Economy, Energy and Fair Work Committee

Meeting date: Tuesday, November 6, 2018

Official Report 802KB pdf

---

Subordinate Legislation

---

Common Financial Tool (Scotland) Regulations 2018 [Draft]

We turn to the draft Common Financial Tool (Scotland) Regulations 2018. I welcome our panel of witnesses: Alan McIntosh, who is senior money adviser at Inverclyde Council; Angela Kazmierczak, who is financial inclusion team leader at Aberdeen City Council; Nicola Birrell, who is senior money adviser with the money advice and rights team at East Renfrewshire Council; and—last but not least—Scott Milne, who is director of WRI Associates. I thank all four of you for coming in today. You do not need to press any buttons—that will all be done by the sound desk. If you want to enter the discussion, please indicate by raising your hand and I will ensure that you can come in. You should not feel obliged to respond to every question; we will see how the discussion and the questions develop. I turn first to John Mason.

I have a range of questions. To start, one of the arguments for the adoption of the standard financial statement is that it would standardise procedures across the United Kingdom, given that a lot of creditors are organisations that operate across the UK or more widely. How important is it that we have the same standard across the UK? Alan McIntosh made the point in his written evidence that debt has never been treated in the same way in both Scotland and England. How do we balance those views?

You are absolutely correct: there has never been a single market—to use a phrase that is quite common these days—in debt recovery across the UK. Scotland has always had its own distinct legal system, and its own debt solutions and debt recovery laws. Creditors who operate in the Scottish market—they pretty much all do—accept that separate legal procedures and debt recovery procedures have to be used for someone who is in debt. They also accept that separate debt solutions will be applied. One such example is the Scottish Government’s debt arrangement scheme—there is no comparable scheme anywhere else in the UK, although the committee will probably have learned from the recent budget that the UK Government is now seeking to learn from the Scottish scheme and introduce a similar scheme in the rest of the UK.

There is not necessarily a need per se for a standard financial statement across the UK, but I do not object to one. The important point is that whatever solution is put in place must be the correct solution for Scotland and for our system. As I said, I have no objection in principle to a UK standard financial statement. I accept that it will benefit creditors and, if it is possible to implement such a statement, I do not see why creditors would object to it. I also accept that it will benefit large national organisations such as StepChange Debt Charity, which can then operate one computerised system across the UK. My opinion is that there is no need for a standard financial statement, although it has some benefits. The important point to consider is whether it will be an appropriate solution for Scottish consumers and will provide fair outcomes for both consumers and creditors.

Previously in practice in Scotland, we had one model that was used with creditors and one model that was used specifically for insolvency. Before we had the common financial tool, two sets of trigger figures were used in Scotland for different debt solutions. That difference was an issue, but I do not think that it would be a bigger issue across the UK especially, as Alan McIntosh said, for people who are giving local debt advice and working only with Scottish clients.

In addition, the Financial Conduct Authority “Consumer Credit sourcebook”, which covers how debt collection practices should be undertaken, still says that creditors should use the common financial statement, which is what our common financial tool is based on, or an equivalent. We are still covered, given that creditors are instructed to use the common financial statement or the SFS, so there is no real need for one tool.

There seems to be an argument that some creditors were not signed up to the common financial tool, and that it is more likely that they would sign up to the standard financial statement. Are you saying that that is not the case?

I do not know if the committee has had any representations with regard to specific creditors that would sign up to the SFS. I know that it was suggested at the start of the process that public sector creditors would buy into it. However, we have not seen any evidence of that, and I think that it is highly unlikely. Somebody aged over 25 who is on jobseekers allowance will get approximately £317 a month, which is less than the housekeeping trigger figure in both tools. We could quite fairly turn round to a public sector creditor and say that that person has no disposable income by virtue of the fact that they are on benefits. A public sector creditor will not accept either a token payment or a period of non-payment—they will go straight in and try to deduct money.

It has been said that public sector creditors will buy into the SFS, but I do not see that happening. In the committee’s evidence session last week, it was mentioned that the Insolvency Service of England and Wales is using the SFS, but there was no talk of Her Majesty’s Revenue and Customs, the Department for Work and Pensions or local authorities that collect debts, and those are the organisations that we struggle with.

I would like you to clarify something. At present, would a Scottish public authority such as a local authority be signed up to the common financial statement, or not?

Local authorities operate case by case—there is no national agreement. We have agreements with some departments with which we work closely that they will sign up to the use of the CFS, but it is done case by case; there is no national agreement on that.

Thank you. Does anyone else want to come in?

Local authorities, like HMRC and the DWP, have to comply with the common financial statement only in the case of a statutory debt option. I concur with Nicola Birrell and Alan McIntosh. Most people whom we see who have local authority or DWP debts are claiming benefits; they would get nowhere near the trigger figures, because their income is simply not high enough. Organisations do not use the common financial tool when putting in place a council tax or rent arrears arrangement, because the person would be paying nothing towards their debt, when it is expected that they should be paying something. I would not agree with the statement that the SFS would help Government agencies that are collecting debt.

Does Scott Milne want to come in?

I tend to deal mostly with situations after the event as part of the formal insolvency process; I do not generally have any engagement with creditors prior to that point in the way that Nicola Birrell, Angela Kazmierczak and Alan McIntosh do.

Is the use of the SFS practical? If we carried on using the common financial statement rather than switching, would that have an impact on creditors?

If all creditors across the UK started using the standard financial statement, I do not know whether it would have an impact. I think that they would continue to use the common financial tool in the way that they currently do; they are legally obliged to accept it for statutory debt remedies. I accept that creditors would probably prefer to have a common financial statement across the UK, but in reality the process would simply continue as before.

I emphasise that, even if we have a standard financial statement across the UK, practice will not be uniform. In Scotland, there are additional layers of guidance on the way in which the current tool is implemented, which is crucial. The use of a standard financial statement across the UK will never be uniform—the key difference is how it is implemented in Scotland, and that is where money advisers have really struggled in the past three years.

From a regulatory perspective, the Financial Conduct Authority instructs creditors that they must be mindful of the legal differences given the different debt solutions in Scotland. There is no reason why the FCA cannot give similar instructions that creditors must have regard to the differences when the standard financial statement comes in.

