasury’s call for evidence on breathing space and statutory debt repayment plans. Both have the potential to make a significant difference to the ability of people in financial difficulty to resolve their debt problems and recover their financial position.

While the two elements of the proposal under consideration – breathing space and statutory debt repayment plans – are closely interlinked, it is important that the Treasury considers the effectiveness of each in isolation, and that the two elements are not seen as ‘one scheme’. Given the holistic nature of debt advice – an FCA regulatory requirement – it is evident that not everyone who accesses ‘breathing space’ will go on to a statutory debt repayment plan, but, rather, whichever debt option is appropriate for their circumstances. Many will and should go on to an existing debt option such as self-negotiation, a Debt Relief Order, IVA or bankruptcy after receiving holistic advice. This means that the ‘breathing space’ element of the scheme – i.e. the provision of protection from interest charges and enforcement action while a person in problem debt seeks advice – must be designed in such a way so as to be effective for all people in problem debt, and not just those who go on to a statutory debt repayment plan. This is particularly relevant when considering how both aspects will be implemented operationally. In that spirit, we have distinguished between the two elements through our comments in response to this call for evidence (see our Proposed Design on page 8).

In Scotland the Debt Arrangement Scheme (DAS) is already delivering some of the protection we believe is needed. We would like to see the Treasury build upon and use the lessons from DAS in Scotland to provide a workable scheme for England and Wales. This scheme would complement existing debt remedies using the best advice models used by the debt advice charity sector in England and Wales. We have commented on the high level aims and principles we believe the Treasury should follow, below, and provided detailed responses on the details of scheme design and implementation in our responses to individual questions. However, while our response covers the details of how this policy should be implemented, as requested, we would like to highlight the following key points on the policy design of the ‘breathing space’ element, in particular, at the outset of our response.

Public sector creditors such as local authorities, HMRC and DWP must be included, in addition to private sector creditor organisations, if the scheme is to be effective in providing a genuine ‘breathing space’ to allow time to resolve financial difficulty. This is particularly important given the significant growth in the number of clients presenting for debt advice with these kinds of debts.

Self-employed people must be eligible for breathing space, and in general, this eligibility should be in respect of their business debts, and not just personal debts (with mitigations against the knock-on impact on other businesses). Business debts should also be eligible for inclusion, where the applicant is no longer trading.

Six weeks is unlikely to be long enough for many people to begin to resolve their financial situation, and we strongly recommend that this six weeks is ‘extendable’, at the discretion of the adviser.

Breathing space should extend to Wales and Northern Ireland as well as England, so that (given the existing DAS protections in Scotland), people in serious problem debt will have access to breathing space protections no matter where they live in the UK

We have also provided our views on how both breathing space and statutory debt repayment plans could be administered operationally. In summary:

Breathing space should operate on an ‘online portal’ model, in which the Insolvency Service provides an online portal which debt advisers at participating FCA-authorised free-to-client debt advice agencies can use to register eligible clients for breathing space protections. Assessment of eligibility and registration on the portal should take place at the point at which they first seek advice. This should be the only route to access breathing space, and advice agencies would have to be fully funded or compensated in some way for the work involved. This would need to include a mechanism by which all creditors are made aware of and have access to the fact the individual has been registered for breathing space protections.

Statutory debt repayment plans should be provided by a panel of approved plan

providers, which should be free-to-client debt advice agencies. All advice agencies participating in the breathing space scheme should refer those clients for whom this is the ‘best advice’ recommendation to one of these providers (or provide the plan themselves if they are a provider), following the full holistic advice process. The Insolvency Service would have an overall administrative role for statutory debt repayment plans, appointing the panel, maintaining an online register of plans (this could be the same register as used for breathing space) and adjudicating on a limited range of possible objections from creditors where necessary.

While we are proposing a model centred around the Insolvency Service, as the most logical choice of public body to perform this administrative function (given the fact they administer the DRO and bankruptcy online portals), we would point out that steps should be taken to ensure that neither breathing space nor statutory debt repayment plans are associated with the insolvency by people in serious debt (as this is likely to prove a barrier to engagement). For example, the breathing space scheme could and should be separately branded, while still being run administratively by the Insolvency Service. For a summary see our Proposed design and Proposed workflow diagrams (pages 8 and 9), and for further detail see our responses to individual questions. Impact on demand and the advice sector Finally, if as we hope, the breathing space scheme that results from this proposal is effective in incentivising more people in financial difficulty to seek advice, then we should expect what could be a significant increase in demand for debt advice once the scheme goes live.

Demand for free debt advice is currently unmet by supply, and has been increasing significantly – a trend that is expected to continue in the years ahead. An effective statutory breathing space scheme, while welcome and in the best interest of people in financial difficulty, will exacerbate these trends. The Treasury should therefore take into account the impact of breathing space on the demand for debt advice, and the current funding structures for debt advice, which have been recently subject to Peter Wyman’s independent review for the Money Advice Service. This consideration should include the need for higher levels of funding for debt advice in the future, including through the Single Financial Guidance Body and from other sources. Other impacts on the advice sector must also be considered, including the need to ensure that money and debt advisers working in agencies across the UK receive the training they need to provide quality advice on breathing space and statutory debt repayment plans.

The Money Advice Trust has been involved in the development of the idea of a breathing space scheme, with other partners in the advice sector, since 2014. Elements of this response, including the following high level principles, are based (in part) on this work. At a high level, we believe the key aims of the breathing space scheme should be to:

Provide time for people in temporary financial difficulties to regain control of their finances.

Give people time and space to recover from problem debt, aiding return to work, recovery from illness, income maximisation or other measures that improve their financial situation.

Help people to repay their debts when and where their resources allow this. Give people a better reason to seek debt advice earlier, before their debt problems

become a crisis. The following general principles should apply to the breathing space scheme.

The scheme should be offered as part of a holistic, free debt advice service. Creditors, government, regulators and debt advice providers should work together to

ensure people get referred for help with debt problems as soon as possible. Steps should be taken to ensure that the scheme is not regarded as a form of

insolvency, as this could undermine the aim of incentivising people to seek advice. Participation in the scheme should be restricted to free-to-client FCA authorised debt

advice agencies There should be no charges for people to apply to the scheme. Creditors should not be compelled to pay a specific fee or charge in respect of the

scheme. The scheme should work from the principle of including all types of debts and

government-collected debts in particular. The self-employed and trading micro-businesses should be allowed to participate in

the scheme and business debts including tax and VAT should be eligible for inclusion in the scheme, with appropriate mitigations against detrimental knock-on effects in the case of debts owed to other small businesses.

More broadly, as we will detail in our responses to individual questions, we believe that flexibility should be a key principle in the design of both breathing space (through an ability for advisers to extend the six week period in certain circumstances) and statutory debt repayment plans (for example through the potential for time-limited token payment arrangements in instances of temporary financial difficulty).

The following diagram illustrates our proposed design at a high level, as well as the distinction we believe should be drawn between the two elements of the proposal.

Breathing Space scheme Separately branded, but administered by the Insolvency Service with

access to breathing space provided by participating free advice agencies

Free advice agencies (assess eligibility,

provide holistic advice)

Register eligible clients on

Breathing Space online portal

Creditors (provide Breathing Space protections)

Notifies creditors with start and

end date Can check individual status

on register

Statutory Debt Repayment Plans Provided by a panel of free-to-client agencies. Insolvency Service has overall

administrative role – appoints panel, keeps register, adjudicates plan objections

Insolvency Service

Runs online portal (for Breathing Space) and keeps private register (of Breathing Space &

of Statutory Debt Repayment Plans as a

subset)

Statutory Repayment Plan providers

(operate plans, distribute payments to creditors)

Creditors (provide Statutory

Debt Repayment Plan protections)

Distribute payments

Register plans with IS

Can check plan register

Agencies refer to Statutory Debt Repayment Plan provider IF that is best advice recommendation

This diagram shows on a more individual basis the flow of work involved in the design we are proposing.

