Breathing space: call for evidence

Question 1

1. Introduction

Accepted Answer

The 2017 manifesto committed the government to implement a breathing space scheme, with the right safeguards to prevent abuse, so that someone in serious problem debt may apply for legal protection from further interest, charges and enforcement action for a period of up to six weeks. Where appropriate, they would be offered a statutory repayment plan to help pay back their debts in a manageable way. This is the topic of this call for evidence.

1.1 Background

1.2 Problem debt

Problem debt, where debt and arrears absorb an excessive proportion of income, can place a heavy burden on individuals and families. It typically arises as a result of an income ‘shock’, such as sudden loss of employment or family breakdown, which can lead to a downward cycle of debt dependence and growing debt burden. As such, it is often linked to other difficulties including worklessness, stress, and mental health issues. The role of debt advice in supporting those in problem debt

People who are suffering from problem debt should seek debt advice as early as possible. Debt advice can help indebted individuals deal with their debts and return to a stable financial footing. Debt advice can help people access a range of debt solutions – from informal plans for those who are able to repay their debt, to debt write-off options under the insolvency regime for those facing more significant difficulties. As well as helping people get back on their feet, effective debt advice can support the economy, encouraging productivity and reducing bad debt write-offs.

1.3 Government action to improve the provision of debt advice

The government is committed to encouraging consumers to access the help they need to make effective financial decisions throughout their lives. The provision of readily available debt advice remains a government priority. In 2016/17, the Money Advice Service (MAS) spent just under £49m on its debt advice work, directing around 90% of this to fund frontline services. This led to more than 440,000 free-to-client debt advice sessions being delivered face-to-face, over the phone and online across the UK.

The Financial Guidance and Claims Bill, which was announced in the Queen’s Speech and has been introduced into Parliament, will legislate for the creation of a new single financial guidance body to simplify the financial guidance landscape. The new body will replace MAS, The Pensions Advisory Service and the Department for Work and Pensions’ ‘Pension Wise’ service. The new body will take on MAS’s role in funding free-to-client debt advice. A key driver behind rationalising the current financial guidance offering is to ensure that more people can access the help they need when they need it, and that as much funding as possible is focused on achieving this goal.

1.4 Government action to improve creditor practice

The government has also taken steps to improve creditor practice – both within the private and public sectors. In the private sector, regulation of the consumer credit industry was fundamentally transformed when responsibility transferred from the Office of Fair Trading (OFT) to the Financial Conduct Authority (FCA) on 1 April 2014. The new FCA regime is helping to deliver a higher standard of consumer protection in the consumer credit market.

The FCA transposed key parts of the OFT’s Debt Collection Guidance into binding rules which set out the types of business practices considered unfair and incompatible with fitness to operate. Firms are also required to comply with the FCA’s high-level principles, including ‘treating customers fairly’. Firms must also thoroughly assess their customers’ creditworthiness, having regard to:

the potential for the commitments to impact adversely on the consumer’s financial situation, taking into account information which the firm is (or ought reasonably to be) aware of at the time; and
the consumer’s ability to make repayments as they fall due

The government believes that the FCA’s rules strengthen consumer protection. These rules are based on the principle that money should only be lent to a consumer if they can afford to repay it, which in turn provides greater clarity to firms on what is expected of them, as well as the sanctions they may face if they lend irresponsibly.

Under FCA rules, lenders must also show forbearance – holding back on the collection of debt – if there is evidence that the client is in financial difficulty. The rules state that the active pursuit of recovery of a debt should be suspended for a reasonable period where the customer informs the firm that a debt adviser or another person acting on their behalf is developing a repayment plan. Further guidance outlines that this period should generally be thirty days where there is evidence of a genuine intention to develop a plan, and the firm should consider extending the period for a further thirty days where there is reasonable evidence demonstrating progress to agreeing a plan. The FCA has a broad enforcement toolkit to punish breaches of its rules – there is no limit on the fines it can levy and it can force firms to provide compensation to consumers if it discovers evidence of bad practice.

The government recognises that not all debt is owed to the private sector, and has taken action to ensure that government creditors have support systems in place for those who are struggling to repay their debts, and that they collect debt in a responsible way. For those who are struggling with tax debt and tax credit debt, HMRC can put a ‘Time to Pay’ (TTP) arrangement in place, which enables them to pay the debt in affordable instalments over a period of time. These arrangements are entered into on a case-by-case basis and are tailored to the ability of the customer to pay, taking into account their particular circumstances. HMRC also provides a Needs Enhanced Support service for those with specific, additional requirements – this can involve face-to-face support from a specialist adviser.

