Report on the Financial Memorandum of the Home Owner and Debtor Protection (Scotland) Bill

Remit and membership

Remit:

1. The remit of the Finance Committee is to consider and report on-

(a) any report or other document laid before the Parliament by members of the Scottish Executive containing proposals for, or budgets of, public expenditure or proposals for the making of a tax-varying resolution, taking into account any report or recommendations concerning such documents made to them by any other committee with power to consider such documents or any part of them;

(b) any report made by a committee setting out proposals concerning public expenditure;

(c) Budget Bills; and

(d) any other matter relating to or affecting the expenditure of the Scottish Administration or other expenditure payable out of the Scottish Consolidated Fund.

2. The Committee may also consider and, where it sees fit, report to the Parliament on the timetable for the Stages of Budget Bills and on the handling of financial business.

3. In these Rules, "public expenditure" means expenditure of the Scottish Administration, other expenditure payable out of the Scottish Consolidated Fund and any other expenditure met out of taxes, charges and other public revenue.

(Standing Orders of the Scottish Parliament, Rule 6.6)

Membership:

Derek Brownlee
Malcolm Chisholm
Linda Fabiani
Joe Fitzpatrick
Tom McCabe (Deputy Convener)
Jeremy Purvis
Andrew Welsh (Convener)
David Whitton

Committee Clerking Team:

Clerk to the Committee
Jim Johnston

Senior Assistant Clerk
Mark Brough

Assistant Clerk
Allan Campbell

Report on the Financial Memorandum of the Home Owner and Debtor Protection (Scotland) Bill

The Committee reports to the Local Government and Communities Committee as follows—

introduction

1. The Home Owner and Debtor Protection (Scotland) Bill (“the Bill”) was introduced in the Parliament on 1 October 2009. The Local Government and Communities Committee has been designated as the lead committee on the Bill at Stage 1.

2. Under Standing Orders Rule 9.6, the lead committee at Stage 1 is required, among other things, to consider and report on the Bill’s Financial Memorandum. In doing so, it is required to consider any views submitted to it by the Finance Committee (“the Committee”).

3. The Committee noted that the costs and savings arising as a direct result of the Bill’s provisions are expected to be comparatively small. However, there is a wide range of different bodies – Scottish Government, other public bodies, local authorities, advice agencies and insolvency practitioners, borrowers and lenders, other private businesses – covered by the assumptions regarding how some costs may fall. For this reason, the Committee agreed at its meeting on 6 October 2009 that it would adopt level two scrutiny¹ in relation to the Bill in order to allow it to test the assumptions behind the figures with these bodies.

4. At its meeting on 17 November 2009, the Committee took evidence from the Scottish Government Bill Team, including representatives covering the perspectives of the Accountant in Bankruptcy, the Scottish Court Service and legal aid. In addition, the Committee also received written evidence from—

• Dundee City Council
• Glasgow City Council
• The Council of Mortgage Lenders
• Scottish Court Service
• Scottish Legal Aid Board
• The Edinburgh Gazette (HMSO)
• Irene Harbottle, W D Robb & Co (insolvency practitioner)
• Insolvency Practitioners Association
• R3 (trade body for licensed insolvency practitioners).

5. All written evidence received is published as the Annexe to this report. The Official Report of the oral evidence session on 17 November can be found on the Parliament’s website.²

the bill

6. The Policy Memorandum states that the Bill aims to introduce a limited set of amendments to legislation in order to protect debtors during a period of recession and, in particular, to reduce the risk of homelessness as a result of insolvency. However, the Scottish Government states that it believes that these measures would continue to be appropriate in the event of an early economic recovery. These amendments constitute part of the Scottish Government’s response to the report of the Debt Action Forum, published on 23 June 2009.

7. The Policy Memorandum states that the Bill will offer greater protection for homeowners in Scotland by requiring lenders to show that they have considered reasonable alternatives to repossession, and requiring the courts to consider the extent to which lenders have done that when deciding repossession cases.