Colleagues will follow up on some of those points—thank you very much.

Perhaps Alan McIntosh can clarify one point. In your written submission, you discussed the differences—which you have mentioned today—between the Scottish and English legal positions. You said:

“even if Scotland was to adopt the Standard Financial Statement, this will not result in a common approach being adopted across the UK, as the Scottish approach is distinct”.

You went on to say with regard to the common financial tool that

“an additional layer of guidance is applied to it by the AIB, over and above that which is applied elsewhere in the UK by the Governing body of the SFS.”

Are you saying that, even if we adopted the SFS in Scotland, there would still be an additional layer of guidance from the Accountant in Bankruptcy to take account of the different position here? Would that be a good or bad thing if the SFS was brought in?

I will quickly explain the background. I have used a common financial statement in Scotland since 2003, prior to its adoption as a common financial tool. I supported the adoption of a common financial tool, and I still support the continuation of a common financial tool. In 2015, I supported the adoption of the common financial statement as that common financial tool, because it worked well—it was flexible, and creditors accepted it quite easily. It involved common sense and in general, in my experience, it provided good outcomes for clients and creditors.

What we did not take into consideration in 2015—I am speaking with the benefit of hindsight—was how the character of the common financial statement would change when it came into use as the tool, as a result of the additional layer of guidance that was brought in and the evidential requirements and verification standards that we now have to meet. That is one of our big concerns.

The majority of agencies that responded to the common financial tool consultation that the Accountant in Bankruptcy carried out last year—there were more than 70 responses—did not want the standard financial statement to be brought in because they feared that it would exacerbate the current situation. One of our primary concerns is that, even as the regulations that we are discussing have been laid, we still do not have a final version of the guidance for the standard financial statement. We are forgetting the lessons of the past, which is what happened in 2015, when we got the regulations followed by the guidance. This time round, I would rather that the guidance was finalised and brought forward at the time that the committee makes a decision on the regulations.

In effect, you would like to see the guidance before a decision is taken on the regulations.

I have a draft version of the guidance in front of me but I would like to see the final version. The common financial tool working group, at its most recent meeting, took the decision that, if the regulations are approved, it will create a subgroup in December to look at them. During that meeting, David Hilferty said that we had to go through the guidance line by line and assure ourselves about how the standard financial tool will work when it is implemented.

11:00  

The guidance should be finalised at the same time as the regulations are scrutinised—that is really important. The guidance raises some issues, on which I can provide more evidence if the committee wants me to do so. Some of those issues are about putting meat on the bones of the regulations, and the committee really needs to look at them. They include issues around child maintenance and verification. Some of my colleagues can expand on what I have said, because those issues are relevant—

We will not have time to go into those issues in evidence today.

I understand that.

If you want to write to the committee to illustrate any additional points, that would be helpful. I see that Angela Kazmierczak is nodding in agreement. Does Scott Milne have any comments to make at this stage?

Again, in general, I undertake my role during or after a formal insolvency appointment. I am not involved in the same way as the other witnesses, especially in the area of creditor engagement. I effectively present creditors with a package as a fait accompli, so there is less scope for me to have a great amount of input to the process.

We move to questions from Colin Beattie.

I want to look at trigger-figure breaches and the administrative impact on advisers. Various witnesses have commented on that, and I would be interested in hearing an explanation of how such breaches would impact on you.

The first point to remember is that a breach of trigger figures does not always have to be justified. As David Hilferty pointed out in last week’s evidence session, a financial statement is not just a way for us to get a solution for someone; it should be a budgeting tool. It should stay with the person as something for them to work towards. It is an on-going conversation between the adviser and the client. We will draw up an income and expenditure chart and, if we see that there is a breach of trigger figures, we will need to have a discussion with the person about why that is the case. That process has already been made quite difficult—we cannot tell people by how much they have breached the trigger figure, or what they are aiming to get to, because we are not allowed to tell them the figure in the first place. Given that most of the money advice process is built on trust—it is a very intrusive process, and we are asking people to give us a lot of detail about their life and household—that is very difficult for us.

If we do not consider that the client’s explanation of why the figures were breached would be reasonable in the view of creditors or the AIB, we need to work with them to get their level of spending down. That is the first impact in terms of the administrative work that we may need to do. It could involve looking at comparison sites or helping clients to complete discount forms. It might include doing a spending diary exercise with the client to try to get them to reduce what they are spending, or advising them about cheaper places to buy food—all that sort of stuff.

The breach may be reasonable—in general, we tend to see such breaches where there is someone with a disability in the house or where someone has a particular dietary need. Another example would be where someone has joint care rather than full care of a child and therefore does not have the allowance for that child in their budget. We then have to try to evidence the breach—we show that there is definitely an overspend, but we provide evidence for the cause of that breach. As I said, that is not always an easy discussion to have with someone who is potentially already at their lowest point. We say to them that they need to go and get evidence that they spend a certain amount on petrol, and we need to write down a reason, such as a health condition, that explains why they spend more than they should. Other reasons could be that they live rurally, or the job that they have. We need to have sufficient evidence for the breach, and we need to explain to the client that we are asking for that evidence not because we mistrust them, but because later down the line we will be asked to provide an explanation.

From what you are saying, it sounds like there is potentially quite a lot of work in each case. Can you quantify the notional cost of that work?

No, unfortunately, I cannot give you a notional cost. It is not really something that local authorities measure. I do not know whether the other witnesses have done any cost exercises.

I want to mention another thing. Nicola Birrell spoke about getting evidence for trigger-figure breaches. If we adopt the standard financial statement, we will need to gather more information as evidence for fixed costs. The common financial statement refers to essential expenditure, which is usually fairly easy to evidence; it includes rent, council tax, gas, electric and the television licence. The standard financial statement shifts more of those areas of expenditure across to fixed costs, which we will then need to evidence. That includes travel costs. Previously, as long as those costs were within the trigger-figure amount, we could just accept them and move on.

If we adopt the standard financial statement, we will need evidence to explain not only trigger-figure breaches but other things too. At present, if we write to a creditor with a voluntary payment plan, they accept that we have done the work and verified the client’s expenditure, and they will accept the payment plan. However, when we are looking at statutory debt options, we have to send evidence to show that what we have put on the statement is correct.