Similarly, DWP has embedded the identification of financial difficulty and vulnerability within its standard debt collection operating model and provides support to customers who engage when they require it most. The department signposts customers to organisations such as the Money Advice Service when financial issues are identified, and engages with organisations in the debt advice sector to continually develop its processes. DWP will always look to introduce a sustainable repayment plan which is bespoke to the individual’s circumstances, and their existing approach includes the provision of breaks in debt repayments, or reductions in the rate of repayment for individuals who are experiencing hardship.

DWP has also established Personal Budgeting Support for Universal Credit (UC), which aims to prepare all claimants for the financial changes UC brings. The need for budgeting support is assessed for all claimants at the start of the claim, and support can be requested at any time, and can include money advice. In addition to this, for a minority of claimants who cannot manage their monthly payment, alternative payment arrangements may be required such as managed payment of the UC housing costs to landlords, making payments more frequently than monthly and splitting the payment between partners within the household.

The Government requires that local authorities put in place discount schemes to reduce the council tax paid by those who have the greatest need. The Government has published guidance on enforcement action which makes it clear that authorities should be sympathetic to those in genuine hardship and are proportionate in any enforcement action. Where individuals fall behind with their council tax, their local authority should be willing to negotiate payments and work with bill payers to agree affordable and sustainable payment plans which ensure that the debt is paid off within a reasonable period.

The Ministry of Justice (MoJ) reformed bailiff law in 2014 to provide essential protection to debtors from the aggressive pursuit of their debt from enforcement agents whilst balancing this against the need for effective enforcement and the rights of creditors. The reforms introduced a simple set of rules which detailed what goods an enforcement agent can and cannot take, how and when they can enter premises and what fees they can charge. In particular, the key reforms provided safeguards to prevent the use of force against debtors and stop enforcement agents entering homes when only children are present. They introduced mandatory training and a new certification process for enforcement agents to ensure that they are the right people for the job. They also ensured vulnerable people were able to get assistance and advice, and that enforcement agents were trained to recognise them.

The government recognises that more can be done in supporting people who are struggling with repayments, and in ensuring that vulnerable customers are supported at each stage of their interaction with their creditors, be they in the public or private sector. The Cabinet Office has established a Fairness Group, which includes free-to-client debt advice agencies, to look at the issues of fairness in government debt management practices, and to make recommendations about how this can be improved. The government wants to use this group to get a better understanding about how debt collection activity impacts on vulnerable customers, and to create an open dialogue between the government and debt advice agencies to see how improvements can be made. Further action to tackle problem debt

Despite these actions, there remains an issue with the levels of problem debt in the UK. FCA research estimates that about one in six people with outstanding consumer credit debt (2.2 million) are suffering financial distress, meaning that they consider their debts to be a heavy burden or they are falling behind on some of their financial commitments. These people tend to be younger, on lower incomes, less likely to be employed and are more likely to hold higher-cost credit products. Furthermore, according to Department of Work and Pensions research, around 660,000 children in Great Britain were living in persistent problem debt between 2011-2012 and 2013-2014.

The government wants people who are struggling with their debts to seek debt advice as soon as they are able. We know that people may delay seeking help because they are overwhelmed by their debt problems, or think that no one will be able to help; however, the longer people wait to seek advice, the more serious their debt problems could become.

1.5 Breathing space

In addition to improving information about and the accessibility of debt advice, the government recognises that more people might be encouraged to seek advice, or seek it earlier than they would otherwise have done, if there were greater incentives for them to do so.

One possible incentive is the freezing of interest and charges on debt due. In Scotland, people in debt entering into repayment plans have a statutory right to have their fees and interest frozen under the Scottish “debt arrangement scheme” (DAS). The scheme provides a six-week “breathing space” for debtors looking to set up a repayment scheme, followed by a statutory repayment plan. There is currently no equivalent scheme elsewhere in the UK. In these countries arrangements to freeze interest and charges, and to suspend debt recovery and enforcement action, are made voluntarily between debtors and their creditors.

1.6 The Scottish Debt Arrangement Scheme

The Debt Arrangement Scheme (DAS) is a Scottish Government-backed debt management scheme which allows people to repay debt through a debt payment programme. It is available to individuals, sole traders, partnerships, certain limited partnerships, trusts, unincorporated businesses, certain categories of charities and certain corporate bodies.