8. The Explanatory Notes describe the purpose of Part 1 of the Bill as to amend the law on the rights of a creditor in residential standard securities to take action in the case of default. Part 1—

• Sets out pre-action requirements for creditors - requiring creditors, before applying to repossess a residential property, to provide the debtor with information and to take reasonable steps to avoid repossessions occurring. They also require creditors to refrain from repossession in certain circumstances.
• Requires all repossession cases relating to residential property to call in court, to ensure scrutiny of the extent to which creditors have complied with the pre-action requirements. In cases where the debtor appears or is represented, it also allows sheriffs to consider wider circumstances about the debtor and those living in the property before any decree for repossession is granted.
• Preserves and extends the right of certain residents other than the debtor to make representations to a court considering a repossession application.
• Gives those facing repossession, and entitled residents who make applications to the court, the right to be represented in court by an approved lay representative.
• Provides a right to seek recall of a decree for repossession already granted, but limits that to only one application, where the person seeking recall has made no previous representations to the court.

9. The Explanatory Notes state that the Sheriff Court Rules Council will also be considering making provision in court rules to facilitate the operation of the procedures that the Bill will introduce.

10. Part 2 of the Bill amends the law dealing with personal insolvency in Scotland:

• Introducing a new route into bankruptcy which does not depend on action by creditors, on the basis of a certificate completed by an authorised person (likely to be an insolvency practitioner, solicitor or advice agency). This aims to ensure that the protection offered by bankruptcy is available as a last resort to anyone who is insolvent. The certificate is intended to open access to bankruptcy for all debtors. This will extend debt relief to anyone who is currently excluded from bankruptcy, particularly to home owners with limited equity, who may be unable to establish apparent insolvency. As a consequence of introducing this new route, the Bill also simplifies the current range of routes into bankruptcy.
• Amending the definition of trust deed in the Bankruptcy (Scotland) Act 1985 in order to include trust deeds which exclude certain creditors or assets. Trust deeds are an alternative to bankruptcy.
• Three specific changes to improve the protections offered by section 40 of the 1985 Act before the trustee in bankruptcy can sell a debtor’s home.
• Abolishing requirements to advertise certain matters in relation to the award of sequestration and trustee appointments in the Edinburgh Gazette.

summary of evidence

Consultation

11. The Policy Memorandum states that the proposals in the Bill are part of the Scottish Government’s response to conclusions from the work of its Debt Action Forum, and a Repossessions sub-group of the Forum. Officials stated that the conclusions were the product of several months of discussion and collaborative work.³ Several witnesses, however, commented on the lack of a public consultation on the Bill and its financial implications.

12. Officials confirmed that no formal 12-week public consultation had been conducted on the Bill or the Financial Memorandum. They said that there had been considerable pressure on the Scottish Government to take action quickly in respect of repossessions in the current economic climate, and said that no consultation was undertaken because an intensive and comprehensive period of discussion had taken place in the Forum between February and May. They argued that this constituted a more substantial and meaningful consultation than a normal open public one.⁴

13. Officials said that costs had been discussed in general outline with stakeholders as part of the work of the Forum. This had helped the Scottish Government to “scope out costs”. However, they confirmed that numbers were not discussed in detail, and accepted that the preparation of the Bill had been over the summer when some stakeholders may have had difficulty engaging with the process.⁵ The Scottish Legal Aid Board said that it could not meet the requested timescale of 10 days to estimate costs.

14. A number of witnesses expressed concern that the membership of the Forum was limited and had restricted the extent to which costs were fully considered. Those representing insolvency practitioners said that they were not permitted to be involved in the Forum, and so did not have the chance to comment before the Bill was introduced, even though they are directly affected. R3 stated that the composition of the Forum was “extremely lop sided in favour of the public sector, and excluded significant stakeholders”. R3 (a trade body representing insolvency practitioners) stated that a wide range of private sector interests had not been consulted – for example, representatives of unsecured creditors.