It is not just about the breach of the trigger figures—the administrative difference between the SFS and the CFS means that, right from the beginning, the latter is more onerous.

Yes.

It is always difficult to quantify such matters, but can you put any sort of percentage or cost on that extra work? You can even give me a time cost.

The cost probably would be in time. There are currently challenges for people in gathering evidence. As Nicola Birrell said, people who are in debt come to us at their lowest point. The need for us to gather more evidence to be able to get a solution can delay the point at which they can walk out the door and feel that they have something in place and are back in control of their finances.

For the standard financial statement, we will need to gather even more evidence, which will prolong the process, potentially by an extra three or four weeks. If we are producing a monthly financial statement and we need to show a person’s fuel costs for a month, we will have to gather evidence for a full month to be able to show what the actual costs are.

That is a huge difference.

Yes.

This subject is probably one that is dear to the hearts of those in the insolvency profession. Trigger figures appear to work for what has clearly been defined as a standard individual. Sadly, however, we do not deal with standard individuals—we deal with self-employed individuals, people who are on zero-hours contracts or those who are managing five part-time jobs at any given point in time. The common financial tool as it stands does not provide for the system to work in such cases, and the standard financial statement even less so, because of the issues that Nicola Birrell has just outlined. The current system is very inflexible. For 20 years, creditors as a group accepted the insolvency profession’s assessment of what was a reasonable amount of income and expenditure, and therefore what was a reasonable contribution. We have a lot of experience of doing that, as have the other witnesses. The common financial tool restricts us in that work, and it appears that the standard financial statement is even more restrictive, simply because there are fewer categories and some elements of expenditure are lumped in together.

I can give you an idea of the cost in terms of time simply from having to deal with trigger-figure breaches. Three weeks ago, an individual came to seek insolvency advice from me with a view to his personal bankruptcy. He was self-employed and worked as a designer with some months on and some months off. We knew the minute that that gentleman walked in the door that his income and expenditure were such that there was no prospect whatsoever that he would be able to provide any contribution towards his debt. It took us between two and a half and three weeks of to-ing and fro-ing with the Accountant in Bankruptcy’s office to reach agreement on a zero contribution. We made an application and there was a breach of the trigger figures, so we tried to garner evidence from the individual. That involved trying to read from bank statements—once we get the evidence, we have to explain it.

I have been asked to provide payslips from somebody who is self-employed. Self-employed people do not get payslips—they generally issue invoices or operate through self-billing. When we deal with the AIB, there sometimes seems to be a lack of understanding of what evidence we are actually able to provide. At no point are we asked to give our professional opinion or judgment on whether something is correct. I can certify an individual’s insolvency by signing a bit of paper, based on my professional knowledge and years of experience and the evidence that has been presented to me. I can make somebody bankrupt, but I cannot suggest what the contribution should be. The current situation is very restrictive for the insolvency profession.

A trigger-figure breach can result in 10 or 15 hours of extra work in order to process and proceed fully with the insolvency application. From a human perspective, the individual who is suffering problems with debt, and who is being pursued by creditors—“harassed” is perhaps too strong a word, although the person may feel that way—is unable to get the resolution that they want and deserve because of the additional time and effort that is spent to-ing and fro-ing with the AIB over what ultimately amounts to a fiver here or a tenner there.

The insolvency profession faces another major issue. It costs me more to administer a contribution of £12.74 every month than the amount by which the creditors benefit; there is no de minimis. As it stands, the tool operates in such a way that whichever number it spits out the bottom is the level at which the contribution order is set. I have worked for various firms, some of which charge rates that the committee would find exorbitant—to be frank, I would have to agree with that view—and some of which charge much lower rates. Even at the lowest rate for an insolvency practitioner, which would be a general assistant in a practice, it would cost us more to administer a monthly contribution of £12.74 from a bankrupt individual. There is zero benefit to the creditors.

Where is the trigger point, for want of a better word? At what point does it become financially viable to collect a payment?

Realistically, from my perspective as an insolvency practitioner, it becomes viable around the £50-a-month mark, given the income that that generates over a four-year period.

How many orders would be for contributions of £50 or more rather than lower amounts?

I can speak only for cases in which I am directly involved. We do not deal with a massive amount of personal bankruptcy. However, a disproportionate amount of the overall number of orders that I see are for contributions below the £50-a-month limit, if you want to call it that, above which the collection of the payment becomes economically viable.

What do you mean by “disproportionate amount”? Disproportionate in relation to what?

There are too many such orders. I would suggest that, if I am looking at 10 bankruptcies, more than half of those involve contribution amounts that are set, following the use of the tools, at less than £50.

Jackie Baillie wants to come in at this point; we will then come back to Colin Beattie.

I have a specific question that relates to the Accountant in Bankruptcy’s letter about trigger-figure breaches; perhaps I could put it to Alan McIntosh first. There seems to be a degree of controversy over which financial statement results in the most trigger breaches. The AIB’s letter states:

“owing to significant concerns raised by the money advice sector, the way in which SFS trigger figures were calculated was changed before the figures were uprated for 2018. On the basis of the 2018 trigger figures for both the SFS and the CFS, there is a clear fall in cases where trigger figures are breached”.

Is that correct? Do you know what changes the AIB made? Should we found on its analysis?

From my understanding, this is what happened. In 2017, the SFS was introduced, and comparative studies were done with Money Advice Scotland, which involved a relatively small number of cases—I believe that the Accountant in Bankruptcy did a comparative study that involved about 1,500 cases. Comparisons were drawn between the SFS 2017 and the CFS 2017. The SFS 2017 produced quite a number of breaches; I cannot remember the specific amount.

A lot of pressure was put on the money advice sector, primarily by David Hilferty, about the level of breaches. In SFS 2018, the figures were uprated, some of them by as much as 100 per cent. Universal credit claimants—benefit claimants—were taken out of the statistics, which raised the average and allowed the SFS 2018 figures to go up. Unfortunately, that was not done for the CFS 2018, which is still the tool that we are using in Scotland. At a time of rising living costs, people on universal credit were seeing their income drop in real terms, and the amount that they were spending dropped, so those figures were actually downgraded.

