Debt Arrangement Scheme - returning funds to the free advice sector: consultation

1. Introduction

This Scottish Government consultation builds on two earlier consultations carried out by Accountant in Bankruptcy (AiB). The response to those earlier consultations strongly supported moving to a new model for delivering the Debt Arrangement Scheme, and the Scottish Government will be bringing forward regulations to implement those changes shortly. Amongst those changes - described in more detail below - were proposals both that all debt payment programmes under the scheme should pay the same flat rate fee, and that AiB should be able to be a payment distributor. This raises the possibility of AiB receiving fee income from plans in excess of its costs. The earlier consultations backed a proposal that any such surplus should be returned to the free advice sector to help offset the sector's costs in helping people access the scheme. This current paper considers how this might work in practice.

Background

1.1 AiB's "Building a better Debt Arrangement Scheme" consultation was launched on 31 October 2018 and closed on 24 January 2019. It contained proposals which were developed after careful consideration of feedback provided by the 2018 DAS Regulatory Review Working Group ('the Group') and AiB's 2018 stakeholder events. Further information on the group, including minutes of meetings and discussion papers can be found on our website at https://www.aib.gov.uk/about-aib/stakeholder-working-groups/das-2018-regulatory-review-working-group.

1.2 That consultation paper was aimed at those familiar with the detailed working of the Debt Arrangement Scheme (DAS) - more general readers may find it helpful to refer back to "The Way Forward" before considering the areas covered by the consultation.

1.3 At present in DAS, AiB appoints a panel of payments distributors (PDs) who are contracted to facilitate the payment process between a debtor and their creditors. In the majority of cases, the PD organisation and the money adviser organisation are different. This can be confusing for creditors and debtors, who may in any event prefer to deal with one organisation to obtain advice, support and information about their case rather than have to discuss personal information with more than one adviser. For a more holistic approach, AiB proposed that private sector money advice organisations or free-to-client advice organisations (known as a Continuing Money Adviser - CMA) with appropriate FCA permissions will manage the entire DAS process for their clients.

1.4 The consultation also explored the prospect of AiB acting as a payments distributor (PD) for DAS. This would enhance the resilience of the PD process, mitigating the risk of any organisation either no longer offering DAS, or having their permissions removed, as AiB would be able to step in to discharge their payments distribution responsibilities. A significant majority of respondents to the consultation agreed that AiB should offer a payments distribution service.

1.5 AiB have published the Building a Better Debt Arrangement Scheme consultation response, which provides a summary of the responses to the questions raised in the consultation.

1.6 AiB will take forward recommendations for Ministers for legislation to empower AiB to exercise the PD function and allow DAS clients to nominate their own PD (via their money adviser) where the PD holds the relevant FCA permissions. Where no PD is nominated in a case, AiB will be appointed PD by default. AiB will also offer the PD function for cases where an existing PD ceases or is unable to act.

1.7 As noted in the consultation paper, where AiB is nominated as PD, it will charge the statutory administration fee for this function but will only seek to recover its costs. Any excess funds will be re-invested in the free advice sector.

1.8 This paper is intended as a form of sub-consultation to address the practicalities of this process. It sets out options on how this might work and seeks opinion on the options, as well as suggestions for any alternatives. It also takes account of issues highlighted in the Scottish Government's Review of Publicly-funded Advice Services in Scotland, published in February 2018 ('the Advice Funding Review'), and reflects comments about the proposed strategy received from respondents to the 'Building a Better Debt Arrangement Scheme' consultation.

1.9 The origin of the thinking behind these proposals is that the DAS administration process requires significant money adviser administrative effort in dealing with the application stage through to completion and any changes of circumstances along the way. In recognition of the effort involved supporting DAS, there is an opportunity to augment the funding available to the free advice sector by allocating any surplus funds generated by AiB's payment distribution service to them. The scheme currently provides no mechanism by which the free sector can be recompensed for the cost of their administrative effort. The revised payments distribution arrangements will allow the success of DAS to contribute to the cost of advice provision, widening access to the scheme by increasing the number of free sector advisers. There is a strong correlation between the availability of advisors in a particular area and the number of DAS applications from that area, suggesting we need to do what we can to enable more free advice to be provided if DAS is to reach all the people who need it. In theory, the costs on individual organisations will be linked to the number of clients they advise about and support through DAS, and any mechanism might aim to reflect that. On the other hand, we do not want to provide incentives for advisers to guide people towards any one particular option, and we do not want to set up a system that is costly and time-consuming to administer - since that would defeat its aim.