15. Officials stated that, while the Insolvency Practitioners Association (IPA) and R3 had not been invited to be part of the Forum, the interests of insolvency practitioners had been represented by the Institute of Chartered Accountants of Scotland. Officials confirmed that, while some discussion of proposals had to be confined purely to the Forum, the terms of reference of the group encouraged participants to consult their wider membership on key points, and disputed any suggestion that it was a ‘closed’ Forum.⁶

16. The Edinburgh Gazette – a direct stakeholder specifically identified in the Financial Memorandum as likely to suffer significant loss – also stated that it was not consulted on the costs. The Gazette stated that, had it been consulted on the proposals, it would have been able to offer alternative solutions which would have achieved savings, minimised the need for extra Accountant in Bankruptcy staff and limited the impact on the Gazette. Officials said that Ministers would meet with HMSO soon to discuss the impact of the Bill on the Gazette.⁷

17. In light of the comments outlined above, the Committee asked officials whether, in the circumstances, the Scottish Government believed that it had been able to give comprehensive consideration to the cost implications. They responded that, while the Bill was prepared in an unusual set of circumstances, they felt that there had been an appropriate opportunity to develop understanding of its impact.⁸

18. Given the range of possible impacts on private sector businesses – and the disputes about these impacts which are evident from written submissions – the Committee also asked officials why no regulatory impact assessment had been prepared in regard to the measures in the Bill. Officials said that there had been no time to prepare an RIA and that it would not, in any event, have added to the picture. They emphasised that an RIA was not necessary because the inclusive process of developing the proposals had been the right way to assess their impact.⁹

Part 1 of the Bill: Residential Standard Securities – Creditor’s Rights on Default

19. Officials emphasised that the Bill sits alongside a package of other support measures, such as funding of the National Debtline, funding increased capacity in legal advice services, increasing support for Citizens Advice Scotland, and increasing funding for the Homeowner Support Fund to help those most at risk of losing their homes. The Bill aims to go further by ensuring rigorous court scrutiny of the steps lenders should take to avoid repossession.¹⁰

20. The Financial Memorandum states that it is particularly difficult to provide accurate estimates of costs with regard to repossessions because lenders are not currently required to provide separate Scottish data on repossessions. It is difficult, therefore, to estimate how many repossessions may be avoided as a result of the Bill. The Memorandum states that it presents estimates which represent the upper limits of anticipated costs.

21. In evidence, officials stated that, while the cost assumptions were based on a projection from the Council of Mortgage Lenders (CML) that repossessions may increase by 60% in 2009-10 compared to 2008-09, the CML had recently revised this to a predicted 33% increase. The Scottish Government is, therefore, confident that the costs will be well within the estimates given.¹¹ The Memorandum does not provide a range of estimates for different scenarios.

22. Longer-term forecasts, and the net effect of the provisions in the Bill on the number of cases, are unclear. The Financial Memorandum applies the 60% figure to Scotland for each of the next two years, before starting to reduce back to 2008-09 levels in 2012-13 and subsequent years – although this is subject to variation depending on economic conditions. The summary table of costs assumes total actions initiated in court by lenders for repossession increasing to 16,000 per annum in the period 2010-12, before dropping back to 13,000 in 2012-13, with 15,200 additional cases in court per annum as a result of the Bill during the period 2010-12, but only 12,350 additional cases in 2012-13. The CML disputed the suggestion that incentives to repossess may increase as property prices recover¹². It, therefore, suggested that the assumptions about the profile of expected court cases may be wrong.

Court-related costs
23. Additional costs are expected to arise for the Scottish Court Service and the Scottish Legal Aid Board. In 2008-09 approximately 10,000 repossession actions were initiated in Scottish courts as ‘Mortgage/Loan/Lender’ actions. Data from England and Wales would suggest that less than one-third of cases result in repossession. Differences between the court system in England and Scotland mean it is extremely difficult to draw any firm comparisons. The Bill envisages that all repossession cases would in future call in court, using the summary application process. Currently only 5% call in court.

