A Choice of Paths - Options to Manage Over-indebtedness and Multiple Debt
Comments from ACCA
October 2004
ACCA is pleased to comments on the Department's consultation paper of the above title.
The whole question of how to deal with consumer indebtedness must be considered as part of a wider strategic approach, which we recognise has already been attempted by the Department via its 2003 White Paper �The Consumer Credit Market in the 21 st Century�.
The wider context must include consideration of the consequences for creditor interests, and thereby for business confidence, of a regime in which debtors are too easily able to walk away from their debts. Whether debts are written off completely, compromised or simply deferred for a period, there will be adverse consequences for any creditor's cash flow. According to the 2004 R3 survey of corporate insolvency, bad debts and cash flow problems are currently factors in the failure of nearly in one in five UK businesses. In considering how to help debtors manage their financial predicaments better, therefore, the Government must avoid destabilising commercial equilibrium by making creditors suffer unreasonably.
The wider picture must also include consideration of the extent to which individuals are allowed, indeed encouraged, to get into debt in the first place and what steps can be taken at government level and by the credit industry to ensure that individuals do not take on debt which they may not be able to cope with.
The White Paper suggested that only 20% of households get into financial difficulties over credit and only 7% have levels of credit use which are associated with over-indebtedness. But the trend in consumer debt continues to rise. By the Summer of 2004, the total of UK consumer debt surpassed £1 trillion, made up of debts owed on mortgages, loans and credit cards. The Bank of England, in its review of Financial Stability in June, drew attention to the rapid rise in the debt-to-income ratio of UK households and warned that the now historically exceptional level of consumer debt makes consumers increasingly vulnerable to unexpected rises in interest rates or falls in income.
In the context of these trends, government and the credit industry must play their parts in encouraging prudent financial behaviour and discouraging conduct which might lead consumers into debt - ultimately, action of this kind is the only way of avoiding large-scale consumer debt. We are concerned, however, that Government policy and action in this area may currently be inconsistent.
In particular, the Government's policy of promoting a substantial expansion of the gambling industry in the UK appears to us to fit uncomfortably with its consumer debt strategy. With research suggesting that, already, the money spent on gambling in the UK has risen to £40 billion, largely fuelled by an increase in internet-based gambling, the planned expansion of the industry, with promised million pound jackpots, can only encourage this figure to rise. Adverse consequences for levels of personal debt and even addiction are, in our view, very likely. The Government's own estimates suggest that expenditure on gambling will rise by up to 45% over the next five years. The Government must be prepared to accept that the UK 's consumer debt problem may be exacerbated as a consequence of its liberal policy on gambling.
The credit industry itself should also be made to act more responsibly both in the way that it offers credit and the amount of credit that it offers its customers.
We would therefore urge the Government, in planning its policy with regard to consumer debt management, to pursue a more co-ordinated approach in which
the opportunities for individuals to become burdened with debt is better controlled and in which there is a reasonable balance between the financial rehabilitation of debtors and the legitimate interests of creditors.
Our responses to specific consultation questions posed in the document are set out below:
Q1 Are repayment schemes inappropriate for the �can't pay' group?
Where a debtor genuinely has no assets or source of income from which to pay off his debts, there seems little point in imposing repayment orders which, from available research, are subject to widespread non-compliance anyway.
Q2 Will debt relief provide an opportunity for rehabilitation?
Debt relief would provide respite from the debts which were covered by a particular debt relief order. But proper rehabilitation would be dependant on the debtor acknowledging and learning from the mistakes that were made in the past. This process would also require proportionate responses from the law and from the credit industry, and a programme of education to inform potential debtors of the consequences of applying for debt relief.
Q3 Is the £50 per month income figure realistic and acceptable?
We agree that the level currently used with regard to income payments orders would be an appropriate figure to adopt in the context of debt relief orders. With regard to paragraph 40 of the document, however, we suggest that �misconduct' will need to be interpreted sufficiently widely so as to cover not only deliberate wrong-doing on the debtor's part but also obvious cases of irresponsible conduct which have caused or contributed to the individual's debt crisis.
Q4 Is providing debt relief an appropriate role for the court?
Expense of administration is clearly a significant factor in devising an effective debt relief scheme. On the assumption that costs can be reduced, and provided there is no real need for the court to intervene, we see no reason why an out of court solution should not be explored.
Q6 Is an Enforcement Restriction Order (ERO) necessary to assist the �Could pay' group?
It is not obvious, from the document, that the ERO would be the answer to the financial predicament of debtors in this group. It is suggested that, once made, the ERO would offer the debtor protection from enforcement action by creditors for the duration of the order, which would be six months (extendable). Moratoria are of course already available to individual and small company applicants for voluntary arrangements. The only difference between the VA and
the ERO therefore, in terms of protecting the debtor from enforcement action, would lie in the involvement of creditors in the moratorium process. In the case of the VA, the creditors would need to give their formal approval to the protection, while in the case of the ERO, the debtor would have only to show that he had tried (and presumably failed) to negotiate an agreement with his creditors.
Q7 Do you agree with the conditions that should be met for the granting of an order?
The conditions set out in paragraph 51 appear to be focused and sensible.
Q8 Is up to 6 months the correct period for an ERO?
6 months seems to us to be a reasonable period for the debtor to prove to his creditors that his financial circumstances were improving.
Q9 Should there be scope for a second order, for a further 6 months, to be granted?
In our view, if the debtor has been unable to prove to creditors that his circumstances have improved within the 6 months duration of the order, only in exceptional circumstances should the order be capable of extension. This leads us to query whether the involvement of the court, in ruling on whether the conditions set out in paragraph 55 had been met, would prove too expensive an addition to the procedure.