* See our comments on notification

mechanism in response to question 11

An individual in serious problem debt contacts a free-to-client

advice agency participating in the breathing space scheme

Advice agency assesses eligibility for ‘breathing space’ at

first contact

If not eligible

Existing full holistic advice process

If eligible

Adviser registers client for breathing space on online portal (and uploads any creditor details provided)

Full holistic advice process. Adviser gathers further details of creditors if not provided at first contact & adds to online portal (or client does this)

Insolvency Service adds client to private register (and/or notifies CRAs*)

Best advice recommendation

Creditors apply breathing space

protections from date provided

Best advice recommendation

Action existing debt option (DRO, IVA….)

Advice agency refers to statutory debt repayment plan

provider (this could be itself)

Existing debt option

Statutory debt repayment plan

When creditor details are provided, Insolvency Service

notifies (with start date)

How should a breathing space scheme be administered?

We have taken this opportunity to provide an additional response to a question not asked specifically

in the call for evidence – that of how the ‘breathing space’ element (specifically) would be

administered operationally (in line with our earlier comments on the need to consider the

effectiveness of breathing space and statutory debt repayment plans individually, as well as

collectively).

We recommend that breathing space should operate on an ‘online portal’ model, in which the

Insolvency Service provides an online portal which debt advisers at participating FCA-authorised

free-to-client debt advice agencies can use to register eligible clients for breathing space protections,

at the point at which they first seek advice. This should be the only route to access breathing space,

and advice agencies should be compensated the work involved in using the online portal.

This would need to include a mechanism by which all creditors are made aware of the fact the

individual has been registered for breathing space protections, such as a private register, or the use

of existing credit reference agency (CRA) infrastructure, for those creditors that use CRAs, or both –

see our response to question 11.

In respect of ensuring good governance, debt advice agencies participating in the scheme could

establish a governance board to monitor operation of the scheme.

This board could have an independent chair, representatives from the participating debt advice

agencies and representatives from other stakeholders such as creditors, regulators, other charities

and independent experts.

Such a board could have some or all of the following responsibilities:

To ensure the scheme functions in accordance with the scheme rules.

To monitor the outcomes for scheme applicants and creditors and propose amendments of

the scheme rules where necessary to the Secretary of State.

To provide a mechanism for dealing with complaints.

To set criteria for the independent monitoring process to ensure quality control.

Such other functions as may be agreed.

We believe the government should define ‘serious problem debt’, for the purposes of assessing

eligibility for breathing space, as an inability to pay one or more debts, determined using an agreed

budget standard (the Standard Financial Statement).

We would like to see the widest possible eligibility for entry into the scheme. We have set out our

suggested entry requirements below.

A person would not be able to apply to enter the scheme unless they have obtained advice

from a debt adviser regulated by the Financial Conduct Authority (or who satisfies the

conditions for exemption).

A debt adviser must assess that the person is unable to pay one or more of their debts.

Inability to pay might be further defined as ‘unable to pay the contractual minimum

instalments of one or more debts as they fall due’. Ability to pay would be determined using

an agreed budget standard (the Standard Financial Statement).

The debt advice would need to show that the scheme was in the person’s best interests and

appropriate for their circumstances. The new scheme would work with in the debt advice

provider’s best advice model.

The scheme should be open to both home owners and those who rent their homes.

There should be no upper limit or lower limit on the amount of debt or number of debts that

the applicant must have to qualify (subject to best advice).

The scheme should allow joint applications so that indebted couples can submit a single

application and a single financial statement where this is suitable.

Self-employed people and trading micro-businesses should be accepted by the scheme, with

respect to both their business and personal debts.

All debts should be qualifying debts under the scheme. This would include ‘priority debts like

council tax arrears, fuel debts, mortgage arrears and rent arrears outstanding at the date the

scheme commences. See our response to question 3 below.

Eligibility should be determined by as few defined characteristics as possible. We do not want to see

large groups of potential clients excluded from the scheme. If there is to be some discretion as to

eligibility, this should be at the discretion of the authorised free debt advice provider.

Breathing space should, at a minimum, be available only to people who seek debt advice from

regulated providers under FCA authorisation. We would go further than this minimum requirement

and restrict the scheme to people who seek advice from a designated list of participating free-to-

client debt advice agencies. We believe a key principle should be that no-one participating in what is

ultimately a government-backed breathing space scheme should pay for debt advice they receive as

a result, as the high fees charged by fee-charging debt management companies will only add to their

debt burden. This is a principle that the government has already applied in a different context,

through the restriction of the Single Financial Guidance Body’s commissioning to free-to-client advice

only in the Financial Guidance and Claims Bill.

Given an aim of the scheme should be to incentivise people to seek advice, we see no merit in

restricting breathing space eligibility to individuals who can demonstrate they have already taken

steps to try to manage their debt.

It seems to us that the whole point of breathing space is to give someone the time to consider their

options before making a decision. We strongly advocate early intervention measures to help ensure

people seek advice. We want people to seek free, independent debt advice as soon as possible

once they have identified that they need help. There is little point in waiting for them to attempt to

muddle through without advice in order to show that they have tried to manage their debts in some

way. This could easily result in poor outcomes for that person. They may have made a financial

decision about which debt to deal with first or take drastic steps that have unexpected consequences

for them. They may have limited the options available to them to deal with their debts by taking a

course of action that is detrimental.

Examples could include:

taking out more credit from high-cost sources;

borrowing from friends or family (sometimes secured against their property or through a

personal guarantee);

securing debts on their house, and putting their house at risk;

paying one creditor above another and creating a preference inadvertently;

paying unsecured credit above a crucial household bill such as mortgage or rent or council

tax;

selling assets, property or realising pension funds without proper advice; or

opting for a debt solution from a less than reputable source that is not suitable for them.

Any of these outcomes make it more complicated once the person does seek holistic debt advice, for the adviser to give advice and restricts the options available to resolve the debt problem. In addition, the increased level of stress and costs for the person who cannot access breathing space when they need it should be considered. This could have an extremely detrimental effect on the mental health of the client, their family and their mental health. We therefore believe that the breathing space period should start from the date that the application for breathing space is registered with the online portal by an advice agency.

We have debated the merits of allowing individuals to “self-register”. This does not seem practical as the six weeks might then be used up before the self-registered applicant can obtain free debt advice. It would make more sense to us for an advice agency to be able to register an applicant via an online portal. This would allow telephone advice services or even online advice services to participate in the scheme. The initial contact would have to at the very least involve sufficient information being gained using a triage approach to establish potential eligibility. This may be more difficult to achieve for a face-to-face advice model unless a triage element is built into the advice process or all potential breathing space clients see an approved debt adviser at their first appointment. However, the success of this approach depends upon flexibility being built into the scheme. The six weeks breathing space should be capable of extension by the advice agency that is in the process of developing a scheme plan but needs more time to prepare a standard financial statement or obtain vital information or where there is an imminent change in circumstances due. An extension should also be accessible where there has been a delay due to resource issues for agencies such as delays in offering full appointments or finding a suitable local advice provider for clients in vulnerable circumstances with particular advice channel requirements.

