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Scottish Government - Protected Trust Deeds: Improving the Process

Executive Summary

The Association of British Credit Unions Limited (ABCUL) welcomes the Scottish Government’s consultation on improving the Protected Trust Deed (PTD) process, and we are grateful for this opportunity to convey the views of Scotland’s credit union movement.

Credit unions have expressed concerns about the administration of PTDs and their impact on credit unions’ operations for several years. Following input from credit unions across Scotland, this submission offers the credit union perspective on the questions asked in the consultation paper, highlighting the main areas of concern for credit unions and offering some additional suggestions to further improve the PTD process, including:

  • ABCUL broadly welcomes the PTD Guidance, but would prefer it to be legislative. In particular, the Accountant in Bankruptcy (AiB) should have more powers to regulate the fees charged by trustees and their agents.
  • We would like it to be a formal requirement that the Debt Arrangement Scheme (DAS) must always be considered, and only if demonstrably inappropriate for that debtor should a PTD be proposed.
  • PTDs should be allowed to run for a longer period of time relative to the debt to allow for a greater amount of funds to be ingathered and distributed to creditors; at least 5 years rather than 3.
  • The trustee should be required to declare whether any third parties receiving agency fees are from a related company to ensure full transparency.
  • No PTD should ever be allowed to deliver zero to creditors; a minimum dividend should be introduced, and a minimum percentage of ingathered funds distributed to creditors should be established; for example, 50% of all ingathered funds.
  • A new “Scottish Common Financial Statement” should be developed with broad stakeholder input to serve as the industry-standard budgeting tool, and in recognition of the unique status and value of credit union membership, contributions to a credit union account should be a category within it.
  • If a creditor has devoted time and resources to secure an earnings arrestment, then it is not right that this should be declared void when a PTD is agreed.
  • Agents’ “fact finding fees” prior to the granting of a trust deed should not to be treated as an outlay of the PTD and effectively charged to the creditors. Neither is it appropriate to charge a further fee for the trustee’s verification of the information gathered by that agent.
  • An “exclusion period” should be established so that loans taken out within say 8 weeks prior to the initiation of a trust deed should be excluded from that trust deed as there should be a presumption that the borrower withheld relevant financial information which prejudiced the lender’s position.

Introduction

The Association of British Credit Unions Limited (ABCUL) welcomes the opportunity to submit a response to the Scottish Government’s consultation on improving the Protected Trust Deeds process. ABCUL is the main trade association for credit unions in Scotland, England and Wales. As a co-operative itself, ABCUL is owned, funded and democratically controlled by its member credit unions. The majority of Scotland’s credit unions are ABCUL members, and they in turn serve the majority of Scotland’s individual credit union members.

Credit unions are not-for-profit financial co-operatives owned and controlled by their members for whom they provide safe savings and affordable loans. Credit unions provide inclusive services to the whole of their communities rather than simply the better-off. Increasingly, some credit unions can offer more sophisticated products such as pre-paid debit cards, current accounts, cash ISAs and mortgages.

There are currently 109 credit unions in Scotland serving around 250,000 members, holding £210 million in savings and lending £180 million. ABCUL’s response is also supported by the Scottish League of Credit Unions (SLCU). Together, ABCUL and the SLCU represent 96 of Scotland’s 109 credit unions.

Scotland’s credit unions have had concerns about the operation of PTDs for several years, which have been raised with the Scottish Government on a number of occasions. Although the proportion of all debt written off in PTDs which was owed to credit unions is low compared to the losses incurred by the major banks and other large scale creditors, the amount is very substantial to credit unions and can have a serious impact on their operations.

Credit unions occupy a unique position in Scotland’s financial services landscape as – while still making appropriate checks to ensure responsible lending – they are often prepared to lend to people who may not be able to access credit from other sources, and do so at ethical and affordable rates of interest. As responsible financial services providers regulated by the Financial Services Authority (FSA), credit unions of course make provision for bad debt. However, the long term sustainability of credit unions’ business depends on borrowers repaying their debts in full.

This may seem an obvious statement regarding any lender. However, considering that high cost lenders charge exceptionally high rates of interest precisely because they expect a substantial number of borrowers to default, and many banks restrict their lending only to those they regard as the most credit-worthy customers, the credit union model of lending based on the ability to repay – including to the financially excluded – in the expectation of full repayment is actually different.

Credit unions are also unique in that they are the only lenders in the UK that operate under an interest rate cap. Credit unions cannot charge more than 2% per month on a reducing balance (26.8% APR), and in truth, many of Scotland’s credit unions choose to charge 1% per month (12.7% APR) or sometimes even less. Lending a relatively small amount at an ethical rate means that the income generated from the loan is fairly small – precisely the reason why many mainstream lenders simply do not offer low value, short term loans. Yet income from loans is crucial to the sustainable running of credit unions.

To give an example, a loan from a credit union for £1000 over a year, charged at 1% per month on a reducing balance, will generate around £65 in income from interest for the credit union. If that debt is written off, then the credit union will have to make a further 16 such loans just to recover the full amount of capital lost. That may not sound like a lot, but when you consider that a number of credit unions are based in small communities with just a few hundred members, the impact of this loss on the credit union is very significant and can have a real effect on the credit union’s capacity to pay a dividend to savers or to lend to other people in need.

Credit unions do of course recognise that sometimes people fall upon hard times and are genuinely unable to repay all their debts on time. As co-operatives and ethical lenders, credit unions have a proud track record of helping people restructure their debts and maintain payments at an affordable level. Indeed, over the years, Scotland’s credit unions have helped hundreds if not thousands of people who were at real risk of losing their homes.

It is therefore a source of immense frustration for credit unions when a member enters a trust deed when no effort had been made to first come to an arrangement with the credit union, and a substantial amount of money – loaned from the savings of other members – must be written off as unrecoverable, given the extremely poor record of any dividend of substance being received from the trustee.

In what are difficult economic times for individuals, small businesses and social enterprises alike, we welcome the Scottish Government’s stated intention to make the PTD process fairer, to minimise the impact of debt relief on the wider Scottish economy and to facilitate the financial rehabilitation of individuals forced to seek debt remedies. As local, ethical co-operatives often prepared to serve people whose only other option would be high cost alternatives, credit unions are especially well placed to support this financial rehabilitation, and we hope the Scottish Government will recognise the unique and positive role credit unions play in Scotland’s economy and in communities across the country.

ABCUL would like to make it clear that we recognise that the vast majority of people requiring to enter a PTD do so because they have fallen into very difficult financial circumstances, and we support the availability of appropriate debt relief for those who cannot repay their debts. Similarly, we recognise that most insolvency practitioners administering PTDs do so in line with the appropriate guidance and good practice. However, as the Scottish Government acknowledges, there are a number of failings in the PTD process, and so it is upon those examples of poor practice and unfairness that we are focusing in this paper.

In this submission, ABCUL is conveying the views expressed to us by Scotland’s credit union movement on the topics raised in the Scottish Government’s consultation, and we will also be raising some ideas and suggestions which we believe would further improve the PTD process not only for credit unions, but for all involved.

The full response is available to download right hand side of the screen.