24. The Financial Memorandum assumes that about 50% of cases will be defended, considerably higher than the current 5% - although it is difficult to estimate this accurately. The Scottish Court Service estimates that the cost of judicial time, assuming a 60% increase in the number of overall cases initiated and 50% of actions being defended, is £288,000 per annum, with additional non-judicial staff costs of £73,000 per annum, £2000 training costs in the first year, falling to around £750 per annum thereafter and minor one off changes required to the court IT system of £1,500. The IPA pointed out that there is no explanation of how the cost of court time is calculated.

25. The Financial Memorandum states that it is not envisaged that the court fees incurred by lenders or borrowers will change substantially as a result of having all repossession cases call through use of the summary application approach. Fees payable by the lender on lodging their application provide an income stream for the court which has been subsumed into the costs for the Scottish Court Services described. Additional court fees for a proof are not expected to be relevant to the vast majority of cases.

26. Under a summary application, regardless of whether or not a borrower wishes to defend an action, the borrower would be required to pay for the lender’s solicitor’s appearance fee. Presently, where a repossession action is defended by the borrower, estimates indicate that the average charge doubles. The Financial Memorandum states that it is not envisaged that such costs will increase significantly. It also anticipates that the introduction of standard averments would limit this scope for variation and, consequently, the impact upon a lender’s solicitor’s charges. Officials stated that costs would rise as a result of all cases calling in court but, conversely, for those who do defend the action, costs will fall.¹³

27. However, the CML stated that lenders may have to renegotiate standard service level agreements with legal firms in the light of attendance at court being required in every case – and these costs will be passed on to borrowers. The CML also stated that lenders are likely to have to write off increased levels of debt if the new process takes much longer, implying that the cost of borrowing may rise as a result.

28. Officials disputed these points. They said that they were “very, very confident” that the Financial Memorandum accurately captures the costs expected, and anticipated no wider effects on the credit market.¹⁴ They emphasised that all that Part 1 of the Bill is proposing is to provide a statutory obligation for court scrutiny of measures which lenders should, under Financial Services Authority regulations, be doing at the moment, and so they could not anticipate any additional financial impact.¹⁵ They also said that, during development of the proposals, they had changed from ordinary to summary procedure specifically to minimise the impact on courts. Cost implications had been discussed fully with the Scottish Court Service, which regarded them as manageable.¹⁶

29. The Financial Memorandum assumes that lay representation may be sought in 25% of repossession actions defended, implying costs of about £72,750 across the advice sector as a whole based on figures provided by Citizens Advice Scotland). The Memorandum suggests that these costs will be met by additional funding already being provided through the Scottish Legal Aid Board to improve in-court and other advice services over the period April 2009 to April 2011.

Legal Aid costs
30. Net additional costs may also arise in relation to applications for legal aid. Based on the assumptions of overall case numbers, the proportion estimated to be defended, and the Scottish Legal Aid Board’s current experience of mortgage rights and related cases in which legal aid may be required, the Financial Memorandum estimates that there may be 3960 additional people likely to benefit from legal assistance by way of public funding as a result of the Bill. The Board’s experience under the current system indicates that in 55% of defended cases of this type legal aid was provided.

31. If all these cases were undertaken by solicitors and paid for through case by case legal aid it is estimated that there would be a net additional cost to the Legal Aid Fund. For a full year based on 15,200 additional cases and the median cost per case for civil legal aid of £387, the gross civil legal aid total is £1,532,520. The Board would expect this total cost would be reduced through recoveries and contributions to a net figure for civil legal aid of £1,063,186. Experience would also suggest that a proportion of individuals receiving legal aid would also receive Advice and Assistance, amounting to an additional £336,600 on top of the civil legal aid total.

32. This gives a final net annual total of £1,399,786 for each year 2010-12 where the anticipated additional cases are 15,200. With an estimated 12,350 additional cases, the equivalent net total for the year 2013 would be £1,074,315. The Financial Memorandum states that this should be seen as an upper limit on anticipated expenditure. The Scottish Legal Aid Board’s written submission supports this assessment of likely costs on it. The Financial Memorandum does not give a range of costs depending on different scenarios.