11:15  

Unfortunately, although the governance groups for both tools include pretty much the same people, they did not see fit to apply the same tweaks to the CFS 2018 that were applied to the SFS 2018. When we compare the SFS 2018 and the CFS 2018, therefore, it looks as if there are fewer breaches, because the SFS 2018 has got better. However, if the same comparison was made with the CFS 2017, before the figures were downgraded, it would probably—although I do not know what the outcome would be—give you a better idea of the situation. That is my understanding.

Would you go so far as to say that there has been a degree of sleight of hand there?

Some people may take the view, to which I am certainly sympathetic, that the intent was to nudge Scotland into accepting the SFS 2018. I cannot say so with any authority—that is just my view.

Do any of the other panel members know any different, or would they concur with Alan McIntosh?

I concur.

I do not know any different, but I can tell you what has happened as a result of the changes. We have clients who did not breach any trigger figures last year, so we could send out their offers. We are now bringing them back in to review their circumstances and, although their incomes have not changed, we are having to tell them to spend less because the CFS figures have gone down. Again, we cannot disclose the amount by which they have to reduce their living standards, because we are not allowed to tell them what the trigger figures are. We simply have to tell them that their creditors now expect them to spend less.

Thank you very much.

To go back to our earlier discussion, I am not hearing much good about the SFS from an administrative point of view. Which tool would you judge as the fairest to both sides in the process: the SFS or the CFS?

I believe—my colleagues may agree or disagree with me—that a lot of these tools can provide fair outcomes for both creditors and debtors. The key is how they are applied. One question that came up in last week’s evidence session was about which creditors are the easiest to deal with. I have found consumer creditors—except perhaps some of the high-risk lenders—relatively easy to deal with. They are pretty trusting, and they accept that we are reputable agencies. I am sure that the same goes for citizens advice bureaux and for insolvency practitioners. If we tell them stuff, they generally accept that we are following good practice as drawn up by the Financial Conduct Authority, and they accept what we do.

Public sector creditors can be a wee bit more difficult, especially because they may be able to take recovery action through sheriff officers. The biggest problem that we have is not with a creditor but with the Accountant in Bankruptcy. That is one reason why it is so important that we work to the standard that is set for us in every single case. Colin Beattie asked about the cost implications. There is an impact if we do not get the figures right. Our client may apply for minimal asset bankruptcy, for which there is a £90 application fee, or for full administration bankruptcy, which costs £200; many clients struggle to get the money for that. If the AIB accepts the application and then decides that further verification is required, our client gets a letter that gives them 21 days to produce the necessary evidence. If they do not do that, the application falls, and they lose their money.

That is why, from a reputational point of view and from the perspective of giving advice—I am sure that my colleagues would all agree—we need to ensure that we double-check and get everything correct every single time, because we cannot risk clients losing money that they may have spent months saving up. We have to ensure that we are right every single time.

I appreciate all that you have said, but I am looking for a judgment that is based on your knowledge and experience of both systems. Which is the fairest all round?

There is a difference in the amounts, arguably because different methodologies are used. In terms of principles, I would say that the CFS is fairer—I have a specific reason for that. In the CFS, there is a separate category that captures lifestyle choices or spending that is led by someone’s household circumstances. For example, it may include vet bills if someone has a pet, school meals or meals at work, kids’ days out, pocket money, hobbies or leisure—all those sorts of things. If someone exceeds the limits in that category, we have a conversation with them about choices and what they can and cannot afford. Those types of spending are easier—although that is not always the case—to set off against each other. However, some of them are now moving into the housekeeping category. That means that we will have to turn round and say to people that they cannot afford either vet bills or food, and tell them that they have to make a decision. I would not want to go down that route with my clients—it does not follow a natural budgeting process.

The idea is that someone has their housekeeping expenditure, their travel expenditure and their phone and connectivity spending, and everything else is more choice based. That allows us to discuss with clients what they can afford within that. As I said, that facility is being taken away in the SFS. Personally, I think that that will make it harder for us to have budgeting discussions with clients, because we will be asking people to make much more difficult choices.

Does anyone else have a view on that?

I certainly agree with what Nicola Birrell said. If pushed, I would say that neither of the tools is particularly friendly or helpful, certainly from the perspective of my profession. However, there is a greater degree of inflexibility in the standard financial statement that will undoubtedly make the process harder.

I just want something that gives people decent and reasonable living costs. I have been using the common financial statement since I began working in money advice back in 2004, and there has never been a big issue with it. However, I am now dealing with more onerous administration in order to implement the standard financial statement, and I am aware of the impact that that might have on clients. There is inflexibility, as other panel members have mentioned. We need something that gives people a reasonable standard of living and means that they can pay their debts back as well. That is what I want to see from whatever tool that we use.

My understanding, from the evidence that we have heard this morning, is that the SFS provides fewer categories, for which different expenditure limits are set. Given that costs for things such as housing and heating—whatever they happen to be—tend to be different in Scotland, what will be the impact on the individual debtor if we move over to the standard financial statement? Putting to one side Jackie Baillie’s point about whether we are comparing like with like in terms of the two systems, what will be the impact on the ordinary individual?

Off the top of my head, I do not think—

In general terms.

The costs for heating and housing that you mention would come under the fixed category, in which there are no limits, so there would be no particular impact in that regard. However, there are a lot of rural populations in Scotland, and spending on items such as petrol has moved to a different category. The things that are left over are items such as food, phone and broadband. The big issue for people in rural communities may be the cost of broadband. Again, if someone is breaching trigger figures, it is up to the person who receives the application to understand and accept our justification for why that is happening. I would hope that, if someone was incurring extra costs because they were based in Scotland, the AIB would understand that. As I said, however, we still have to provide evidence whenever there is a breach.

It is hard to say what the impact would be—it would depend on the individual case, so it is difficult to make generalisations. However, the Scottish Government has made provisions in its recent changes to the debt arrangement scheme, which were approved by this committee in September and came into force on 29 October. Debtors who are on the scheme do not now need to disclose their full disposable income to their creditors. That recognises to some extent the restricted nature of living on a budget for a period of time. The Government felt that people on the debt arrangement scheme should not be restricted in that way—that is understandable, and I supported those changes.

