12. PTDs are of course already subject to tight regulatory control from both AiB, who monitor the processes conducted under the legislation ensuring that they are done correctly, and the RPBs, who monitor the conduct of the Insolvency Practitioners appointed in trust deeds and other insolvency solutions. The wider debt management industry is also subject to detailed regulation and scrutiny by the Financial Conduct Authority.
13. However in light of feedback from stakeholders and statistical analysis, we believe there is a need for further regulatory action. The two areas of concern we intend to address in the short term have been highlighted above. We set out statistical evidence and reasons for reaching this conclusion below.
Where PTDs may not be the most appropriate solution
When the debtor's contribution could pay off the debt in full
14. Two key principles that underpin the recent legislative reforms of the debt management and debt relief system in Scotland are that those debtors who can pay their debts, should pay their debts, and that the system assists in getting the right person into the right product. The current regulations prevent the protection of a trust deed where the proposed contribution would be sufficient to pay off the debt in full in four years or less – four years being the normal period for which the debtor will make contributions in a trust deed. The question is whether this strikes the right balance between debtors' and creditors' interests.
15. Throughout the consultation, particular concerns have been raised about whether for "low debt" trust deeds, DAS would have been a more appropriate solution in a significant number of cases. The debtor's contribution, if full surplus income is paid, under both solutions should be the same, as both use the Common Financial Tool to determine the contribution. Benefits for the debtor include not being made insolvent whereas from the creditors' perspective, DAS returns at least 90% of the principal debt, whilst the average dividend payable (in cases that paid a dividend to ordinary creditors) for PTD cases concluded in 2016-17 and 2017-18 has been 19.8 and 17.8 pence in the £, respectively.
16. As can be seen in Table 1 (Annex A), 49% of "low debt" PTDs (total debt of below £7,000) could have utilised DAS to facilitate repayment of the total debt in a DPP spanning five years or less. Given the difference in the level of returns to creditors, the question is whether it is reasonable to expect debtors to make contributions for an additional year, or whether they should be entitled to debt relief. Debtors could also potentially benefit from being in DAS rather than in a PTD, as DAS is not insolvency and, as mentioned, will not come with the consequences involved such as conveying assets pre and post insolvency, allowing the individual to maintain control of their estate.
17. Additionally, in a growing number of trust deeds, the debtor will be asked to make contributions for a longer period than the four years, for example, in lieu of the trustee realising assets or equity. In such cases, the trust deed may still be protected, even if the debt would be paid off in full by the contributions paid over the longer period. In these circumstances, we do not consider a trust deed an appropriate solution, and we propose to change the regulations to end this anomaly.
18. We are therefore considering introducing legislation to specify that where debts in a trust deed can be paid back in full, considering the contributions being made, in a time frame of 60 months or less – or otherwise within the duration of the trust deed - then the trust deed would not be protected. Your feedback on this proposal is sought in Annex B.
19. The 2013 Regulations introduced a minimum debt level of £5,000 in PTDs and the consultation asked if this remained an appropriate debt level. The majority of respondents agreed that it is, with others who disagreed arguing that it be increased to between £7,500 and £10,000. Further discussions with key stakeholders highlighted concerns, particularly from the money advice sector, that increasing the minimum debt would be detrimental to the more vulnerable individuals in society. It was highlighted that those who could not afford to get large amounts of credit would be penalised by this and forced into bankruptcy, as it would be unlikely they would have the surplus income needed for DAS. Taking this feedback into consideration, we are minded to leave the minimum debt level at £5000. However as some time has passed since the initial consultation, it would seem reasonable to seek current views on this. Your feedback on changing the minimum debt level in trust deeds is sought in Annex B.
Striking the right balance between debtors and creditors
Fees and outlays
20. Table 2 (Annex A) shows the percentage of funds ingathered in PTDs which are returned to creditors has steadily decreased over the last 10 years, whilst the average cost charged for the administration of a trust deed has generally increased. This of course may be justified if either the nature of the trust deed caseload had grown more complex or there were other more general reasons for expecting an increase in the costs of administration. In fact, the evidence as we have it suggests exactly the opposite – very few trust deeds now involve ingathering funds by dealing with complicated assets (as can be seen in Table 4 Annex A), and IT developments have significantly reduced the costs of administration: this is underlined by AiB's own experience in successfully reducing the costs of administering "full administration" bankruptcies (which are broadly similar).