Our starting position is that all debts should be qualifying debts under the scheme. This would include ‘priority debts’ like council tax arrears, utility debts, mortgage arrears and rent arrears outstanding at the date the scheme commences. It should also include benefit and tax credit overpayments, along with HMRC tax debts. We do not want to see some types of debt being exempt from inclusion in the scheme. Exclusion of court fines for example, will just serve to destabilise a financial situation further. Whilst the debt adviser is attempting to set up a sustainable arrangement for the client, this process could easily be derailed by continued enforcement action using enforcement agents or the threat of imprisonment to recover the fine.

It is particularly important, in our view, that debts owed to the public sector be included in the breathing space scheme. Council tax arrears, in particular, have increased from just 14% of callers to National Debtline in 2007 to more than a quarter (26%) of callers in 2017. Callers to National

Debtline with benefit overpayment debts, owed to DWP and local authorities, have increased from 10% in 2014 to 16% in 2017. Other advice agencies report similar trends. The collection practices of public sector creditors, in particular, can cause significant distress to people in problem debt, and have been the subject of sustained scrutiny from the advice sector in recent years.1 The extra powers that public sector organisations such as local authorities and HMRC have to recover debts (for example, liability orders leading to bailiff action in the case of the former, and direct recovery of debts in the case of the latter) can undermine an individual’s efforts to resolve their wider financial difficulty. Inclusion of public sector creditors in the scheme is therefore vital, if the scheme is to achieve its aim of providing people with a genuine ‘breathing space’ to resolve their financial situation.

Although rent and mortgage arrears can be included in this scheme to prevent action to recover the arrears, it is worth considering whether there should be further protections. We would suggest that the courts should have the power to prevent a landlord or mortgage lender carrying on with eviction or repossession once breathing space has been granted. This seems to be a loop hole in both DROs and the DAS scheme that could be addressed. Perhaps at the very least, a judge would be required to take breathing space inclusion into consideration as a discretionary matter when considering eviction or repossession cases. We are not advocating that anyone stops paying their essential bills or outgoings during the period of breathing space. However, arrears on these bills should be included within the scheme to stop enforcement action and freeze default interest, fees and charges (where these are being added to household bills).

It is crucial that debts owed by the self-employed and micro-businesses are included in the scheme. This should apply whether the business is still trading or has ceased trading. In our experience of running Business Debtline, many people blur their business and their personal finances and it is not easy to separate the two. In our “Cost of doing business” report2 we found that: “Almost seven in 10 of those who had taken out a personal loan were using it to prop up their business, leading to a blurring of business and personal finances.” The scheme should also be open to those who are still self-employed or running a small business as well those from businesses that have ended. At Business Debtline, we talk about “small businesses” as our clients, but our remit is largely micro-enterprises (EU definition for micro-enterprises - fewer than 10 employees and an annual turnover of less than two million euros). The Financial Ombudsman Scheme uses a similar definition that sets out who is eligible to bring a complaint to the Ombudsman.3 It is worth looking at the lessons of the Scottish Business Debt Arrangement Scheme which allows business debts such as VAT and PAYE arrears as well as debts to other creditors to be repaid whilst a business maintains on-going credit facilities which are often essential for business survival. The impact of this relatively new scheme in Scotland should be evaluated to see whether the breathing

1 Money Advice Trust (2017), Stop The Knock: Mapping local authority debt collection practices in England and

Wales, November 2017, link, StepChange Debt Charity (2016), Creditor and debt collector conduct: what’s making debt problems worse?, July 2016, link; Citizens Advice (2016), The state of debt collection – the case for fairness in government debt collection practice, January 2016, link 2 Money Advice Trust (2015), The cost of doing business: Supporting the self-employed and small businesses,

June 2015, link 3 http://www.financial-ombudsman.org.uk/faq/answers/complaints_a9.html

space and statutory debt repayment plan proposals in England could be adapted to fit the needs of a trading small business. However, the scheme design must include mitigations against the potential knock-on effect of the inclusion of business debts in the case of debts owed to suppliers, and in particular, other small businesses. We believe legislation implementing the scheme should include a rule making power that would allow certain debts, or debts accrued in certain circumstances, to be excluded. For instance, it might be appropriate to exclude debts owed to individuals where there is likelihood that inclusion in the scheme would cause undue personal hardship to that individual. Sole trader debts owed to another sole trader might be another example.

Yes we believe that all interest, fees and charges should be frozen throughout the breathing space period. This freeze should continue to apply into any initial breathing space extension period that is granted to the advice agency that is in the process of developing a scheme plan. The freeze should then continue to have effect under any statutory debt repayment plan that is set up as a result. This freeze would apply to arrears only on continuing liabilities such as mortgage payments, not the on-going mortgage interest that forms part of a monthly mortgage payment.

There are certain requirements that should be met by a client in order to continue to be eligible for breathing space. However, it is difficult to be definitive about whether clients should make repayments during the six week breathing space. It is probably helpful to differentiate here between continuous liabilities such as on-going household bills and outstanding credit debts. We would very much wish to emphasise that continuous liabilities should continue to be paid wherever possible, and emergencies dealt with (e.g. if repossession is threatened for rent or mortgage arrears). Generally, the actual arrears on household bills, benefit and tax credit overpayments, tax debts and the balances owed for credit should be placed on hold for the six week breathing space period (with an extension if required). The length of time required will depend upon how long it takes for the adviser and client to have appointments, and work through the client’s financial situation, complete a standard financial statement and decide on the most appropriate debt option for them. It does not seem appropriate under these circumstances for the client to continue to be required to pay all their commitments including credit debts whilst this assessment is carried out, as if they could afford to do so, they would not have sought debt advice in the first place. Indeed continuing to make payments towards credit debts may well put the client into further hardship during this period. We accept that there should be some further duties on applicants entering the breathing space scheme. Continued engagement is a condition of on-going protection under the scheme. These include being required to attend the required advice sessions. We have set these requirements out below. Many of the requirements that would apply to the initial breathing space stage would continue to apply under a statutory debt repayment plan. Additional requirements in relation to plan reviews are set out later in our response.

Applicants will only enjoy the protection of the scheme if they remain engaged and maintain payments that have been assessed as part of the advice process as affordable and sustainable.

Applicants must co-operate with scheme providers and respond to communications. Applicants will need to provide proof of debt and any proof of income and outgoings required

by the scheme provider. If an applicant does not make contact at agreed times, does not respond to requests for

contact, or fails to co-operate with the advice provider, they will be notified that they will be removed from the scheme within a set timescale.

If the applicant still does not respond to the notice in that time period the applicant will be removed from the protection of the scheme.

The applicant can be readmitted to the scheme only at the scheme provider’s discretion where there is good reason for previous non- engagement.

We can envisage circumstances in which the breathing space period could end before the initial six weeks, such as where a client enters into an insolvency option such as an IVA, DRO or bankruptcy. It is also possible that the breathing space period could end at the client’s request or due to non-cooperation with an adviser who is carrying out the holistic debt advice process with that client. However, we would point out that the timescale for anyone to enter into another debt option is likely to be longer than six weeks. This is why we propose that the debt advice agency should be able to request an extension of the initial breathing space protection under set circumstances. This should be on a discretionary basis but we would not favour a “tick-box” approach to the extenuating circumstances that might apply. Any list of circumstances in guidance or regulations listing where an extension could be granted should be for illustrative purposes only.

For example, it may take some time for the advice agency to go through the advice process, and complete a full budget.

If it has been established that the client’s best option is a DRO, there are often resource limitations for advice agencies in setting up the DRO and there is likely to be an extended waiting period for the adviser to make the DRO application on behalf of the client.

