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12/02/2018

Breathing Space: R3's consultation response

Over the past year, a combination of poor real wage growth, inflation, and rising consumer debt levels have contributed towards a troubling picture of financial health for many individuals in the UK.

In August 2017, R3’s Personal Debt Snapshot - our tracker of how British adults feel about their personal finances - found that two-fifths (41%) of Brits are at least fairly worried about their current level of debt, with a similar proportion (40%) saying they often or sometimes struggle to make it to payday.

And earlier this year, the Insolvency Service’s 2017 figures on UK levels of personal insolvency showed an increase of 9% on 2016, totalling 99,196 cases throughout the year.

Rates of personal insolvency have been steadily on the rise since mid-2015, and in light of these increases, R3 is keen to see more being done to encourage financially distressed individuals to seek accurate and effective advice from properly qualified advisers at an early stage.

It was therefore welcome when, in October of last year, the Treasury issued a call for evidence on how best to design and implement a six-week ‘breathing space’ scheme for individuals in debt – a scheme R3 has long campaigned for and which will be an effective method to relieve financial pressure from many indebted individuals across Northern Ireland, England and Wales.

You can find R3’s full response to the consultation on R3’s website here.

What is a breathing space, and why is it needed?

Broadly speaking, an ideal breathing space scheme would provide an indebted individual with a period free from creditor action - freezing all repayments and charges, along with any creditor enforcement action - while an individual seeks advice on their financial situation from a qualified and professional source. This would help people choose the most appropriate debt solution for their needs in a considered, informed and timely manner.

Despite a range of notice periods provided by creditors to indebted individuals, R3 is concerned that those in financial distress do not always opt for the most appropriate solution for their particular needs. This could be due to poor or incomplete debt advice from an unprofessional source, or because either creditor pressure or an individual’s distress regarding their situation leads them to accept the first option presented, when it may not be the best for their particular circumstances.

Although most insolvency practitioners already offer an hour of free advice to those facing financial difficulty, the introduction of a six-week period free from creditor action would ensure there is ample time available for people to fully explore the range of solutions open to them, through close engagement with fully licensed and regulated professional advisers, in a pressure-free environment.

For a breathing space to provide the greatest benefit, R3 suggests that the scheme be open and available to all, and should include all forms of debt. The scheme should also be extendable by an additional 28 days for particularly vulnerable individuals, if deemed absolutely necessary by the regulated adviser overseeing the breathing space. However, it is important to note that only one breathing space period should be available to an individual within a 12 month period, to ensure the scheme is not abused as a means to avoid paying debt. As well as this, the individual should not currently be part of a formal insolvency procedure and have not been part of such a procedure in the preceding 12 months. Any further criteria would risk making access to a breathing space more difficult for those most in need.

Why six weeks?

There has long been a debate about the most appropriate length of time for the respite period to run, with some commentators suggesting a far longer time-frame, from several months up to a year. However, a breathing space period is not a debt solution. There are already a number of effective solutions available to an indebted individual; the breathing space is there to give people time to consider their situation and decide on the particular solution which works best for them.

Any breathing space needs to strike a balance between providing protection for potentially vulnerable indebted individuals on the one hand, while, on the other, still maintaining the fundamental principle of repaying debts.

Finding this balance is vital, as a notably long period free from any creditor action could risk causing lenders to tighten their initial lending criteria, which would restrict access to and increase the cost of credit.

R3 believes that a six-week breathing space period, as proposed by the Government, would provide the correct balance.

Statutory Debt Management Plans

The Government’s call for evidence included a proposal to introduce a statutory Debt Management Plan (DMP). A debt management plan is an agreement between an individual and their creditors to pay all of their debts, and is not a formal insolvency procedure. While personal insolvency procedures allow for debt forgiveness, this is usually not the case with a debt management plan. Currently, these plans sit outside the statutory framework in England, Wales and Northern Ireland.

However, it is important not to conflate a statutory DMP with a statutory breathing space – the two are distinct processes, either of which can be implemented without the other, and they must be treated as such.

While R3 believes there is a clear-cut case for the introduction of a breathing space scheme, there is notably less evidence to support the introduction of a statutory DMP within England, Wales and Northern Ireland. Tighter regulation of the existing debt management plan landscape, rather than the introduction of a new procedure, would be the most obvious first step to effect change. As a starting point, this should include the establishment of a central register of all DMPs: there is currently no data available on the number of debt management plans in use, their length, or their outcomes.

The proposed statutory DMP seems similar to the Debt Arrangement Scheme (DAS) already in place in Scotland. However, the Government should remember that what has worked in one place may not necessarily be the best option elsewhere, particularly in light of the differing regulatory and market environment in Scotland compared to Northern Ireland, England and Wales.

Next steps

Although the call for evidence closed on the 16th of January, the Government wishes to involve the proposed new Single Financial Guidance Body (SFGB) in finalising the precise details of any breathing space scheme. Given that the SFGB’s formation will depend on the passing of the Financial Guidance and Claims Bill, currently at Committee stage within the House of Commons, it is unfortunately likely to be quite some time before any further action is taken.

In the meantime, R3 will continue engaging closely with the Government and parliamentarians to ensure the correct balance is found between the needs of indebted individual and of lenders, and that those in financial distress will not be restricted in accessing the scheme.

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see www.r3.org.uk for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
     
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.