Personal insolvency framework review: R3’s views

12 December 2022

In early July, the Government issued a call for evidence on a review of the personal insolvency framework. 

Having called for this review for some time, we welcomed the opportunity to submit evidence and offer our thoughts on how it could be improved.

Making the framework fit for purpose

The fundamental purpose of the personal insolvency framework should be to strike the right balance between:

1. Preventing individuals from entering formal personal insolvency solutions where possible;
2. Rehabilitating indebted individuals who genuinely need financial help;
3. Penalising debtors who abuse the system; and
4. Protecting creditors’ interests and maintaining the confidence of lenders and other economic actors, through supporting the principle that debts should be repaid where possible.

While we believe that the three formal solution options offer the correct range of solutions to support the above aims, many indebted individuals do not enter the correct solution for their circumstances, most often due to lack of access to specialist debt advice and barriers around the cost of entry, meaning that framework in its current form is not fit for purpose.

Through engagement with our Personal Insolvency Committee, personal insolvency stakeholders including charities and debt advice providers, and our members, we submitted a 20-page call for evidence response highlighting our five key recommendations to improving the current framework.

Levelling the playing field

One of the key barriers to preventing individuals from accessing the right solution for their circumstances, we believe, is the cost of entering the procedure – particularly when it comes to bankruptcy.

To mitigate this barrier, we recommend that the fee for entering bankruptcy or a DRO should be removed for debtors that meet the criteria for these solutions and are on income-related benefits.

Additionally, another solution would be to have a single, equal-value, cost of entry for each of the three formal solutions – for example, of £60 or £70 – to be paid to the Insolvency Service when the debtor enters the solution.

Focusing on guidance

Another key issue indebted individuals face is a lack of knowledge about the personal insolvency options that are open to them.

We would support the introduction of a single online gateway, to be overseen by the Insolvency Service, if it were to act as a sign-posting hub where individuals could receive tailored guidance and pathways to specialist and regulated advice.

Expanding the debt advice exemption

Given the potential rise in individuals in financial distress as a result of the current cost of living challenges, it is vital that adequate numbers of qualified and regulated debt advice sources are available to individuals.

In our consultation response, we explain how the constraints imposed by the FCA authorisation regime for regulated consumer credit activities cause problems for both people in financial difficulty and the insolvency profession, and call for the FCA to expand the debt advice exemption so that licensed IPs are able to provide debt advice even where they do not contemplate an appointment in a subsequent procedure.

Allowing movement

The current framework does not account for the reality that indebted individuals’ circumstances can change very quickly. For example, the recent cost of living challenges may mean that a significant number of individuals entered into a solution which they won’t be eligible for a few months down the line, as they incur more debts due to an increase in their outgoings.

Meanwhile, the change in financial criteria for DROs last year has meant that a number of individuals in IVAs would now be eligible for a DRO, when they previously would not have been.

To help solve this, we recommend the introduction of a simple mechanism to allow indebted individuals to transfer between the different statutory procedures.

Extending the bankruptcy process

To align with the framework’s purpose, it is important we can distinguish between those indebted individuals who have accrued their debts recklessly and/or have sought to hide their assets, and those who have merely been the unfortunate victims of circumstance.

Our view is that the current 12-month term of bankruptcy does not allow for this distinction to be made, nor is it a sufficient period of time to properly investigate the actions of the indebted individual for possible misconduct.

A return to a three-year bankruptcy term, with the option for the debtor to apply for this to be reduced to a two-year term, would restore the balance between debtors and creditors, and bring our framework in line with those in other countries, such as Australia.

Next steps

A successful personal insolvency framework should strike a balance between allowing people to get back on their feet by relieving them of insurmountable indebtedness, while seeking to return to creditors what is owed to them – and we believe our recommendations will go some way to achieving this.

While we don’t expect to see movement on this issue before the end of the year, we will ensure that the views of the profession are heard at every opportunity this issue continues its policy journey.

You can read our full consultation response here.