Despite the numerous reforms, casework has shown up many failings of the personal insolvency system in Scotland, and a structure based more on principles and less on regulation is needed

by Alan McIntosh

(First Published in the January edition of The Law Society of Scotland's Journal. See here.

Personal insolvency in Scotland is a dysfunctional market. Thousands of debtors and small creditors each year receive a poor service, which although maybe not representative of the whole industry, means significant numbers of service users are being failed.
Poor services take the form of some firms refusing discharges from protected trust deeds (PTDs) in up to 88% of cases, almost always meaning no dividend for creditors.
We have also found in a number of cases, particularly creditor sequestrations, where debtors have assets and may be solvent, justified concerns in relation to overbilling, with strong evidence of “time dumping” to increase fees. However, challenging such fees is prohibitively complex and costly, which leaves these cases impenetrable to any scrutiny.
Equally, statements that there is no desire for families to lose homes except where absolutely necessary sound hollow, when in almost two thirds of cases we have undertaken, this outcome is avoided once independent advice and assistance is provided.
In our experience, attempts to intervene have been less welcomed in cases where the Accountant in Bankruptcy (AiB) is the trustee than with private trustees, who tend to be more prepared to take a commercial, commonsense approach.
We have no way of knowing whether similar results would be produced over a larger group, but feel it is incumbent on the Scottish Government and the industry to find out. Even if not, it would bring a better understanding of the reasons why and the frequency with which people lose their homes: at present there is a dearth of such information among the plethora of statistics collected by AiB, indicative in itself of the importance afforded this issue.
Arguments for more regulation, however, predictably meet resistance from practitioners. They claim they are already overregulated: that resonates as true when you consider the layers of regulation that they need to comply with from professional bodies, AiB and, where it applies, the Financial Conduct Authority.
Practitioners are frustrated with the cost and burden of constant legislative change, which never seems fully to address the evil it targets, but takes a broad-brush approach to all in the industry, and does not reduce the scope for new controversial practices to be developed, such as in relation to trust deeds where the debtor is balance sheet solvent or is rich in equity, which does not get realised for creditors.
Yet bad practice continues: debtors are sold solutions, not advised; homes are lost when not necessary; dividend levels for creditors in PTDs, AiB is reporting, are plummeting. All of which means the arguments for further reform are overwhelming.
The problem is the market innovates and adapts faster than legislation and those with supervisory responsibilities, resulting in poor regulation despite the layers of rules. Equally, professional bodies protest they cannot discipline members, as those with supervisory responsibilities fail to report them, claiming no rules have been broken, while complaining they are unhappy with practices.
Even from discussions with AiB, it is hard not to sense that regulatory fatigue has set in. This at a time when all the evidence points to the need for further reform. Debtors feel a similar fatigue when trying to avoid the sale of their homes: a sense that obtaining independent advice is pointless, that there is no point engaging.
The inevitable conclusion is that a new approach is needed, one focused more on higher level principles and ethics than a strict rule based system. Less tinkering, but a peeling back of the layers of regulation to allow less burdensome but more effective oversight. Arguably, AiB needs to consider whether the remedies would be better served by their retreating from some areas where they are not effective.
Debtors need to obtain independent, specialist advice. Too often it is assumed every option has been exhausted, when it hasn’t. We have seen cases where debtors pay thousands, borrowed from family members, but are not linked to any specific process, like recall or abandonment of a property. Sometimes it is nothing short of a ransom payment to avoid action to sell a home, when the action is raised later anyway.
The personal insolvency industry needs change, but not just for the sake of it and not just more rules to correct for a lack of foresight last time, otherwise we will always be chasing solutions. It needs regulatory leadership to be provided which protects the interests of all stakeholders.