However, we should bear in mind that debtors who have entered into bankruptcy or trust deeds still have to offer information on their full disposable income, and they continue to live with restricted budgets. As budgets become tighter in the future, that will make it harder. There is a greater chance that people will default and miss payments, which I am sure has consequences for insolvency practitioners such as Scott Milne as well as causing problems for money advisers. If a trust deed fails—although sequestration can never really fail—the client gets their debt back, and they will come back to us. We spend a lot of time dealing with people who have entered into a solution that does not work—it fails, and they come back to us and we need to start from scratch again. That means that clients will not get their debts resolved within four years—it may take six or eight years. The SFS will not be a good thing if it puts people on a more restrictive budget.

In general, does either system—whether it is the common financial statement or the standard financial statement—provide a reasonable standard of living for the person who is trying to make the repayments?

That is subjective, because it depends on what one considers to be a reasonable standard of living. We have clients who live in poverty, but that is not because of the common financial statement—it is because they are on very low incomes.

For the majority of the clients whom my money advisers see in Inverclyde, the big issue is not whether they are breaching the trigger figures—it is verification. The majority of my clients never get near the trigger figures, because they are on universal credit and so on. It depends on what you see as a reasonable standard of living. I put a definition in my submission—that is just one definition. I will not read it out, because that would take quite a long time.

Generally speaking, I think that a reasonable standard of living means being able to go to work, live in a warm house and have various types of clothing. Sometimes I go to my kids’ schools and I see children wearing clothing that is totally inappropriate for the winter—that is the effect of low incomes. Those are the sorts of things that I would associate with a reasonable standard of living. That would include being able to have some social time and going out for a meal. It really depends on your view of what constitutes a reasonable standard of living. I would hope that we have moved on from Victorian times. Whether we would allow certain things would be decided case by case, but there is the potential not to have a limit in some cases.

I would say no, for a couple of reasons. First, I should say that the tools are not based on the need to provide a reasonable standard of living—they are meant to ensure that people have a lifestyle that is based on the average standard of living of those on the lowest incomes. We do not start out by trying to give people a reasonable standard of living; we are not measuring that, because it is definitely not what the tools are devised to do.

There are two reasons for that. First, although the common financial tool is given a lot of credit for bringing in a savings provision, which we did not have before, it provides for 10 per cent of someone’s disposable income to a maximum of £20. If someone has a disposable income of £200, they get only £20 a month to put away. If they have an income of less than £100, they are saving less than a tenner a month, which is nothing. To be honest, it is very unlikely that clients will be saving that amount. If there is an unexpected school trip or the washing machine breaks down, they do not have the money to deal with those things. In my view, we are not providing for an adequate standard of living if we do not allow people to save enough money to enable them to deal with an emergency, or even an extra birthday or anything like that.

The second reason relates to the Scottish Government’s work on child poverty. The Government already talks about material deprivation and the need for people to save a tenner a week, but the financial tool does not allow for that. We do not say that an adult must have something to spend on themselves every week. The current tools would fail according to the measures on poverty that the Government is already discussing.

What changes should we make to the system in order to reflect your suggestions?

If you want a tool that gives people a reasonable standard of living, you have to start by asking what constitutes a reasonable standard. You ask what you need to give people, and what is left over goes towards their debt. If that is not what you want—if, instead, you want people to live on the average standard for those on a lower income—you should go ahead and use the current tools. You cannot retrofit the tools to ensure that they give people a reasonable standard of living, because that was not what they were designed to do.

That is absolutely correct. We see a huge skew in the standard of living. If someone is a wealthy individual with a large house and a huge mortgage, that is apparently okay. I have dealt with bankrupts who were paying thousands of pounds a month on a mortgage. They can choose not to have to do that if they see fit, but because there is no trigger figure for the mortgage cost and it has no bearing on the rest of the arrangement, it is quite all right. To some degree, the current system almost favours the better-off, notwithstanding the fact that they might expect a higher general standard of living in terms of their expenses. If they choose to channel a huge amount of their income into housing costs such as a very expensive mortgage or rent payment, they are not penalised for that.

I am looking at the issue from a creditor perspective. Fundamentally, once I am appointed, my clients are the creditors, and my job is to get money back for them, while still having a duty of care to the insolvent individual in terms of their wellbeing—not only financial but mental wellbeing, although that is something that we all have to deal with.

11:30  

From a creditor’s perspective, I genuinely do not see that there is a standard-of-living problem. In a scenario in which expenses have been calculated for a hostile bankruptcy appointment with a creditor, and the debtor is clearly clever enough to beat the system, we have no scope for any adjustments or potentially to attack that arrangement. There is nothing more distressing for a creditor who is owed thousands and thousands of pounds than seeing the bankrupt living in a £5 million or £1 million house and still driving a nice car on hire purchase because it is a necessary expenditure to get them to and from whatever self-employed or trust-employed job they may have. There is a great disparity between the less well-off in society and those who are somehow able to beat the system. I am talking about those who come from a much greater position of wealth to begin with and who have declared themselves bankrupt or wish to do so.

There is no option box in the tool that would help to fix the situation. When we run the figures through the common financial tool and stick in all the information, there should be a discretionary box to enable those of us with the expertise—not the Accountant in Bankruptcy—to make a judgment call. That should be the case if we have to use the tools, but I still say that our profession would rather not do so. We would rather see an assessed amount for a fair living standard, which takes us back to Nicola Birrell’s comments about what constitutes such a standard.

As a profession, certainly in Scotland, we would prefer that a fixed amount of a person’s total income is deducted for general living expenses, depending on circumstances, and that a percentage is applied to whatever is left. Such an approach would provide consistency across the board while taking account of each debtor’s individual circumstances rather than applying one fix for all potential problems. However, the tool does not give us an option box or a discretionary box, or a £10 or £20-a-week savings box. We do not have a way to provide for when something goes wrong, and things go wrong all the time—sometimes a fridge blows up for no reason, as happened to me the other day. We cannot pigeonhole everything into a set of numbers and tools. One size absolutely does not fit all.

Would the approach that you suggest address the issues that you have raised with regard to those who are better-off being able to beat the system and avoid making the payments that they should be making?