The scheme is administered by the Accountant in Bankruptcy (AiB). The AiB is the Scottish government agency responsible for administering the process of personal bankruptcy and corporate insolvency, and implementing, monitoring and reviewing government policy in these and related areas, for example Protected Trust Deeds and diligence. The AiB reports to the Scottish Government’s Minister for Business, Innovation and Energy. Under DAS, a debtor commits to a programme of repaying their debts based on their disposable income. Debtors must seek advice and assistance from a money adviser before applying for a debt payment programme under DAS. This programme can last for any reasonable length of time depending on the amount of debt and how much the debtor can pay. Creditors will receive regular payments towards the debts owed to them under the terms agreed.

When the money adviser or DAS Administrator applies to creditors for approval, all interest, fees, penalties or other charges owed are frozen, provided the application is approved. Debtors are also protected from creditors taking any action against them to recover their debt. This is the ‘breathing space’ period to which this document refers.

The following debt payment programme under DAS allows a debtor to repay their debt over an extended period of time. It can be for any amount of money or for any reasonable length of time. A proposal is sent to all of the debtor’s creditors for consideration and they are given 21 days to respond with their acceptance or rejection to the terms of the programme. A charge is made to creditors for the provision of the payments distribution service and application fee.

A debtor must comply with a number of conditions, which are specified in legislation, once the debt payment programme has been approved.

Following a review of the Money Advice Service, the previous government agreed to consider whether some form of breathing space would be a useful and viable addition to the range of formal and informal debt solutions available to consumers and creditors. The new government has committed to introduce a six-week breathing space.

This call for evidence is the first step in implementing the manifesto commitment, and seeks to gather information to gain insight into how a six-week breathing space could best be designed.

1.7 About this call for evidence

The government is issuing this call for evidence to gain further insight from the debt advice sector and creditors about the scale of the issue, and about how best to design, implement, administer and monitor a six-week breathing space scheme and statutory debt repayment plan. Any views or suggestions that respondents wish to put forward on any of the questions, or other relevant areas to debt management not specifically covered here are also welcomed.

1.8 Who should respond to this call for evidence?

Given the broad potential impact of this policy, the government welcomes views from within the debt advice sector, private and public sector creditors, voluntary sector and wider society, as well as members of the wider public who wish to contribute.

Question 2

2. Questions for consideration

Accepted Answer

This document is broken down into sections designed to consider various aspects of a breathing space policy. Questions will cover and seek evidence on the design and implementation of both a breathing space scheme and a statutory debt repayment plan, as well as the potential impact of a breathing space on debtors and creditors. We welcome expert views and evidence on these points.

2.1 Access and entry into a breathing space

The following questions seek views on the commencement of a six-week breathing space – specifically, who should be able to access a breathing space, and how a breathing space should be activated.

The government is clear about the benefits of seeking debt advice, and is committed to ensuring that there is adequate provision for those who need it.

2.2 Access: the characteristics of breathing space participants

Question 1: In your opinion, how should the government decide who is eligible for a breathing space? In particular:

How should the government define serious problem debt in the context of a breathing space?
Should eligibility be determined by a set of defined characteristics, or should there be some discretion to determine eligibility?
If there is some discretion, who should be tasked with exercising it – a regulated debt adviser, or some other person?
Are there any other entry criteria and / or exemptions the government should consider?
Who should be responsible for regulating and enforcing access to a breathing space and how can disputes be resolved?

2.3 Entry: the trigger point for starting a breathing space

Question 2: What should be the trigger point for a breathing space? In particular:

Should a breathing space only be available for a person who seeks regulated debt advice?
Should individuals have demonstrated they have already taken steps to try to manage their debt?
If so, at what point should the six weeks start – for instance: once a breathing space has been requested, when the first advice session has occurred, or once adviser has confirmed a breathing space would be appropriate?

2.4 Features of a six-week breathing space

This section seeks views on the key features of the six-week breathing space from the perspective of debtors, creditors, and how the system will operate as a whole.

As set out in the introduction, the government and the FCA have taken steps to ensure that financial services and consumer credit firms should treat people fairly and have responsible lending practices, but the government recognises that there is more that could be done in this space.

Any breathing space scheme must be carefully designed. It must be easily accessible by those who need it most, be beneficial for those who are struggling to repay their debts, and simple and practical to implement for creditors.

2.5 How the scheme could work for debtors

The government acknowledges that serious problem debt is difficult to escape, and that there is no overnight solution. Entering into a breathing space, or any form of debt solution, could be a big choice for someone who is struggling to cope with their debt. As previously outlined, the government wants more people to seek debt advice, and is committed to ensuring that there is sufficient support for those who are in crisis. This support must be flexible; clearly, different people will require different means of support.

