Following on from the recent budget, HM Treasury has published a consultation on two new consumer credit policies. The consultation builds upon the Government’s call for evidence which was concluded in January 2018 and on existing successful practice in the Scottish Debt Arrangement Scheme (DAS) [footnote 1]. The consultation offers businesses and organisations on both sides of the consumer credit marketplace the opportunity to have their say on how the new proposals should be implemented.
The consultation considers two proposed statutory measures designed to aid struggling debtors to manage their debt, by offering more lenient terms than a typical debtor’s credit agreement. The introduction of the policies, which formed part of the Conservative Party’s 2017 manifesto commitments, aligns with the Government’s interest in managing personal debt problems and providing proactive support to vulnerable consumers.
What is being proposed?
A new breathing space is intended to provide individuals that are struggling with debt commitments with legal protection from creditors so that they may seek debt advice and an appropriate solution. The policy objective underlining the proposal is to provide ‘sufficient protections’ to make debt sustainable and to encourage individuals to seek more debt advice, which the Government believes to be in the wider interest of society at large.
It is proposed that eligibility for a breathing space will be determined by certain criteria. The debtor must:
- have obtained debt advice from an FCA-regulated adviser or an organisation qualifying for an exemption from FCA regulation
- be assessed as being in ‘problem debt’ by a debt adviser
- not have been in a breathing space in the previous 12 months.
Statutory debt repayment plans (SDRPs) are intended to assist individuals by overriding the debtor’s existing repayment schedule with a manageable timetable for repayment discussed with debt advisers and creditors. Key aspects of DSRPs are that they provide protection from credit action, plus further accrual of interest, fees and charges is prevented, for the duration of the plan.
To be eligible for a SDRP the debtor will have to:
- have obtained debt advice from an FCA-regulated adviser or an organisation qualifying for an exemption from FCA regulation
- be assessed as being capable of repaying their debts over a reasonable timeframe
- obtain the agreement of their creditors to the plan, or otherwise obtain a ruling from the Insolvency Service requiring compliance by their creditors.
It is important to note that the two proposed measures would operate separately – a debtor could enter a breathing space without a plan, or vice versa. This is critical for lenders. The hope is that as the options will provide borrowers with two different tools with which to navigate their debts, rather than offering a limited singular pathway to recovery, borrowers will be able to more fully and flexibly engage with the repayment process, ultimately reducing the scope for financial hardship for consumers, whilst improving returns and minimising costs for lenders.
Practical implications
The proposed mechanisms will undoubtedly offer a lifeline to consumers on the brink of being overwhelmed by their debts. However, lenders may be concerned that the proposed schemes may mean longer delays to debt recovery, or as to how any ongoing cases will be affected.
As the proposals develop, lenders may wish to seek advice on how to adapt their recovery procedures to address breathing spaces and SDRPs. Though many lenders already offer various forbearance measures and similar opportunities to adapt the terms of loan agreements, these proposals will necessitate a reconsideration of lenders’ existing terms to ensure that the new regime replaces, rather than augments, the opportunities for borrowers to delay or alter their repayments.
The consultation, which ends 29 January 2019, provides an opportunity for interested parties to respond to the schemes’ proposed protections, eligibility criteria and administration. Responses can be sent to breathingspace@hmtreasury.gov.uk.
Walker Morris will monitor and report on developments.
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[footnote 1] See our earlier DAS briefing.
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