Treasury publishes responses to call for evidence on implementation of problem debt breathing space scheme

On 19 June 2018, the Treasury published its call for evidence response (Response) in respect of the government’s proposed 2017 manifesto pledge to introduce a ‘breathing space scheme’ for serious problem debt (Scheme). The call for evidence for the Scheme was published in October 2017 (Call for Evidence), and the Response summarises the feedback received from over 80 unique respondents. A consultation paper is expected later in the summer with proposals for the Scheme.

The Scheme, broadly, consists of two aspects:

• The first part is designed to give those in ‘serious problem debt’ the legal right to a six week protection period, to receive debt advice and enter into a sustainable debt solution (i.e. to provide the individual with a six-week ‘breathing space’ period).
• The second part is a proposed a statutory debt repayment plan (SDRP), which would enable individuals with unmanageable debts to enter into a debt repayment agreement with creditors to repay within a realistic timeframe. During the SDRP period, the individual would receive legal protections from creditor’s taking enforcement action.

It is noteworthy that ‘problem debt’ was broadly defined in the Call for Evidence as instances where debt and arrears absorb an ‘excessive proportion’ of income. One of the requested inputs was a more precise definition of this, and any such definition will presumably be incorporated as part of any subsequent consultation.

Some of the key issues raised in Response were:

• ‘Most’ respondents felt that an individual should have to seek debt advice before entering into a breathing space period, although there may be circumstances where this is not appropriate.
• ‘Some’ respondents argued that there should be some specified criteria (in addition to speaking to a debt advisor) which would determine eligibility for a breathing space period. Some, however, some felt that this was inappropriate given the complexity and wide variety of individuals struggling with problem debt. ‘Many’ respondents felt there needed to be an element of discretion in determining eligibility for a breathing space period.
• Respondents ‘broadly thought’ that all of an individual’s debts should be caught within the breathing space, aside from certain, specific, often sensitive debts (such as child maintenance payments).
• There was a ‘divergence of views’ regarding freezing of interest, fees and charges during the breathing space period.
• ‘Most’ respondents felt that the breathing space should be entered on a person’s credit file.
• A ‘wide variety of structures’ were considered for the administration of the breathing space.
• Although a ‘number of respondents’ considered that a single creditor should not have a veto on an individual entering an SDRP, there was ‘less consensus’ about the course of action to be pursued where multiple creditors objected to a SDRP.
• ‘Most’ respondents felt the SDRP staying in place should be contingent on an individual keeping up with agreed repayments and, if an SDRP were to fail, a ‘number of respondents’ suggested that creditors would be able to revert to their usual collection practices.
• ‘Most’ respondents felt that collection activity should be stopped, and interest fees and charges frozen, during an SDPR period and that all of an individual’s debts should be included (aside from certain, specific debts similar to those for the breathing space period). There was ‘less agreement’ on whether interest, fees and charges could be applied retrospectively for during the period of the SDRP, should the SDRP fail.
• There was ‘less consensus’ on how the Scheme could be appropriately administered for creditors.

The Treasury has stated it will consult on proposals to design the Scheme later this summer, with regulations establishing the scheme expected to be made during 2019.

DLA Piper Comment: The issue of problem debt has echoes of what the UK Financial Conduct Authority is doing in areas of the consumer credit market since it took over the regulation of this area from the Office of Fair Trading in 2014.

By way of example, the FCA recently announced a package of remedies follow its Credit Card Market Study, including looking at issues of persistent credit card debt and early intervention mechanisms for credit card firms (more details can be found here).

Although broader in scope than merely for financial services firms, any Scheme would likely have the effect of increasing the pressure on consumer credit firms operating in this space to calculate a customer’s affordability at the outset and during the ongoing relationship with a customer – to avoid ending up subject to breathing space or SDRP moratoriums. It will also be important to ensure that firms’ collections teams are alert to the issues that such a Scheme could raise.

The consultation, when it comes out this summer, should be on the radar for such firms who should be prepared to respond if they have particular concerns.