Given the range of existing debt management and relief solutions, it is important for the government to gain a better understanding of how a six-week breathing space would best work for someone who is already receiving support from their creditors, or who is planning to enter a formal debt solution, such as bankruptcy.

The government would also like to seek views on how a breathing space scheme could interact with the repayment of ‘priority debts’. These are the debts that have the most serious consequences – such as court or bailiff action, disconnection, or eviction – if they are not repaid, and are prioritised by debt advisers when advising clients on their debts.

Question 3: Should all debts be eligible for a breathing space?

How should multiple debts be treated; is there a priority order of debts which should be included as part of a breathing space arrangement?
Should some types of debt be exempt? In particular, where the debt is the late payment of a fine or penalty?
In particular, should debt owed by self-employed / microbusinesses be included?

Question 4: Should all interest, fees and charges be frozen throughout the breathing space period?

Question 5: What activities must the breathing space participant continue with to remain eligible? For instance:

Should they be required to attend advice sessions?
Should they be required to make any repayments during a six-week breathing space, if their financial situation allows it?

Question 6: Are there circumstances in which a breathing space period could end before six weeks, such as if an appropriate solution is found? Who could be responsible for enforcing this?

Question 7: Should breathing space protections only cover debts existing at the outset, or also include new debts arising during the six-week period?

Question 8: Should a breathing space be noted on a person’s credit file?

Question 9: How frequently should a debtor be able to access a breathing space, and what criteria should control the frequency of access?

2.6 How the scheme could work for creditors

There could be benefits for creditors as well as debtors in having a period of protection. As well as helping people get back on their feet, effective debt advice can support the economy, encouraging productivity and reducing bad debt write-offs.

However, the government is also aware that implementing a scheme of this type could have implications for firms, both in the implementation of the infrastructure to properly manage such a scheme, and in the potential financial pressures as a result of not collecting debt. It is important that we get this right.

As supporters of a breathing space have noted, apart from in Scotland statutory protection from interest, fees and charges is currently only available when a debtor enters a formal debt solution such as bankruptcy, an Individual Voluntary Arrangement (IVA), or debt relief order (DRO). Pursuing one of these solutions has an impact on a person’s credit file.

In implementing a breathing space scheme and statutory debt repayment plan there will need to be a mechanism to ensure that all creditors are made aware that a customer has entered a breathing space.

Question 10: What challenges would creditors face in implementing the scheme?

Question 11: Who would be responsible for notifying creditors that a customer has entered a breathing space? What updates are required during the breathing space period?

Question 12: Would a breathing space scheme impact on business revenue or have any other significant detriment?

Question 13: Should any creditor be exempt due to the size of their business?

Question 14: What benefits could creditors see as a result of a statutory breathing space scheme?

2.7 How the wider system could function

As previously outlined, the government and the FCA have taken steps to improve debt collection practice among creditors. The government, in implementing a breathing space scheme, needs to ensure that the design of the scheme will complement the existing systems and rules in place, rather than duplicate or work against it.

The government would also need to ensure that any scheme is being used by those who need it most, and that it is not able to be exploited. The manifesto committed the government to introduced the scheme “with the right safeguards to prevent abuse”.

Question 15: How could the government ensure that a breathing space works with and adds value to existing support structures?

Question 16: What safeguards are needed to prevent the scheme being abused?

Question 17: Should a breathing space be extended to Wales and Northern Ireland as well as England?

2.8 After a breathing space: statutory debt management plans

The following questions are centred on the period after a breathing space, when someone coming out a breathing space would be entering, or working towards entering, a future plan for dealing with their debts.

The manifesto commits the government to introduce a statutory debt repayment plan where appropriate, which would formalise existing debt management plans as a debt solution. A debt management plan can be used as a way of repaying debts. The client makes reduced payments to non-priority and/or unsecured creditors if they can’t afford the full contractual payments. These are typically set up by a debt adviser who negotiates a debt management plan with their client’s credits creditors. A debt adviser can also agree a repayment plan for priority debts using the client’s disposable income.

In Scotland, statutory ‘debt payment plans’ offered by the Debt Arrangement Scheme (DAS) are administered by the Accountant in Bankruptcy (AiB), an agency of the Scottish Government. As well as managing the DAS scheme, AiB is responsible for administering the process of personal bankruptcy and corporate insolvency, and for implementing, monitoring and reviewing Scottish government policy in these and related areas.

Question 18: How could a statutory debt repayment plan be administered?