21. Changes made in November 2013 sought to bring greater accountability for the nature and amount of costs charged, by moving the basis of charging for PTDs to a fixed fee augmented by commission based on a percentage of the total assets and contributions realised by the trustee. The trustee may also recover administrative costs from the debtor's estate. Stakeholders have raised concerns with regard to these "administrative costs", which are known as "category one disbursements" and "category two disbursements". Category one disbursements are costs claimed on the case by a trustee where payment has been made to a third party, for example, paying for professional services such as postage. Category two disbursements are costs that are related to the PTD appointment and are incurred where no payment has been made to an independent third party, for example, generic costs in the administration of the trust deed such as printing documents and business mileage. The trustee has to seek permission from creditors to claim category two disbursements in addition to their fee. Most stakeholders agree that introducing the revised remuneration process has brought greater transparency and control over the administration fees and costs as intended. That said, significant concerns were raised that since the introduction of the fixed fee, category one and two disbursements have greatly increased. Stakeholders have suggested that further changes are needed in this area.
22. Category one and category two disbursements are reported to AiB both as initial estimations of costs that will fall to a case, and then the costs that are actually incurred at a later date. For all cases granted on or after 28 November 2013 we can compare the difference between the estimated and actual incurred fees reported. Reports show that 72% of cases saw an increase with the average estimated fee reported at £1300 but the actual average incurred fee recorded at £1600 – significantly higher than was the case before 2013. There is no obvious reason for this, and strong reasons (as mentioned previously) that suggest we should have expected movement in the other direction. Detailed statistics on category one and two disbursements can be found in Annex A.
23. The 2013 Regulations included measures to introduce greater transparency and control over the administration fees and costs of a PTD. In light of the statistical information we have and direct feedback from our stakeholders, these objectives do not appear to have not been fully achieved. Costs have actually increased despite increased automation in the process. To further increase transparency, we propose to include category one and two disbursements within the fixed fee - that is, the trustee would be required to administer the trust deed for a single fixed fee, set when the PTD was circulated to creditors, which would only be changed in relation to elements such as a percentage taken of the funds ingathered. Your feedback on this proposal is sought in Annex B.
Creditor voting process
24. In recent years some creditors, particularly those likely to hold only a small proportion of debt within a PTD, have reported their frustration over the current voting system. In particular, they feel their voice is lost in a process that requires a significant degree of active objection to prevent trust deed protection and which is consequently underpinned by deemed consent. Currently, a trust deed will not be protected if the majority in number of creditors, or creditors with at least one third in value of the debt included in the PTD object in writing. There are many creditors that typically hold a small percentage of the total debt who feel powerless to prevent the protection of proposals that offer an extremely poor dividend return, or do not adequately deal with assets conveyed to the trustee. Consequently these creditors may have a tendency not to participate in the voting process at all.
25. A number of factors influence the approach taken to creditor voting practices. Proposals are generally adopted where the outcomes fall within the financial parameters set by larger creditors. These organisations tend to be able to absorb losses more easily as they make provisions for bad debt in their commercial charging models or, due to the size of their customer base, can balance these losses within other products. We also understand that the acceptance of proposals stem from a reluctance to be perceived as treating customers unfairly. Additionally, the emergence of creditor agents has been influential in dictating acceptance thresholds.
26. As previously mentioned, many smaller creditors, who often have ties to local communities, consider they are prejudiced by the current system. They feel they can be forced into arrangements resulting in financial losses that are significant for their organisation, and could impact their ability to help the community in return.