Yes, absolutely—if we move away from the common financial tool as it is. If a debtor wants to stay in the house that costs them £3,000 a month for their mortgage or rent, they will have to figure out how to do that in a way that does not involve a cost to creditors, as is currently the case.

On your last point about the need for a discretionary box to allow you to decide, to whom would the creditor or debtor have the right to appeal? If you were going to exercise discretion, how would they appeal against your decision?

One would apply the same rules that give creditors the right to appeal against trustee remuneration or any action of the trustee. A creditor has the ability to insist that the trustee convenes a meeting of creditors, and they can be represented at that meeting. They can seek to be elected as a commissioner in place of the Accountant in Bankruptcy in order that they can assume greater control and gain a greater understanding of the process on a daily basis. There is nothing to prevent the introduction of regulations to give creditors the opportunity to object to such a decision. The objection processes that I have described are in place as things stand. I suppose that I am asking whether the Accountant in Bankruptcy is the right person to make a judgment call on what is right or wrong in a set of circumstances.

We move on to another question. If one assumes that the SFS were to be brought in, would you have any concerns about how the tool would develop as things progress? Alan McIntosh accepted that there would be some benefits in having a UK-wide system. Is there any concern about that, or would it be helpful to have a UK-wide system, rather than a separate Scottish CFS system, with regard to how the tool develops in the future?

I have raised concerns. I have acknowledged that there could be benefits in having a UK-wide system, although I do not think that we need one. There are issues with accountability and transparency, and the public visibility of the figures. Even if we were to discuss the figures that currently apply—which we cannot do publicly—the reality is that those are not the figures that will be introduced in April 2019 if the regulations are passed, because the CFS figures are currently under review. One of my concerns is that, if the situation is similar to that which occurred with the CFS 2018, in which the figures went down—that seems to be nonsensical, but it is completely logical if one looks at the methodology that was used to calculate the figures—there will be no real accountability. We will simply need to accept the figures.

I will give another example. I believe that the Accountant in Bankruptcy plans to lay before the committee regulations with new figures relating to the threshold for bank arrestment and earnings arrestment. The figures are upgraded every three years, but the AIB has to come before the committee, which has to look at those figures. If the committee passes the regulations that we are discussing today, our sector pretty much has to accept the governance body’s methodology for calculating the figures, whether or not it chooses to tweak them. The governance body is not going to come before the committee, so there will be no scrutiny of the figures.

That is a concern for me, because I believe that such scrutiny lies within the Parliament’s authority. Personally, I believe that the Parliament should scrutinise those figures. Once the figures are signed off, they can be changed—as was the case with the CFS 2018, when they went down; Nicola Birrell expressed her concerns about the problems that those changes have created for some of her clients. The CFS 2018 changes never came before the committee, so elected members never got to see the new figures. They were not aware that that change had happened, because we cannot share the figures. That is a general concern for me.

My specific question is about whether, if we had a UK-wide system as opposed to a separate Scottish CFS system, that would make any difference in terms of the input into how the system is run or the ability to influence it. Your point is that the Parliament should be in a position to scrutinise the figures, as the committee is doing with the draft regulations before us. Is it a concern that that would not be the case if we moved to a UK-wide SFS system?

That is my concern—there would be no scrutiny unless regulations were brought to Parliament. The current regulations have been brought to the committee now only because the CFS is being discontinued in April. If these regulations are passed, new regulations will not come before the committee for a considerable period of time. My colleagues may want to add something on that point.

I think that Scott Milne wants to come in.

Scotland is a bit different—we are our own country, which is why we are all sitting here in the first place—and, in my view, a UK-wide system would mean a total loss of control.

As a local authority, we always participate in the AIB’s consultations on Scottish legislation, which obviously impacts on us quite a lot. Our concern is that, if we move to the SFS, Scottish voices will be diluted. There will be consequentials for us as a result of the decisions that are made about the SFS with regard to the CFT and how the AIB will go on to administer it for statutory solutions. Only Scottish advice agencies are talking about that; we are pretty much united on the matter and we speak with one voice. It is not a concern for our colleagues in England and Wales because they do not have the same products and processes. My concern is that our voice might not matter as much in those discussions, and we might find that we cannot influence the direction as heavily as we would like.

Running counter to that is the suggestion that moving to a UK-wide system means that creditors would be applying the same rules and principles and would be able to understand what is happening in Scotland. Do you see that as a counter-argument at all?

Not really—as I said, we have never had an issue with using the CFS. The regulations for creditors tell them to use the CFS and not the SFS at this point in time.

Far too much importance is placed on, and far too much concern given to, the concerns of creditors. Creditors genuinely do not care about which system is used; they just need to know that the arrangements are coming from somebody who is a regulated or authorised person.

In fairness, the suggestion—to paraphrase those who have made it—is that creditors would benefit because they, in addition to debtors, would know where they are. I suspect that debtors do not care as long as they are treated fairly and can rely on a proper system being in place.

Willie Coffey has a brief follow-up question before we come to Andy Wightman.

As someone who is new to the committee and to the subject, I find it absolutely fascinating to listen to the contributions from the witnesses, which have been made with such passion. My question is for Alan McIntosh. Where does the accountability trail end up, if not in the Parliament? At the tail end of your written submission, with regard to the SFS, you state:

“if Scotland adopts it and it produces unexpected results, it cannot just be turned off.”

Does that mean that we are stuck with it for ever more?

I can give you an example. PayPlan, which is a private company, is one of the largest free providers of debt solutions across the UK. When the SFS 2017 was introduced in April 2017, PayPlan adopted the tool and trialled it for a few months. My understanding is the company has stopped using it for over a year because it felt that it produced overgenerous results in favour of the debtor. We will not be able to do that. Once the regulations are passed, we do not get to cancel them—they are in place whether or not we like them and whether or not the tool works. In England and Wales and in Northern Ireland, agencies have the option, because the use of the tool is voluntary, to turn it off and say that they are not using it until the system is fixed or staff are given more training. We do not get that option.

My big concern is that, once the regulations are passed, Scotland will, rather than joining the rest of the UK in using those figures, be used as an example to push the use of the figures across the rest of the UK. If the regulations are passed, the figures will be accepted and used uniformly across the whole of Scotland, which has not been the case so far across the UK, where they have been widely used but not uniformly adopted. If we in Scotland turn the figures into legislation, their use will basically become uniform.