Question 19: What challenges would be faced in administering a statutory repayment plan?

Question 20: What protections should apply during the statutory repayment plan?

For instance, should it protect debtors from interest and fees and charges or just a selection of the three? If a selection, which of these three should be prioritised?

Question 21: For whom and for what debt solutions will a statutory repayment plan be most appropriate?

Question 22: How will a debt adviser determine if a statutory repayment plan is appropriate?

Question 23: If a statutory debt repayment plan cannot be agreed, how could the behaviour of creditors be managed immediately after the breathing space?

Question 24: Should the repayment plan apply to all debt?

Question 25: For the included debts, should some debts be prioritised for repayment?

Question 26: What should happen if one or more creditors disagree with the plan?

Question 27: What activities must the statutory debt repayment plan participant continue with to remain eligible? Must they simply meet agreed repayments to remain eligible?

Question 28: How should changes in income be dealt with? Should it be possible to suspend a plan, or have reduced payments for a period of time?

Question 29: What happens if a plan fails? Should creditors be able to apply any interest, fees or charges that they were prevented from charging during the plan?

Question 30: Should there be a regime for sanctioning debtors where there is misconduct in relation to a breathing space or statutory debt repayment plan, as there is for bankruptcy and DROs?

Question 31: Should a statutory debt management plan be extended to Wales and Northern Ireland as well as England?

2.9 Evaluating the impact of a breathing space and statutory debt management plan

In implementing a breathing space and statutory debt management plan, the government is keen to identify and assess the impact of such a scheme - both for debtors and for creditors.

Question 32: For each of (1) a six-week breathing space, and (2) a statutory debt management plan, please describe in detail, and with supporting evidence, the positive impact expected through:

Improved access: How will it would encourage more people to seek debt advice earlier?
Better support: How will it would improve outcomes for customers who are already in problem debt?
Increased repayments: How will it increase the amount of debt repaid to creditors?

Question 33: Once implemented, how could the government determine whether the breathing space and statutory repayment plan have been successful? What metrics would be appropriate to use?

Question 3

3. Next steps

Accepted Answer

3.1 How to respond to this call for evidence

Please send your responses by 16 January 2018 to BreathingSpaceCFE@hmtreasury.gsi.gov.uk.

3.2 Confidentiality

Information provided in response to this call for evidence, including personal information may be published or disclosed in accordance with access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA) and the Data Protection Act 1998 (DPA) and the Environmental Information Regulations 2004.

If you want information that you provide to be treated as confidential please be aware that, under FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Treasury.

HM Treasury will process your personal data in accordance with the DPA and in the majority of circumstances this will mean that your personal data will not be disclosed to third parties.

3.3 Consultation principles

This call for evidence is being run in accordance with the government’s consultation principles.

The government’s consultation principles state that ‘timeframes for consultation should be proportionate and realistic’. This call for evidence will run for 12 weeks, which should be sufficient time for stakeholders and interested parties to consider and respond. The government considers that this is an appropriate amount of time to review the report and the questions raised, and contribute to this evidence-gathering exercise.

Question 4

4. Annex A: Full list of questions for consideration

Accepted Answer

Question 1: In your opinion, how should the government decide who is eligible for a breathing space? In particular:

How should the government define serious problem debt in the context of a breathing space?
Should eligibility be determined by a set of defined characteristics, or should there be some discretion to determine eligibility?
If there is some discretion, who should be tasked with exercising it – a regulated debt adviser, or some other person?
Are there any other entry criteria and / or exemptions the government should consider?
Who should be responsible for regulating and enforcing access to a breathing space and how can disputes be resolved?

Question 2: What should be the trigger point for a breathing space? In particular:

Should a breathing space only be available for a person who seeks regulated debt advice?
Should individuals have demonstrated they have already taken steps to try to manage their debt?
If so, at what point should the six weeks start – for instance: once a breathing space has been requested, when the first advice session has occurred, or once adviser has confirmed a breathing space would be appropriate?

Question 3: Should all debts be eligible for a breathing space?

How should multiple debts be treated; is there a priority order of debts which should be included as part of a breathing space arrangement?
Should some types of debt be exempt? In particular, where the debt is the late payment of a fine or penalty?
In particular, should debt owed by self-employed / microbusinesses be included?

Question 4: Should all interest, fees and charges be frozen throughout the breathing space period?

Question 5: What activities must the breathing space participant continue with to remain eligible? For instance:

Should they be required to attend advice sessions?
Should they be required to make any repayments during a six-week breathing space, if their financial situation allows it?