For a DRO or bankruptcy application there may well be a wait for the client to access the considerable fees for making the application.

An insolvency practitioner must be found to complete an IVA and there may be delays in getting this process underway.

In addition, some clients who access telephone or online advice need to be referred to face-to-face casework-based advice services, such as those provided by Citizens Advice or AdviceUK member agencies, where this is more appropriate for their circumstances. The referral time and waiting period to obtain a face-to-face appointment can add a further delay that exacerbates the factors above. It seems to us to be particularly counter-productive to the scheme’s aims for the breathing space protections to expire after the initial six week period in these circumstances. We believe that the advice agency should have the power to extend the initial breathing space where there is a genuine reason for doing so. We also believe that the advice agency should also have the power to extend the breathing space period in other circumstances, for example, where it has not been possible to fully complete the holistic debt advice process due to appointment delays, evidence gathering and so on.

We are not entirely clear what “enforcement” requirements there are in this respect. We would not envisage a process where it is open to individual clients to extend their own breathing space. This would only be possible at the professional discretion of a free-to-client debt advice agency. Also, this process could involve an online notification by the advice agency (or by way of an easy online application) to the Insolvency Service-run breathing space portal in the model we are advocating.

As the breathing space period only lasts for six weeks as envisaged currently, there are not likely to be many instances where additional debts are taken out during the six week period. At the point of seeking debt advice, most people will have had their credit rating affected by non-payment of credit debts already. Therefore, their ability to access more credit at this point would be limited. Should the client enter into a new credit agreement during the six weeks, we would not envisage this debt being protected by breathing space, but clients should be advised not to obtain further credit when breathing space is granted as a requirement of the scheme. We can see that for continuing liabilities such as household bills, the outstanding balance may continue to grow and another payment might be missed within that period. Breathing space could cover any further debts that accrue during the six week period if the client’s liability results from an agreement that was made prior to the breathing space period. Care would need to be taken with how tenancy agreements are covered within breathing space, as a tenancy agreement may be arguably ‘new’ if a fixed term tenancy agreement happens to end within the appropriate period. We would also draw your attention to the issue of overdrawn current accounts. We would be concerned if the account provider is allowed to immediately freeze or close the account as a result of breathing space having been used, as this could leave an individual unable to pay their essential on-going costs. We would also be concerned if the account provider is allowed to close the account once the breathing space period has expired. It is clearly important that the debts to be included in any statutory repayment plan and the balances outstanding needs to be crystallised at a set point. It makes sense to us for this crystallisation to take place at the date at which the client enters the statutory debt repayment plan. Therefore, for the purposes of a statutory repayment plan, it should cover all debts that exist on the day that it is made. However, as not everyone entering the breathing space scheme will take out a statutory repayment plan, it could be more straightforward for the crystallisation point to be at the date the client enters the initial breathing space. Either way, there should be a mechanism to include debts later, where such debts existed at that time but have been overlooked (accidentally) by the client or by creditors. In the case of bankruptcy, debts that existed at the date of the bankruptcy order are included, even if the applicant forgot to list them in the application. This works very well and allows bankruptcy to provide full debt relief.

We anticipate the need for creditors to know which people who are under the protection of the scheme. There will of course need to be a quick and easy mechanism in place for creditors to become aware of the fact that an individual has been registered for ‘breathing space’. There may also be an on-going need for creditors to be able to see ‘at a glance’ whether someone remains on the scheme.

There would appear to be two options – the use of the existing credit referencing system, and/or a private register (which would be run by the Insolvency Service in the model we have described) that creditors could access to ascertain that an individual is registered for ‘breathing space’. The two options are not mutually exclusive – and we suspect the best approach would be to use both, with creditors who already use credit reference agencies (CRAs) using this existing infrastructure, and creditors who do not (such as local authorities) using the private register, so that they do not have to become CRA users just for this purpose. In effect, this would amount to the same information accessed in two different ways – either via a CRA for those creditors who use credit referencing, or from the Insolvency Service’s private register for those creditors who do not. This element of flexibility could help to keep infrastructure set-up costs to a minimum for both categories of creditor. Whichever mechanism is used should take into account the following considerations.

The information would need to be accessible by all creditors (and not just financial services or utilities creditors i.e. including public sector organisations such as local authorities). Many people who seek debt advice are very concerned about their credit rating, and the perceived impact of seeking advice on this is one reason why many delay dealing with their debt problem. Whatever mechanism is used will have to be communicated to individuals clearly and effectively to avoid this deterrent effect.

The future impact on creditworthiness should also be taken into account. For example, if the existing credit referencing system is used, creditors could potentially use an historic ‘breathing space’ flag in assessing applications for credit in the future. This would need to be carefully considered and perhaps regulated.

If a flag of credit data identifying people under the protection of the scheme is a part of the mechanism chosen, however, consideration must also be given to the costs for lenders and credit reference agencies to set up such a flag, should this not be possible using existing infrastructure. If a ‘register’ is used, then we believe it must be kept as a private register. We would have serious reservations over any register being set up as an open access public register. We believe that a public register is likely to deter people from seeking the protection of the scheme. Indeed, we believe that the more the scheme looks like an insolvency scheme, the less people in temporary financial difficulties may be likely to apply (which is why, while we believe the Insolvency Service is the natural public body to administer the breathing space scheme, it must be separately branded). Thirdly, we understand that public registers (like the DAS register in Scotland) are open to abuse from less reputable companies using the register as a marketing list targeting financially vulnerable households.

We believe the design of the scheme should be guided by the fundamental principle that people with serious problem debts should be able to access breathing space where they need to do so. We are not in favour of adopting strict criteria banning access to the scheme where someone has already accessed breathing space by creating a rigid timescale. This could prevent people who have repeated changes in circumstances from seeking relief. There needs to be full account taken of the needs of clients in vulnerable circumstances. Someone with mental health issues may need more than one attempt to engage with advice. If such a client was unable to engage a second or third time, it would need a demonstrable reason for the advice agency to support further attempts. This might have to be at the advice agency’s discretion where someone could demonstrate they were seeking treatment for example, or now had support from a family member that was not there previously. However, we would see multiple attempts as an exception.

It should be within the remit of the debt advice agency to refuse to make the application for a client. This would require a clear set of criteria as to when refusal to make an application for breathing space is permitted. This must come down to elements such as there being no demonstrable change in circumstances, or change in financial commitments. As a result, there could be no reasonable prospect of alternative outcome being forthcoming in the professional assessment carried out by the advice agency. Clearly, we would not support repeated six week breathing space periods where no debt option is forthcoming, as this would undermine the integrity of the scheme principles as well as constitute a drain on advice sector resources and creditor commitment to the scheme. We would imagine that anybody unhappy with such a decision by a debt advice agency would be able to make a complaint to the Financial Ombudsman Service or to the scheme operator. This is another good reason why only FCA authorised debt advice providers should be able to provide the scheme.

We are not in a position to answer this question in any depth as we are not a creditor. We imagine that creditors would have different challenges depending upon the type of creditor they are. There may be technological and data-sharing challenges for various government departments acting as creditors in particular. Other smaller companies or sole businesses who are creditors within the scheme will have greater challenges due to lack of familiarity with the processes. We would have thought large consumer credit lenders will be best placed to implement and adapt existing processes that they already have in place for dealing with other forms of debt option such as debt management plans, IVAs and DROs.

