Creditors, take a deep breath: HMT steps up to manifesto commitment on shield against problem debt

HM Treasury has launched a Call for Evidence on the UK government's 2017 general election manifesto pledge to introduce a 'breathing space' scheme for people with serious problem debt.  HMT recognises the potential impact on creditors' infrastructure and bottom line.  With this in mind, financial services and consumer credit firms will want to make sure that their voices are heard as the new scheme takes shape.

Why now?

Although the Call for Evidence recognises a wide number of existing and pipeline initiatives to help borrowers in financial difficulties, HMT believes that there is a continuing issue with the levels of problem debt in the UK.  FCA research estimates that about one in six people (2.2 million) with outstanding consumer credit debt are suffering financial distress.  HMT believes that the introduction of a formal shield against interest and charges might incentivise those struggling with problem debt to seek advice earlier.


What's the proposal?

Currently, people with problem debt (debt and arrears that 'absorb an excessive proportion of income') can generally only seek statutory protection from interest, fees and charges by entering a formal debt solution such as bankruptcy, an Individual Voluntary Arrangement (IVA) or a debt relief order (DRO).  Using any of these solutions will have an impact on an individual's credit file.  The one exception is the Scottish government-backed Debt Arrangement Scheme (DAS), which is the only statutory debt management plan in the UK.  This generally relates to unsecured debt.  Mortgage arrears (but not regular mortgage payments) can be included in certain circumstances.

The government has committed to implementing a breathing space scheme which would allow someone with serious problem debt to apply for legal protection from further interest, charges and enforcement action for a period of up to six weeks.  If appropriate, they would also be able to enter into a statutory repayment plan to help them to manage their debt payments in the longer term.


More questions than answers: What sort of debt?

At this stage, there are no detailed proposals on how the breathing space and statutory repayment plan will work.  The Call for Evidence wants stakeholder input on the various issues raised for both debtors and creditors.  These include:

  • Which debts should be eligible – in the related Press Release the government states it's seeking input from 'lenders and creditors' and the Call for Evidence refers to 'financial services and consumer credit firms' as well as issues with 'priority debts' leading to disconnection or eviction, which suggests that the scope could be wider than just consumer credit
  • Whether debt owed by self-employed / microbusinesses should be included
  • The trigger point for the breathing space
  • Whether the protections afforded should only cover debts existing at the outset or include new debts arising during the six-week period

HMT is also asking for views on whether the new breathing space and debt repayment scheme should apply in Wales and Northern Ireland as well as England.


Everyone's a winner?

The Call for Evidence states that the proposed new scheme must be designed with care to ensure it is 'easily accessible' and 'beneficial' for those with problem debt, but also 'simple and practical to implement' for creditors.

Acknowledging existing formal and informal debt solutions, the government is keen to fully understand how a six-week breathing space would interact with these mechanisms where individuals are already using or planning to use them.  There is a need to avoid duplication or conflict with existing systems and rules.  The impact on repayment of 'priority debts' (ie those with the most serious consequences such as eviction) is also a focus.

In selling the idea to creditors, HMT emphasises the positive effect of successful debt advice as a support for the economy as it encourages 'productivity' and reduces 'bad debt write-offs.'  Creditors may query whether these benefits are in danger of being outweighed by the likely implementation costs of new systems and processes, coupled with the potential repercussions on financial performance from delayed recovery of interest and other charges as well as the principal sum.


What's next?

Responses are requested by 16 January 2018.  Watch this space for further information on the timing of any draft new legislation to implement the changes.

This latest development should also be viewed in the context of other on-going FCA activities in the high-cost credit and persistent debt areas.  Take a look at our blog posts 'FCA counts the cost of high-cost credit: a possible ban on unarranged overdrafts' and 'Credit Cards – the FCA's solution to a persistent problem' for more information.

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