33. The estimate in the Financial Memorandum is based on all representation being paid for on a case by case on-demand basis through individual solicitors. However, other targeted expenditure by the Scottish Legal Aid Board is expected to result in additional lay and solicitor provision that will absorb a proportion of these additional cases where representation is required at Court. This means that the additional on-demand expenditure from the Fund is likely to be below the estimates above. No figures for additional running costs for the Legal Aid Board have been included in these costings, although the Financial Memorandum notes that if after 2010-11 civil legal aid applications increased, there would be a requirement for additional running costs of around £27,820 per year based on one additional junior solicitor post.

Part 2 of the Bill – Sequestration and Trust Deeds

Accountant in Bankruptcy
34. The Financial Memorandum describes additional costs which are expected to arise for the Accountant in Bankruptcy (AiB) and the Scottish Legal Aid Board as a result of Part 2 of the Bill. The AiB estimated that 500 new applications, from debtors who are currently excluded from bankruptcy, will be enabled by the new certification of sequestration route. This will require additional staff and IT development. The AiB has estimated an annual net cost of £50,000 per annum. The Financial Memorandum has not given a range of estimates as illustrations of the cost effect of different case-load scenarios.

35. Several witnesses challenged the estimate that there will be around 500 new sequestration applications for the new route. Irene Harbottle, R3 and the IPA all stated that the AiB grossly underestimated by several times the number of applicants the last time a new procedure (the low income low asset or LILA) was introduced – having estimated 2500, but there being over 9000 in practice. They argue that it has grossly underestimated again. Irene Harbottle stated that for every 500 new cases underestimated, the additional staffing costs required would be £80,259, with further additional set-up costs in the first year. The IPA gave figures on estimated costs if there were 2000 cases.

36. Officials from the AiB strongly disputed both that it had grossly underestimated the number of LILA applications, and that applications under the new route would be well above 500. They said that, in respect of the Financial Memorandum for the Bankruptcy and Diligence etc. (Scotland) Bill, introduced in November 2005, it had estimated 7,500 applications and that the number in 2008-09 had in fact been 9,417.¹⁷

37. They also stated that the AiB’s annual report for 2008-09 showed only 383 applications refused. In their opinion, the LILA route assists the majority of potential applicants for bankruptcy, and only a very few cannot access bankruptcy at present. The 500 estimated had been calculated by inflating the 383 by roughly the same factor by which its initial estimate of LILA applications had been out.¹⁸

38. The AiB also estimated that an additional 2,000 awards will be made each year on the basis of a certificate which would previously have been made on the basis of an existing route into bankruptcy, although this will not increase the administration costs for these cases. The IPA stated that these additional cases will increase costs to the AiB significantly, by an additional net £200,000 per annum.

39. Measures in Part 2 of the Bill are estimated to require a total of 4½ additional staff, costing £105,110 in 2010-11. Further costs will be required for recruitment and overheads (estimated at £45,000 in the first year, with ongoing overhead costs at £36,000 annually). IT development is estimated at £60,000 in the first year, with ongoing support at £6,000 annually.

40. Irene Harbottle and the IPA said that the AiB would not be able to administer even the estimated number of new cases at the staffing levels suggested in the Financial Memorandum. Officials explained their staffing assumptions. They said that they use a modelling tool to measure the staff time required at different grades for various tasks, and can project workload and inform decisions on the balance between dealing with work in-house and contracting it out through agency agreements. Its agency arrangements also give it flexibility to deal with significant changes in workload.¹⁹ The AiB is keen to minimise the requirement for extra staff by improving processes so as to move towards self-sufficiency and minimise its call on Scottish Government funds.

41. There is currently a charge for searching the Register of Insolvencies which will be abolished by secondary legislation, this will result in an estimated loss of income to the AiB of £72,000. Regulations are expected to extend the Register of Insolvencies to include trust deeds before they become protected, resulting in an estimated fee income from trustees of £240,000 per annum. There will be an additional staffing requirement to deal with processing additional information for inclusion in the Register of Insolvencies.