In the model we are proposing, the Insolvency Service would be responsible for notifying creditors that an individual has been registered for breathing space, with a start and end date for this period (see Proposed design diagram on page 8), through the online portal. An adviser would assess a client’s eligibility for breathing space, at the point of first contact, and if they are eligible, register them for breathing space protections using the online portal. At this stage, any creditor details that the client is able to provide to the adviser could also be uploaded to the portal. At this point of registration, the Insolvency Service would add the individual to its private breathing space register, and/or notify credit reference agencies (see our response to question 11 for more on this aspect). Many clients would, of course, need time to gather this information, and so we propose that additional creditor details could be uploaded to the portal at a subsequent date – either by the adviser, or by the client themselves (this would also allow for integration of this process into advice agencies’ online advice services). When creditor details are uploaded to the online portal, the Insolvency Service would notify that creditor of the fact that the individual in question is registered for breathing space, with a start and an end date for the protection period. The end date should be adjustable, to allow for the six week period to be extended at adviser discretion, as we have argued above.

We are unable to comment on this question.

It might be appropriate to exclude debts owed to individuals where there is the likelihood that inclusion in the scheme would cause undue personal hardship to that individual. Sole trader debts owed to another sole trader might be an example. However, such exemptions could undermine the purpose of putting in place a holistic approach to a debt problem. If any types of creditor or debt are excluded from the process, then they still need to be paid. Attempts to recover the money owed would run the risk of disrupting the stability of the client’s agreed financial plan and risk non-payment of other creditors in the scheme. This could lead to the collapse of the plan to the detriment of the client and all their other creditors.

We cannot speak for creditors. However, we can say that the benefits of debt advice have been widely demonstrated. Money Advice Service research shows that the amount of debt was reduced as a result of receiving debt advice.4 We would expect creditors to see debt levels reducing in a steady, systematic fashion over time through additional payments made under a statutory repayment scheme and other debt options accessed as a result of the ‘breathing space’ incentive to engage with debt advice. We would expect creditors to see lower collection costs overall, as they would not need to chase debts that are in a breathing space scheme or a statutory repayment plan. We would also assume that there will be fewer costs for lenders in processing predictable, agreed payment amounts each month, (even though these might be at a low level), rather than having to chase up erratic payments that may be high one month and missing altogether the next. Some creditors who provide on-going services such as utilities, landlords, mortgage lenders and local authorities should see a steady payment of continuing liabilities. As debts are being dealt with under a coherent and sustainable plan, on-going payments should stabilise whilst payments are made on priority arrears at an affordable rate. An initial breathing space followed by a coherent repayment plan should also lessen the costs and risk to lenders of unaffordable borrowing, where people attempt to cover household bills by taking out extra unaffordable credit or increasing their overdrafts. The ability for people to recover from income shocks or changes in their circumstances is greatly enhanced by the protections offered by breathing space and an affordable debt repayment scheme. This approach is vital for people to get on their feet again. Creditors are more likely to see payments maintained where these have been worked out as affordable using a holistic debt advice approach to a debt problem. If the statutory repayment plan is restricted in provision to free-to-client debt advice services only, it also provides creditors with clarity on the costs of the scheme. With current informal fee-charging debt management plans, the cost to the client may vary and may not always be clear to creditors. This money could instead be used to repay debt.

4 Money Advice Service (2012), The effectiveness of debt advice, link

It is worth noting the example of the Debt Arrangement Scheme outcomes which show a steady return to creditors in payments made but also plans completing under the scheme. “DAS allows debtors to pay their debts in full without facing insolvency. 425 DAS debt payment programmes were completed in the quarter between July and September 2017, up from the 408 completed in the same quarter a year ago. A total of £9.4 million was repaid through DAS this quarter, which is up from £9.2 million repaid in the same quarter of 2016-17.”5

The ‘online portal’ model we are proposing would build upon or complement the models already developed by the Insolvency Service for DROs and bankruptcy. Embedding the breathing space application process into the existing support structure provided by free debt advice agencies would make sense to us. It is, of course, vital that there is as seamless a delivery of the service as possible and that this should build upon the existing advice processes and standards that exist in debt advice already. The service needs to work over different delivery channels such as telephone and online advice. As we have said, it is vital to avoid building a system with onerous levels of evidence-gathering and proof requirements, as this could make it difficult for advice agencies to submit applications in good time. We would also like to explore how breathing space can work with self-help models of debt advice, perhaps through the development of tools such as CASHflow.6

We would expect access to the scheme to be via a free-to-client debt advice provider who is authorised by the FCA to provide impartial, free debt advice. Such advice agencies will also be subject to Money Advice Service quality standards and the peer review scheme. We have robust procedures in place to make sure that a client’s full financial situation is taken into account. This means that there are already safeguards in place through regulatory supervision, as well as through existing professional standards for debt advice. Any debt advice agency would need to show that the scheme was in the person’s best interests and appropriate for their circumstances. Once a full debt advice interview was to take place, including the completion of a standard financial statement, it should become clear if someone is abusing the scheme. This would lead to the advice agency removing the client from breathing space protections or making an application to the relevant body to do so. Indeed, in our experience, it is unlikely that anyone wanting to “abuse the system” would submit themselves willingly to a full financial assessment or indeed cooperate with the advice agency through the process. However, the risk of abuse of the scheme (in our view, a small risk) makes it all the more important that advisers receive comprehensive training on the breathing space system. This could be provided through the existing free advice sector training mechanisms including Wiseradviser, run by the Money Advice Trust, and the Institute for Money Advisers. We see very little advantage for clients in “gaming” the system. It is possible, depending upon the scheme, that being registered for breathing space will affect credit ratings, and entry into a statutory debt repayment plan will definitely entail appearing on a central register, which may be public. This will lead to credit reference agency reporting data which will again affect credit ratings. There would

5 https://www.aib.gov.uk/sites/default/files/das_digest_autumn_2017_final.pdf

6 http://www.moneyadvicetrust.org/advice-agencies/CASHflow/Pages/default.aspx

be little gain for clients in trying to access breathing space. There would, in our view, be very little chance of anyone getting through the advice process into a statutory debt repayment plan even if they had managed to obtain the full period of breathing space. Indeed, all they will have achieved is a six week delay in their creditors taking action against them to enforce their debts. More broadly however, we think that safeguards should be put in place to protect clients from unscrupulous fee-charging companies or lead generators who purport to offer debt solutions but are of dubious quality or effectiveness. We would suggest that the scheme is restricted to a set list of free-to-client debt advice agencies as official scheme providers to avoid companies that are not even authorised to give debt advice by the FCA to offer debt management. We have previously argued that a regulatory gap between the FCA and the Insolvency Service enables unregulated lead generation companies to channel people towards bulk IVA providers where this might not be the most suitable debt option for them.7 This would also mean that individual clients would have the right to complain about their debt advice provider’s services, advice or decisions to the Financial Ombudsman Service, which would act as an additional safeguard.

It is vital that the breathing space protections apply equally to people in Wales and Northern Ireland as well as England. These provisions will then have equivalent status to protections in Scotland. We can see no reason why these protections should not be available to all. There may be some particular features of the Northern Ireland legal and debt options landscape that mean that the scheme would need to be implemented differently. However, we believe the principle should apply throughout the UK.

