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Scotland has been at the forefront of something of a sea-change in the
perception of debt and debt recovery in recent years and as a consequence the
revenue management sector has been living through innovative times. In recent
years, we have seen the abolition of poindings and warrant sales and their
replacement by alternative schemes to support the repayment of debt, as well as
changes to diligence and enforcement. However, perhaps the most significant
event has been the enshrining in statute of the responsibility of Government to
facilitate debt repayment and a role for money advisers.
The shift in public and political recognition of debt management and the need
for measures to address the difficulties faced by those unable to keep up with
repayments owed much to the publicity surrounding poindings and warrant sales in
the 1990s. Political campaigners seized on these emotive issues. It was
suggested that poindings and warrant sales were bringing untold misery to poor
households, actions that were unacceptable in a modern humane society. Yet the
reality was somewhat different.
The Debtor (Scotland) Act 1987 The Debtor (Scotland) Act 1987 had already changed things.
The individual
possessions of debtors could no longer be sold on their doorstep, under the
critical eye of neighbours who objected to the indignity being imposed on their
neighbours by sheriff officers. But politicians were forced into the
position of being seen either to support poindings and warrant sales, or to vote
for their abolition, irrespective of the consequences.
The result was the
pushing through the Scottish Parliament of a Member's Bill in 2000, which
abolished poindings and warrant sales in December 2002.
The Scottish Executive recognized that abolition, without its replacement by
other measures to address non-payment of debt, could be a charter for people
simply to choose not to pay their debts with no consequences, so a balance was
sought. It brought forward a three-pronged approach to tackle the whole issue of
debt recovery, based on a scheme to support debtors in repaying debt and a new
regime of 'attachments'.
The Debt Arrangement and Attachment (Scotland) Act 2002
The Debt Arrangement and Attachment (Scotland) Act 2002 introduced in January
2003, set out the main features of a Debt Arrangement Scheme, or DAS, which
allows debtors to repay debts through single regular payments under debt payment
programmes. Enforcement procedures will be suspended whilst debts are being
repaid in this way. Those with enough excess income to be able to pay off their
debts and those who choose to take part in the DAS will be immune from bank
arrestment and will also receive money advice about managing their debt in the
future.
Debtors opting for DAS must repay all their debts, in full, by regular
installments. This could take several years – as a guide, the average current
voluntary repayment plan usually lasts for seven years. For the duration of the
DAS, the debtor will be on the DAS register, and will be most unlikely to be
able to obtain further credit. Creditors who knowingly lend to DAS debtors will
not be able to enforce their debt until the DAS has come to an end.
The Scottish Executive is currently working with money advice agencies to ensure
appropriate guidance is available to those who will work with debtors taking
part in the scheme. A system for collecting payments is also being set up.
However, since DAS does not come into force until later this year, probably in
November, the debt recovery sector finds itself in a form of limbo.
The Act also introduced a new method of diligence, the range of legal procedures
which allow a creditor to enforce payment (where the debtor does not pay
voluntarily) against the assets of the debtor. The new form of diligence,
'attachment', can be used against the moveable property of a debtor for the
recovery of money owed.
Special procedures were also set out for the use of an Exceptional Attachment
Order, which can be implemented when a creditor seeks to attach moveable
property of a debtor kept in a person's home. Various measures designed to
assist debtors, for example through the provision of money advice, were also
included, so that attachment could only be used as a last resort.
A new approach
But the changes made to the enforcement process as a consequence of the
legislation have made it extremely difficult to navigate successfully, as well
as prohibitively expensive. As a result, creditors now find it very difficult to
enforce debt recovery. The balance has clearly shifted too far towards the
debtor and away from the creditor.
This new approach by the Scottish Executive to debt resolution has a major
weakness. It may work well for those in debt who recognize their financial
difficulties and want to take action to resolve them. But it does nothing to
address the problem of those debtors who can pay but won't, or those who refuse
to recognize their financial problems. The real issue for debt recovery and
enforcement will be how the new approach tackles those who don't want to address
their financial problems.