27. In striking the correct balance between creditors and debtors, our informal consultations have strongly suggested the need to re-examine the voting system and rules around what would be acceptable in terms of deemed consent. There are potential benefits in striving to increase creditor engagement and active involvement in the approval of proposals. It is acknowledged that this could be seen as imposing administrative burden on creditors, in that they could no longer rely on abstention to count as an affirmative vote. Investment in technology has, however, created the facility for creditors to see full details of a proposed trust deed on-line in a format that can be easily digested and then vote via the click of a button. This is a significant development and a step-change from the reliance on burdensome postal procedures necessary at the time the current rules were developed.
28. In light of this feedback we propose to introduce a new voting model, more closely aligned to the current creditor voting system involved in the Company Voluntary Arrangements (CVAs) process. This would mean that a trust deed would only be protected if, from the creditors who have voted, those who own 75% of the value of debt have actively accepted the terms of the trust deed. The following scenario-based examples may best explain how this model would work in practice:
Scenario 1 – A trust deed containing a total debt of £20,000 is split between five creditors. One creditor who is owed £3,000 actively rejects the proposal, no other creditors reply. This trust deed would not be protected.
Scenario 2 – A trust deed containing a total debt of £8,000 is split between four creditors. One creditor who is owed £500 rejects and one creditor who is owed £2,000 actively accepts: the others do not respond. The trust deed would be protected on the basis that creditors with debts amounting to 75% or more of the value included in the votes received have actively accepted the proposal.
Scenario 3 – A trust deed containing a total debt of £6,000 is split between eight creditors. One creditor who is owed £500 rejects and two creditors owed £1,200 jointly actively accept the proposal. The other creditors do not reply. The trust deed would fail to become protected on the basis that the 75% threshold for active consent among the voting creditors has not been reached.
29. The proposed revision to the existing model promotes active consent and has been suggested by stakeholders as an appropriate option for the trust deed process. A further consideration in this regard is the approach to adopt in the event that no creditors respond to the proposal. Our proposed approach in this scenario would see the trust deed becoming protected. While we acknowledge that this does not follow the CVA model, we would consider it appropriate for an individual seeking resolution to financial difficulty not be penalised in the event that creditors choose not to respond. Your feedback on these proposals is sought in Annex B.
Further powers to refuse to protect a trust deed
30. The previous consultation asked if there should be any additional grounds under which a trust deed should not be protected over and above the powers AiB currently have. Although a majority of respondents were in favour of introducing additional grounds where AiB could refuse protection, there was no general consensus as to what these grounds should be and the circumstances under which they would be exercised. The Scottish Government recognises that a trust deed remains, in essence, a private and voluntary agreement between a debtor, their trustee and their creditors and if the creditors are content to accept the terms presented, it is not for AiB to intervene.
31. Introducing such a measure could be argued to perhaps create further stress and uncertainty for debtors who will have already embarked on a lengthy process to address the debt issues they are seeking to resolve. In addition, legislative provisions exist for non-acceding creditors to challenge the protection of a PTD in court if they consider that they are being unduly prejudiced. If the voting process in trust deeds is changed to a) allow smaller creditors more of a say, and b) ensure a level of creditor active engagement, there may be no requirement to provide additional grounds for the refusal of protection of a trust deed by AiB.
32. Reforms to the voting process would help promote creditor engagement, assist in striking the right balance between the interest of debtors and creditors and remove the requirement for any further powers to refuse protection of a trust deed. Therefore, in light of the voting process changing, we propose to make no amendment to Regulation 11.
33. However we are interested in views on this matter. Whether AiB should have further powers to refuse protection of a trust deed is included as a question in this consultation. Your feedback on this proposal is sought in Annex B.
Confirmation of Debt
34. The earlier consultation asked if creditors should have to submit their claims in a PTD within 120 days if they were to be included in the payment of dividend. Most respondents indicated support for the introduction of this process on the grounds that it would increase transparency. To increase transparency and to bring the creditor claims process in line with what is already operating in bankruptcy we propose to introduce a 120 day time limit for creditor claims in PTDs - unless the creditor could show that due to exceptional circumstances they could not meet this deadline. This will ensure that the estimated dividend payable to creditors will usually be established early in the process.
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