7 http://www.moneyadvicetrustblog.org/2016/08/02/why-the-fca-must-regulate-insolvency-practitioners-and-

lead-generators/

We have put some consideration into how a statutory debt repayment plan could be administered. This has included considering, for completeness, whether the Insolvency Service could administer statutory debt repayment plans directly. However, we are concerned that an over-formalised process will deter people from seeking a statutory repayment plan, particularly if this becomes seen as ‘another form of insolvency’. We are also wary of replicating the rigid evidence requirements that have made DAS a more complex, time-consuming and difficult process for advisers in Scotland. It appears that the changes to DAS rules have made it more difficult for advisers and clients to comply and we have seen a fall in applications since the changes were made.8 There need to be discussions with the Accountant in Bankruptcy about the effect of the rules under the Bankruptcy and Debt Advice (Scotland) (BADAS) Act 2014 and whether these rules should be changed.9 We therefore believe that an alternative model should be used whereby statutory debt repayment plans are provided by an Insolvency Service-appointed panel of providers, which should be FCA-authorised, free-to-client debt advice agencies. There will be other advice agencies in the breathing space scheme who do not directly provide plans. These advice agencies would refer those clients for whom a statutory debt repayment plan is their best advice recommendation to one of the providers on the panel to implement the plan. We believe this model would be in the best interest of the client, and the use of existing payment distribution mechanisms that exist in the sector would minimise set-up costs for this element of the proposal. In this model, the Insolvency Service would have an overall administrative role for statutory debt repayment plans, with responsibility for appointing providers to the panel, keeping a private register of plans (this could be a subset of the register used for breathing space), and adjudicating any unresolvable creditor objections to individual plans).

We would envisage that where a client is making payments under the statutory debt repayment plan the provider would organise payments to creditors, as is the case with existing debt management plans (DMPs). A difference would be that in the case of statutory plans, the provider would need to register each plan on an Insolvency Service-kept private register (which as described previously could be a subset of the breathing space register). Debt advice agencies may wish to provide statutory debt repayment plans themselves, or they may choose to refer to a provider on the panel. All providers would have to meet FCA standards on prudential requirements and handling credit money. This system could involve the transfer of the

8 https://www.aib.gov.uk/sites/default/files/das_digest_autumn_2017_final.pdf

9 https://www.aib.gov.uk/news/releases/14141414/0101/badas-regulations-are-laid-scottish-parliament

client to another plan provider, if required to do so by the client at any point within the scheme, or where this appears to be in the client’s best interests. For the plan provider there would be challenges in administrating reviews of the plan. Reviews might be required due to clients reporting a change in their circumstances, or due to the requirements of the scheme. We would expect it to be good practice (and comply with FCA rules and guidance), to require an annual review of the plan in any case. Providers would, therefore, need to dedicate resources to carrying out such reviews. This requirement is another argument, in our view, for a panel of free-to-client providers, given the existing free-to-client agencies who already have experience of carrying out these reviews in the case of voluntary DMPs.

We want to see consistent and adequate protections applied during the statutory debt repayment plan. These should include the freezing of interest, fees and charges on both arrears for continuing liabilities such as priority bills and on all consumer credit balances. We can see no merit in singling out one of these types of charges in the way proposed. We also want to see the following key protections. During the period of protection, debt collection action and enforcement action to recover debts cannot be taken. This includes the following protections:

Creditors cannot present a bankruptcy petition in respect of a debt in the scheme. Creditors cannot pursue any remedy for the recovery of a qualifying debt. Any existing county court proceedings will be stayed. Providers of gas and electricity are prevented from disconnecting gas or electricity supply or

forcibly fitting a pre-payment meter in respect of a debt included in the scheme. This protection does not extend to any utility debts accrued at a later date as these would be continuing liabilities.

A creditor may not make a demand for payment in respect of a debt covered by the scheme. A creditor may not reduce or make an application to reduce the amount of a statutory

entitlement or payment solely for the purpose of recovering a relevant debt. Once someone has entered the scheme these cannot subsequently be backdated when they leave the scheme.

A creditor may not charge a person additional interest, fees or other charges in respect of a debt (this would only apply to arrears on ‘continuing liabilities’ – see below).

We are not sure how to answer this question, as a statutory debt repayment plan is itself a debt solution. To answer the question about whom a statutory debt repayment plan could be most appropriate for, this will depend entirely upon the circumstances of the client. We have set out below some scenarios that we have thought of where this could be the best advice for an individual client. It is important that in each case, this advice would be weighed up following a full assessment of the client’s financial

circumstances, their own wishes, and the “best advice” principles commonly used across the free debt advice sector. The client has a temporary change in circumstances which means that they need the protections afforded by a statutory debt repayment plan, can start to pay their debts back over time, but do not want a more drastic insolvency solution.

The client has a permanent change in circumstances and can no longer afford their on-going monthly payments, but can still afford to clear their debts within a reasonable time.

The client has borrowed too much and can no longer afford the repayments, but will be able to clear the debt within a reasonable time if the interest and charges are frozen.

The client has a change in circumstances that means they need the protection of a statutory debt repayment plan to pay minimal or token payments for a set period. Once their circumstances change again they should be in a position to resume payments in full or choose another debt option.

The client owns a property and this has sufficient equity to mean that bankruptcy or an IVA would not be suitable. They can make reduced payments to clear their debts over time.

The client is not eligible for a DRO as they own property, have too much available income and/or exceed the £20,000 eligible debt limit, but can make reduced payments to clear their debts over time.

The client has assets that mean bankruptcy is not suitable or they cannot afford the application fees.

The client is adamant that despite another debt option such as bankruptcy or a DRO being more suitable, that they wish to pay their debts back in full.

An adviser will assess whether an applicant is eligible for a statutory debt repayment plan. This assessment will incorporate a full budgeting process to complete a Standard Financial Statement. This process will include an assessment of all income and expenditure. Budget guidelines would include an element for building up an amount of precautionary savings against future necessary expenditure that can’t be met from a monthly budget. The rate of accrual and target saving balance would be subject to the principles of the Standard Financial Statement. The adviser will assess eligibility for all debt options as part of a robust holistic advice process (this is a regulatory requirement). Where a suitable debt option is identified, the adviser will provide advice on how to access this debt option using the “best advice” model, currently applied by all free debt advice agencies in England & Wales. If the applicant is unable to access a debt option identified as more suitable than a statutory debt repayment plan (for instance because they have to save up for an application fee for bankruptcy or a Debt Relief Order (DRO), or apply for a grant), the advice agency should be able to use its discretion to treat this lack of (immediate) access to the alternative as a form of temporary financial difficulty for a limited period. This could involve registering the client for a statutory debt repayment plan set up with token payments, to offer them protections while the lack of access to the preferable debt option is resolved. However, the advice agency would need to demonstrate a clear and time-bound plan to resolve the access issue.

In our answers to the questions posed above, we have suggested an extended breathing space period could be put in place if it is likely that the debt advice agency is going to be able to put in place a particular debt option such as a DRO or an IVA or to assist a client to go bankrupt. It would make complete sense to us that breathing space protections should continue under such circumstances for a temporary period. In addition, it would make sense for the statutory debt repayment plan to be flexible enough to embrace those who are in a position to make minimal payments for a temporary period, perhaps where they expect an imminent change in circumstances. Therefore, the protections of the statutory debt repayment plan would be put in place as a protective wrap around the client for a set timescale (with the possibility of extension) even where they are not yet in a position to pay back their debts within the usual parameters of the scheme. It would make sense for a token payment plan to be put in place for a set period with a review at the end of this period. This proposal could include a projection of how payments will increase at set times during the lifetime of the plan to fulfil the intention of the statutory debt repayment plan to pay debts off within a reasonable period. However, should these increased payments become untenable due to circumstances, then a variation could be put in place. We would not wish to see people unable to access the protection of the plan due to strict payment criteria however. Circumstances do change, and flexibility must be built in. If no statutory debt repayment plan or other debt option can be put in place, for that client, we would like to see creditors continue forbearance measures. However, we appreciate that these measures cannot necessarily apply indefinitely. Once protection ends, advisers would need to employ the procedures that they currently use with their clients who are in this position, including signposting arrangements for further advice.