I also have concerns about accountability. For example, the gentleman from the Money Advice Service who gave evidence last week spoke about comparative studies that were undertaken with the Joseph Rowntree Foundation’s minimum income figures, which were not as bad. I was on the common financial tool working group, but I have never seen that report because it has not been circulated. People will say that, as Money Advice Scotland sits on the governance body, along with the Accountant in Bankruptcy, Scotland is being represented. However, I sat on the Money Advice Scotland management committee—as Nicola Birrell currently does—and its social policy committee, and I did not see the report to which I referred; neither did I see it as a member of the common financial tool working group.

I requested at the common financial tool working group that a study be done into the public visibility of the trigger figures. A study was commissioned, and months and months went by. Eventually, I asked what had happened to it, and I was told that it had been done. I asked to see it, and was told that it would be shared only with the SFS governance group. Again, I stress that, as a member of the common financial tool working group, a Money Advice Scotland committee member and a member of the MAS social policy committee, I did not get to see that study. Although Scotland is represented by certain organisations, I believe that those organisations are restricted with regard to those to whom they can circulate information. What sort of a voice do we really have?

We move to a question from Andy Wightman.

I have a few points to make. It is true, is it not, that the vast majority of debtors do not venture into statutory solutions. Can you quantify the rough amount of those who do?

Not off the top of my head. I could run a report and come back to the committee with the number of people who have been on statutory solutions over the past year.

That might be helpful—thank you. Alan McIntosh said earlier that there was no role for Parliament in scrutinising the actual trigger figures. There is no such role now and there never has been; I want to clarify that nothing is changing in that regard.

No.

You indicated that you would like such scrutiny to take place. Would that be possible under the current legislative regime?

11:45  

It depends. The problem is that, in order to access the figures, one needs to have a licence agreement. For example, although I do not have a licence agreement, my employer, Inverclyde Council, has a licence agreement with the Money Advice Trust and the Money Advice Service in relation to the common financial statement and the standard financial statement. As part of the licence agreement, we cannot publicly disclose the figures to clients or to anyone else. We cannot put them on our website.

If Parliament wanted to see the figures, I guess that they would need to be submitted confidentially. If they appeared on the Parliament website, I take it that they would become public information. I have questions about how far Parliament could scrutinise the figures. It is quite clear that we cannot share them or allow them to get into the public arena, otherwise we would be in breach of our licence agreement.

I will come to that point in just a minute, but first I will ask another question. You said that it is proposed that the common financial statement will not be used beyond April next year, as the regulations are intended to replace it. There is therefore a question with regard to the administration, updating and governance of both the common financial statement and the standard financial statement. If the regulations are not passed, what will happen to the common financial statement through 2019-20?

We will need to resolve that problem, because the trigger figures will need to be upgraded. The raw data that is used to create the figures is obviously publicly available; I do not know whether someone could look at that. One of the witnesses at last week’s meeting said that certain sections of the Scottish Government could take on that role. Perhaps the task could be passed on to an academic organisation such as a university department. Obviously, somebody would have to take on the responsibility of upgrading and possibly tweaking the figures, otherwise they will be frozen in time while the cost of living continues to increase.

If that work was contracted to a university or the Government did it in-house, the same licensing regime around the use of the figures would presumably have to apply, would it not?

No, because it would be our licence. We would have come up with something else, so that we, or the Scottish Government, would be able to issue the figures.

I was probably being a bit devilish, but when the figures were introduced in 2015 I submitted a freedom of information request to the Accountant in Bankruptcy. I asked for the common financial statement trigger figures, although I already had them—I just wanted to see whether the AIB would give them to me in response to my FOI request. The AIB refused to do so on the basis that it was bound by the licence agreements. I suppose that, if the Scottish Government took on that role, it would have to disclose the figures under freedom of information rules.

That moves me on to my substantive point. Nicola Birrell spoke earlier about the importance of trust in the system in dealing with clients. At present, the licence agreement means that the figures cannot be shared. As I understand it, the argument for that is that it provides creditors with some comfort that debtors cannot game the system. Ms Birrell, do you think that the figures should be made public?

Definitely, yes. I do not understand why they cannot be shared. I work in an integrated advice team that provides a lot of different types of advice. My colleagues who work in welfare rights can sit down with a client who has a disability and show them the scoring system for the personal independence payment. They do not worry that the client will turn round and say, “Oh, I’ve got that condition, and that one” in order to try to game the system. My colleagues who work in housing can explain the allocations policy and tell clients how points are awarded. Again, they do not worry about clients pretending and gaming the system.

I do not understand why we have such a deep mistrust of people who are in debt. Most of the people who come to see us are not reckless or feckless; they have got into debt not because they are badly behaved or dishonest but because something has happened in their life. They may have become ill, had a relationship break down or lost their job. They were living within their means and doing everything right, and they thought they could manage their debt, and then something happened that they did not expect. I have to operate with a level of mistrust, which does not feel right.

When we have a conversation about that, my colleagues in other advice sectors do not understand the level of information that our sector takes from people. We ask clients for their bank details and all the details of the health of everybody in their house. We ask them about their background and what happened to them, and to explain how they go about their lives, how they pay their bills and what they spend their money on. We ask clients for a bank statement so that we can go through it and itemise everything on it. That is not a comfortable position to be in.

We have to do a lot of work to build trust and to release the shame from the person, because what money advice clients have in common is that they blame themselves, regardless of the fact that—as I said—most people have simply experienced a change of circumstances, or they have been living on a very low income that did not provide them with enough money to buy essentials. Clients who come to see us blame themselves. It is quite common—as I am sure that my colleagues will tell you—that people miss their first, second and third appointments because their bottle goes. Most people in such a situation would say to clients, “We are going to stop dealing with you, because you have abused the terms of the system.” We tend not to do that, because we understand that debt clients may need a couple of opportunities to come back to us.