Industry opinion regards the success of DAS as heavily dependent on the
commitment of the Executive to its promotion. It is crucial that sufficient
resources are devoted to the Scheme so that effort can be focused on changing
the perceptions of those debtors who either refuse to recognize their problems
or have no inclination to do anything about them. That effort must be
significant and sustained if it is to change the nature of Scotland's debt
culture.
As the balance has shifted away from the creditor so has it shifted from debt
enforcement to revenue management – and breaking the debt cycle. This goes much
wider than debt recovery. It is not just about developing attractive packages
for those who are ready to admit they need help. If efforts to tackle rising
debt are to be successful, the Scottish Executive must focus more clearly on why
people get into debt; and how to go about breaking the cycle of debt.
We have long recognized that the climate of opinion has been changing, and that
if we were to retain our position at the head of the field, we would need to be
innovative in tackling revenue management. By regarding the totality of revenue
management as a people-focused and customer-led concern, and by having the
foresight to develop our business ahead of legislative changes, we have in many
ways pulled the industry forward and have led the way for accountable working
practices.
Our approach – already proved through the results we have been able to achieve –
is to get involved with clients earlier in the cycle. Early intervention can
break the debt cycle and prevent individuals from falling into debt. A range of
methods and approaches are used. We try and communicate in the same way that our
customers communicate and in ways they understand. For example, rather than wait
for a bill to become overdue, we will contact individuals before the due payment
date, to remind them to pay. That might be by text messaging to mobile phones,
or by e-mail, or by telephone calls by highly skilled personnel. In this way,
repayment is not allowed to become a problem.
Another initiative we are currently pioneering is customer profiling. The
process compares a number of factors, including geo-demographics and lifestyle
habits, to predict the likely behaviour of different households in different
locations. It aims to identify which groups of individuals are likely to be more
susceptible to approaches to convert to making regular payments.
A recent pilot project with one of Scotland's larger local authorities used the
approach to target the majority of council taxpayers who paid regularly in cash.
By encouraging those payers to convert to direct debit payment, the likelihood
of their defaulting or falling into arrears is reduced, and outstanding debt can
be recovered in a managed way.
Random approaches to customers generally produce a 6-7% conversion rate. However
when we introduced instead a targeted approach, based on models that predicted
likely household responses, conversion rates leapt by up to 30%. The profiling
approach is now being developed further and tested with other local authorities
across Scotland.
However, a complicating factor in the resolution of debt is the fact that the
vast majority of debt is owed to the public sector through council tax and
business rates arrears. Local authorities are required to show "best value",
based on a five-year cycle of assessment, and their collection of outstanding
liabilities is no different. However, the interpretation of "best value" has
been changing in recent years, with "best value" becoming "best price", with no
account being taken of quality in collection. So on the one hand, legislative
changes have made it more difficult to recover debt for creditors, whilst on the
other, local authorities are being forced to focus on cost rather than level of
collection. Authorities may well improve on performance indicators for cost of
collection but will lose out badly on level of collection. Lower collection
costs leads to a false economy with 100% of nothing being significantly less
than 90% of something.
Looking back now, as I prepare to step down as managing director of Stirling
Park LLP, it is clear that the poindings and warrant sales issue drew a
significant line in the sand for Scotland. It not only sparked a debate about
debt recovery and enforcement, but also created a platform for discussion about
the Government's responsibility for the problem of debt. It has prompted a much
wider debate than seen in England or Wales about the role that Government should
take on and has put on the Statute Book the responsibility of Government to help
in the repayment of debt, along with a role for money advisers.
Diligence legislation is also to be revised again along with the current
business organisation of sheriff officers and regulation of their activities.
There is more to come, too, on the debt management front. The latest issue for
Scotland to address is reform of personal bankruptcy arrangements with further
consultation this summer on proposals from the Scottish Executive. Relaxation of
the personal bankruptcy rules would see debtors discharged of debts within a
year, with repayment contributions from income being required for only a short
period. While the measure is aimed at encouraging entrepreneurship, this kind of
sequestration could effectively amount to debt write-off.
Adam Lewis has been
a partner with Stirling Park for 17 years.
Source:
Credit Control Journal
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