Our starting point is that a person entering a repayment plan would be required to list all of their qualifying debts for inclusion in the plan. This would include ‘priority’ debts like council tax arrears, fuel debts, mortgage arrears and rent arrears outstanding at the date the plan commences. Arrears of certain ‘continuing liabilities’ that accrue after the date that a person enters the scheme would not be capable of inclusion in the scheme; nor would the ‘main’ outstanding obligations – such as the non-arrears balance of a mortgage. Regular payments towards continuing obligations, like contractual mortgage payments, would be included in applicants’ on-going budgets. We propose that plans should broadly follow the DAS definition of continuing liabilities. These are:

A mortgage or secured loan Rent An insurance premium A duty, local or general tax or rate A domestic water or sewerage charge A periodic allowance, child maintenance or child support The supply of electricity, gas, broadband, or fixed telephone line services Heating oil or fuel oil A hire purchase or conditional sale agreement A court fine Other items prescribed in regulations.

We would suggest that a hire purchase or conditional sale agreement should be treated as a continuing liability where the goods in question are deemed to be essential for the applicant. This follows existing debt advice practice where hire purchase agreements are conditionally priority debts. Agreements secured by a bill of sale might also be classed as conditionally continuing liabilities. (However, bills of sale may have been replaced by goods mortgages by the time this scheme comes into effect.)

At the moment debts are prioritised on the basis of the sanctions available to creditors - how bad the consequences of not paying that bill would be. So debts are likely to be treated as priority debts where non-payment could result in losing the home or going to prison, or losing essential goods (such as a car needed for work) This conditional element of essential goods make ‘priority debts’ harder to define in legislation, but the continuing liability approach could help with this. However, as a purpose of statutory debt repayment plans is to prevent enforcement against debts where the person is making reasonable repayments, the question arises as to the basis on which a debt in a plan might be described as a ‘priority’. The current definition based the sanction available to creditors would no longer apply. The DAS scheme is in Scotland treats all debts equally and splits payments on a pro-rata basis. However, some debt advice charities have highlighted how this can leave private tenants exposed to eviction; as a private landlord may refuse to renew a tenancy where they feel rent arrears payments are too low.10 As a result the debt advice charities generally agreed that the scheme should treat arrears in respect of the main home (e.g. mortgage or rent) as “priority debts”. There is also an argument that certain government debts, such as tax arrears, should be treated as priority debts, given the wider public benefit. The scheme could allow for certain government debts to have some priority in payment, but government creditors would still be bound by the protections of the scheme. If the scheme allowed for some debts to be prioritised for payment, a system of defining the amount of such payments would need to be developed.

The plan could also include a provision for creditors to object to an individual statutory debt repayment plan proposal. This might be on the grounds that there is inaccurate factual information in the proposal or that the creditor is aware of a crucial missing factor. There should be a mechanism to include pre-existing debts that were missing from the original proposal once the scheme provider is alerted to their existence. Creditors should also be able to object to the financial information on the financial statement, but their ability to do so constructively may be affected by whether they have access to the Standard Financial Statement. An objection from some creditors may be broader than a claim that the budget includes an element that is outside the bounds of the Standard Financial Statement operational rules.

10

https://capuk.org/downloads/policy_and_government/setting_the_pace_briefing.pdf

However, this should not be upheld unless the spending exceeds the maximum limits within the Standard Financial Statement and cannot otherwise be justified (by the adviser and their client). We would welcome these proposals as necessary safeguards, but we believe that the grounds to object should be limited to set criteria, which would need to be drawn carefully in the regulations. Care is also needed when thinking about the forum for such objections. For instance, legislation could provide for creditors to apply to the court; but this could be costly and unwieldy in practice. Creditors would also need a forum to raise other issues that might arise (a person’s continued eligibility for a statutory debt repayment plan, conduct by a plan provider and so on). We would favour a mechanism to allow an unresolvable creditor objection to go to the Insolvency Service, which in our proposed model would be the overall administrator of statutory debt repayment plans, for adjudication. However, we favour the presumption that a proposed statutory debt repayment plan should go ahead as proposed, unless a creditor actively disagrees with an element within the plan, based on a limited set of criteria. We do not see the need to replicate the IVA rules where creditors need to positively vote in favour of the plan as this will add undue complexity to the proposals.

We accept that there should be further duties on applicants entering a statutory debt repayment plan than just meeting the agreed repayments. Continued engagement must be a condition of on-going protection under the plan.

Applicants will only enjoy protections if they remain engaged and maintain payments that have been assessed as part of the advice process as affordable and sustainable.

Applicants must co-operate with plan providers and respond to communications. Applicants will need to provide proof of debt and any proof of income and outgoings required

by the plan provider. Applicants have a duty to report any change of circumstances to the plan provider. Applicants must take part in any scheduled reviews or reasonable requests for review. People

will be expected to be proactive in contacting the advice provider at the agreed time for review.

If an applicant does not make contact at agreed times, does not respond to requests for contact, or fails to co-operate with the advice provider, they will be given notice to comply within one month.

If the applicant still does not respond to the notice in that time period they will be given a final notice of a specified period.

After this notice expires the applicant will be removed from protections The applicant can be readmitted to the plan only at the provider’s discretion where there is

good reason for previous non- engagement.

Clients should be required to contact the advice provider for a review at any point where they have a change in circumstances or a significant change in income and outgoings. This would constitute a condition of receiving continued protections. We very much support the idea that it should be possible to reduce or suspend payments during the lifetime of a plan. There is no need, in our view, to suspend plan protections, but it should be

possible to suspend payments in some circumstances for a short period. It should be possible for a reduced payment plan to be put in place for an extended period of time where there has been a change in circumstances resulting in a significant change in income and outgoings. We would like to see flexibility built in as to how long this reduction should continue. It is vital that these protections are built into the plan design to allow the flexibility for clients and advisers during the lifetime of the plan.

We do not agree that creditors should be able to apply interest, fees or charges retrospectively where the plan fails. This is unnecessarily punitive for the client and does not take into account the many reasons that a plan might fail. One of our concerns about IVAs is that the burden for the failure of the plan falls entirely upon the client. In this example, the insolvency practitioner fees and costs are paid first. This means that when the IVA fails, particularly at an early stage, the client will have lost all the money paid in fees, and still have all their debts to pay plus added interest and charges backdated to when the IVA was set up. We would be much more supportive of a plan design that only allows interest, fees and charges to resume from the date that the plan fails. This would seem to us to be a fairer outcome. We would also like to see rules put in place to allow clients to be readmitted to the plan (only at the plan provider’s discretion) where there is good reason for previous non- engagement. Protections should then resume.

We do not favour mirroring the insolvency regime for bankruptcy and DROs. If an applicant does not make contact at agreed times, does not respond to requests for contact, or fails to co-operate with the advice provider, they should be given notice to comply with requests within a set period, such as a month. If the applicant still does not respond to the notice in that time period they could be given a final notice. This would last for a specified period, after which the applicant would be removed from protections. Removal from the plan seems to us to be an adequate consequence to perceived misconduct. If a sanctions regime is put in place that mirrors the Debt Relief Order Restrictions Order, this would need to be run by a body such as the Insolvency Service. It is certainly not part of the role of a debt adviser to operate a sanctions regime. Such a requirement could cause a conflict of interest for the agency and the potential to lose the confidence of clients in the agency’s role in giving them best advice. Establishing such a regime would require the existing of a body such as the Insolvency Service as the overall administrator, as we are advocating in this response. This could entail the scheme operating in a similar way to a DRO. It would also mean, of course, that a statutory debt repayment plan would be firmly placed within the suite of insolvency options, which brings it with a risk of reduced engagement. This might have the effect of deterring early engagement by people seeking debt advice and mean that people are less likely to take up the scheme because of their fear of the consequences of insolvency.