The same goes for evidence gathering. Much of the time, people who are in debt are not opening their mail, and we have to show them a big list of things that they need to give us within 21 days, otherwise it will cost them 90 quid or 200 quid. As I said, not releasing the figures is a shocking way to treat people who have done nothing wrong. They have done everything right. We do not tell people not to take on credit—in fact, we tell them that credit is a good thing—but as soon as they struggle to pay back that credit, we stop trusting them. That is what it seems like to me.

Thank you; that is helpful. In last week’s evidence session, it was suggested that the existing system—the common financial statement—needs some review. Scott Milne has advocated the use of a very different system, as has the Institute of Chartered Accountants of Scotland. Instead of changing the basis on which we assess people’s ability to pay off their debts, should we undertake a rather more fundamental review of how the system works and how assessments are done before we get to the question of which tool we should use? Is there some value in that, or do we not need to do that?

There is a lot of value in that. One of the biggest missing pieces is the fact that no one is speaking to the debtors about what it is like to live within the trigger figures. We sign off plans for clients and send them away, and then we see those clients every six months, if they are in an informal payment arrangement, to see how things are going and ensure that they are managing things okay, and to see whether they need any other support. We also confirm to creditors whether a client’s circumstances have changed, which is a duty on us. That discussion lasts for half an hour—it does not constitute research; it is simply anecdotal. We want to know how people are actually managing and whether they are sticking to their plans. As I think that my colleagues will agree, we all have clients who—with the best will in the world—go out with a plan, saying that they are going to stick to their figures, and the next time that we see them, they have had to take out another loan or do this or that, and they have missed payments.

Rather than simply asking how we fix that, we should be looking at why that is happening, and whether there is an issue with sustainability in the system. A key part of that would involve getting the debtor’s perspective.

Fundamentally, our profession believes that a different solution or method of calculation for a statutory debt solution would be viable for an informal debt solution. In an informal debt solution, individual debtors are doing their best to pay off their creditors. In a statutory debt solution, if we exclude the DAS, it is—

If we exclude what?

A DAS—debt arrangement scheme—effectively provides for repayment of the debt in full over a period of time. Other statutory solutions in Scotland, such as a trust deed or bankruptcy, are debt forgiveness tools—creditors will not get 100p in the pound, so the calculation that we are doing is effectively for a different purpose.

We believe—I personally believe, as do those in my profession to whom I have spoken—that there absolutely is scope for a different system. I find it bizarre that trigger figures cannot be discussed. I am not party to any agency agreement or licence agreement to use the tools. I am an insolvency practitioner, so I have to use them—the statute requires that I do so. I am not signed up to using them; I simply have no choice but to use them—

I am sorry to interrupt you. If you have not signed a licence agreement, does that mean that you are not bound by the confidentiality rule?

We adhere to it. We do not tell debtors what the trigger figures are.

But in law you are free to do so if you wish.

I cannot answer that question just now, because I have not given the matter any consideration. I have adopted a similar approach—as far as I am aware—to that of advice centres and agencies that operate under the pre-statutory insolvency regime.

It does not take much for a debtor to work out what the trigger figures are. If a debtor says, “I spend £500 a week on shopping”, the adviser might say, “Sorry, you can’t—that is too much”, so the debtor says, “How about £350 then?” and the adviser replies, “Yes—that works.” It is not difficult for someone with a little bit of intelligence to calculate in their head what the trigger figures are.

We do not sit down with a debtor and say, “Right—I want all your receipts and your shopping bills.” We say, “What do you spend?” If I am appointed by the court to act for a creditor, I send a document to the debtor—of course I ask them to come and see me, but I also give them an income-and-expenditure form to fill out. We then plug that information into the common financial tool and, if it breaches trigger figures, we have to disallow certain expenditures. In those circumstances, we are obtaining the evidence after, rather than prior to, the event. If a debtor says to me that they spend £500 a month on shopping, I plug the number in and the system either accepts it or not. It does not require a huge leap for someone to work out what the trigger figures are within a very close range.

I understand that creditors might be worried if they thought that our professions were working with debtors to try to ensure that they pay the minimum amount or nothing at all. However, as I said earlier, in a statutory debt process, creditors have rights to challenge all that. They have a right to question us and a right to be heard. We present them with a scenario, and more often than not they accept it.

I go back to my point that one tool does not fit all scenarios. We are being asked to use the same tool for very different scenarios. In one scenario, someone whose marriage has broken down—as Nicola Birrell suggested—and who has run into financial difficulties may want to avoid bankruptcy, and may not want to get involved in a trust deed or be tied into a debt arrangement scheme for X number of years. They just want to sort their problems out. That is a very different animal from someone who has been made bankrupt by HMRC for not paying their taxes, or someone who comes to me and says, “Scott, I really can’t deal with this—my business has gone bust and I have huge personal guarantees to the bank. Please help me deal with this.” Those are all completely different animals—some are at opposite ends of the spectrum—and yet we are supposed to use the same process in all scenarios to decide what the outcome will be.

Like Alan McIntosh was, I will be a bit devilish. I understand the concerns from creditors about spending that will max out trigger figures in certain categories—there may be a need for lifestyle changes. However, if the figures are based on the average standard of living for those who are on incomes in the lowest quintile, why are we so worried that people are going to adhere to that standard? Why do we want to ensure that they do not possibly get there? I have a bit of an issue with that. I have never seen a money adviser go about their business by saying, “That is what you should put in that category, because I’ve worked it out, and that’s what you’ll get to spend.” As I said, there would be no point, because we could not then do the budgeting that is key to what we do—it would not be sustainable. If people are at those limits, they are not living a luxurious life—we have already established that—so why would creditors be so worried about it? That is my concern.

We are now running out of time—in fact, we have run over our intended time. If you all think that there should be a review of the system, perhaps you could write to the committee and indicate which areas such a review might cover. You could also set out specific comments on how a better system would operate, because—as I think is commonly accepted—it is easy to criticise but often more difficult to see how to build something better. If you would like to submit any thoughts to the committee, we would welcome those.

I have a brief follow-up to the convener’s request. It would be useful if you submitted any further information quite quickly, as we will be taking evidence from the minister next week.

That is very helpful—thank you.

You may not be able to write a 200-page thesis, but if you can provide any thoughts to us quickly, that could potentially be very useful to the committee. I thank you all for coming in today.

11:58 Meeting continued in private until 12:46.