As with breathing space, it is vital that the statutory debt repayment plan proposals apply equally to people in Wales and Northern Ireland as well as England. These provisions will then have equivalent status to protections in Scotland. We can see no reason why these protections should not be available to all. There may be some particular features of the Northern Ireland legal and debt options landscape that mean that the scheme would need to be implemented differently. However, the principle should apply throughout the UK.

We know from our own National Debtline client surveys that 18% of our callers wait over two years before contacting us for advice. In this time situations can worsen and debt can grow. The motivations and barriers for seeking advice are often complex, reflecting the often complex lives of people with debt. A debt problem is often part of a set of inter-linked circumstances which can make taking action to start to deal with debts more difficult. These include mental health problems, long-term illness and disability. Importantly, we know that seeking advice can help people to get on top of their issues, with half of our callers reporting having partly or completely resolved their debts a year after contacting us. There is also clear evidence of improvements in longer-term financial capability as well as health and well-being. At the same time, the debt collection process and how debts are currently enforced are key contributors to the stress and anxiety experienced by a large number of people in problem debt. Our own research into the experiences of people who try to deal with their debts themselves, shows that creditors and their agents can sometimes fall short in terms of their own attitudes and behaviour, such as flatly refusing to negotiate; charging seemingly disproportionate fees; and failing to signpost people to independent advice. In this context, we believe an effectively-designed ‘breathing space’ scheme, and the protections it provide, has the potential to provide a significant incentive to seek advice.- if these are communicated clearly and effectively – by government, the advice sector, creditors and other stakeholders. Breathing space will require significant promotion if its impact in incentivising people to seek advice is to be maximised. The impact of this on demand for debt advice – and the resourcing of supply to meet this demand – must also be taken into account. Demand for free debt advice is currently unmet by supply, and has been increasing significantly – a trend that is expected to continue in the years ahead. An effective breathing space scheme, while welcome and in the best interests of people in financial difficulty, will exacerbate these trends. The Treasury should therefore take into account the impact of breathing space on the demand for debt advice, and the current funding structures for debt advice, which have been recently subject to Peter Wyman’s independent review for the Money Advice Service. This consideration should include the need for higher levels of funding for debt advice in the future, including through the Single Financial Guidance Body and from other sources.

It is not clear that people in debt seek advice with a specific debt option in mind. It is therefore difficult to state confidently that the prospect of a statutory debt repayment plan will have the effect of persuading people to seek debt advice. However, this might be the case for people who have struggled to put in place sustainable payments with their creditors either because these collapse because of an inconsistent response by each creditor to their offers, or a patchy response to requests to freeze interest and charges or one particular creditor taking enforcement action which disrupts the whole process. However, it would take some time for awareness to filter through to people that there is a better solution out there.

Our annual survey (2016) shows that 78% of callers to National Debtline who went on to make a repayment arrangement with their creditors had continued to make payments 12 months on. However, our own research into the experiences of self-help clients seeking to deal with their debts themselves shows that the journey to getting a resolution to debt problems can be challenging for people. Initial conversations can cause concern and confusion leading to people ‘burying their heads in the sand’ rather than engaging with their creditors. In particular, threats to escalate a debt and unrealistic requests for repayment can lead people to feel helpless and powerless to resolve their situation. Some found themselves agreeing to repayments that were unsustainable as a result. This sense of resignation will often cause people to disengage from the process. People in vulnerable circumstances, and in particular those with mental health problems found communicating with their creditors difficult. By providing a period of breathing space in which to allow people the time to work out a reasonable budget and assess their options without the pressure of communicating with creditors is likely to remove some of these challenges.

A statutory debt repayment plan will be instrumental in improving outcomes for people in debt for the reasons set out above. In addition, the ability to pay back debts in a consistent and orderly fashion, without the risk of creditor action undermining the agreement, allows people to move forward with their lives, confident that they have statutory protection to enable them to clear their debts at a regular payment amount they can afford.

The breathing space scheme will not, in and of itself, increase the amount of debt repaid to creditors during the initial breathing space period. However, it allows the applicant to seek advice to assess what the best option is for repaying their debts, which increases the likelihood of debts being repaid in the longer term. In itself, the creation of a budget using the Standard Financial Statement will allow a realistic assessment of a household’s finances which should lead to a stabilisation of the situation.

Once this process is completed, if a statutory debt repayment plan is suitable, this will be put into place. It has been well documented that repayment of affordable amounts on a regular basis, will result in greater levels of debt repayment in the long run.11 This might be at smaller amounts than the individual creditor might like, but sustainability of the payment arrangement is the key to its success. It is more costly for creditors to have to deal with erratic or broken payment arrangements generally, than a slower level of repayments reliably received.

We would support an initial review of both the breathing space scheme and statutory debt repayment plans, which should take place in a reasonable timescale after implementation, perhaps after a year of operation. This review should look specifically at whether the length of time provided under the initial breathing space period is adequate. We would expect this review to consider the resource impact on advice providers, and in particular length of time it takes for an advice appointment, and for the advice provider to reach a conclusion about the eligibility of the client for being registered for breathing space, and also for advice providers to reach a conclusion about suitability of clients for a statutory debt repayment plan. Factors that will affect this time period will include how “light touch” the evidence requirements are for advice providers and how easy the administrative processes are under the scheme for advisers to navigate. As we have argued previously, it is crucial for the success of the scheme, to our mind, that advice providers are given the flexibility to extend the initial breathing space time period where they are in the process of preparing a plan or other debt option. If the extension of this grace period is not allowed under the scheme, then the review should measure what impact impact of removal from protections after the initial six week period is on client outcomes, advice sector resources and the effect on creditors. A review should look at a range of factors relating to both breathing space and statutory debt repayment plans, including;

the volume of unmet need for breathing space; whether the administrative process in place is working well or could be streamlined; what improvements could be put in place for the scheme to function better; and how creditors’ recovery rates have been impacted by the scheme.

whether any evidence requirements are reasonable or too onerous for advice providers and

clients;

11

Money Advice Service Impact of debt advice https://masassets.blob.core.windows.net/cms/files/000/000/618/original/Debt_Advice_Evaluation_summary_v11.pdf

the instances of statutory debt repayment plan breakages and collect the reasons for plans failing;

what improvements could be put in place for the scheme to function better; repayment levels under statutory debt repayment plans; and how creditors’ recovery rates have been impacted by the scheme.

The review should consider the impact on a client’s wellbeing of both entering breathing space, and setting up a statutory debt repayment plan. These should include the effect on physical and mental health and anxiety, stabilising finances, family relationships, any impacts on housing and so on. Our surveys of people calling National Debtline show that seeking advice can have a significant positive impact on their lives with 77% saying their emotional and mental health had improved as a result. Any steps to explore the impact of the introduction of breathing space on these outcomes will be important in understanding the efficacy of the scheme. An initial review period may not be long enough to evaluate all the factors within the scheme. Future longer term reviews should also be built into the scheme to evaluate the long-term effects on client wellbeing, debt repayment levels, creditor recovery rates and the impact on the debt advice sector.

The Money Advice Trust

21 Garlick Hill

London EC4V 2AU

Tel: 020 7489 7796

Fax: 020 7489 7704

Email: info@moneyadvicetrust.org

www.moneyadvicetrust.org