Legal Aid
42. Currently only a very small number of people obtain Advice and Assistance under legal aid for sequestration and the cost per case is very low (around £65). If all 500 new cases anticipated by the AiB were to be eligible and costs were to remain around the same, the maximum additional cost to the Fund would be £29,250, but this level of cost is thought unlikely.

Advice agencies
43. The Financial Memorandum states that the Bill will increase the range of options available to the money advice sector and should reduce the number of cases which require ongoing support. It is expected that any additional training required by Money Advisers in order for them to grant a certificate will be minimal and this training would be provided under existing provision to support accreditation and ensure sufficient capacity. Officials stated that a discussion forum with advice agencies would be reconvened and would consider any additional support required.²⁰

Insolvency Practitioners
44. Paragraph 138 of the Memorandum states very briefly that the Bill is expected to be cost-neutral for insolvency practitioners – with possible additional constraints on their ability to recover costs due to the improved protection for debtors’ family homes offset by reduced advertising costs.

45. However, this is vigorously disputed by some witnesses, who suggested that the Bill may result in redundancies throughout the insolvency practitioner profession. Irene Harbottle stated that appointing the AiB as the trustee by default in the new procedure will result in the loss of fee income and jobs for insolvency practitioners, significantly beyond the levels of additional employment to be created at the AiB. R3 said that this is transferring to the public sector work which is currently self-funded with no recourse to public funds.

46. Officials did not accept the presumption that exempting the family home may mean that more Trust Deeds are rejected, resulting in an increase in sequestration. They emphasised that it was not the intention or expectation that the provisions in the Bill would result in work being removed from insolvency practitioners. They argued that provisions may in fact encourage more people to approach insolvency practitioners for advice.²¹ They also said that any increase in work for the AiB could be put out to practitioners through agency contracts.²²

Edinburgh Gazette
47. The Financial Memorandum states that abolition of the need to advertise sequestrations in the Edinburgh Gazette would result in a loss of income to it of £396,600, with a corresponding saving to the Scottish Government. The Edinburgh Gazette would also lose income from advertisement of trust deeds (£480,000), and from sale of data to credit reference agencies, creditor organisations and debt management companies, who would be able to receive data free from the Register of Insolvencies. The Financial Memorandum acknowledges that this may affect the staffing required by the Edinburgh Gazette.

48. The Edinburgh Gazette stated that the Financial Memorandum does not accurately reflect the financial impact on it, or the cost savings for the AiB. It states that the costs have been calculated using a unit cost figure (£26.44) well above the actual costs of submitting notices (£22.50, or £19.13 if the submitter chooses to do so electronically), and so the cost saving of no longer doing so is significantly overstated. Officials said that they had had a number of meetings with the Edinburgh Gazette, but had not been able to get cost information at that time, so had used the best estimates then available within the AiB.²³ They confirmed that they stood by the estimates in the Financial Memorandum, and emphasised that their priority was to save public funds by avoiding duplication.²⁴

49. The Gazette stated that the loss of business could call into question the viability of a separate official newspaper for Scotland, with an impact on Scottish employment greater than the recruitment planned by the AiB. It also said that its technology development has been of wider use, such as in relation to Scottish Government subordinate legislation – implying that this economy could be lost in future. There is no indication that these factors were taken into account by the Scottish Government.

Costs on local authorities

50. The Financial Memorandum states that the provision requiring trustees to notify local authorities of an application to the Sheriff to sell a debtor’s family home may lead to some additional administration. This will give local authorities early notice of households who may be at risk of homelessness and the Financial Memorandum states that any additional increase in costs incurred by local authorities is likely to be offset in the longer term by benefits arising from early intervention.

51. Glasgow City Council suggested that extending debtor protection may mean that local authorities have to wait longer to realise assets, and more people who have council-owned debt may use the new routes into bankruptcy and so impact on the level of local authority debt collection. The Financial Memorandum does not describe any such costs on local authorities. Officials acknowledged that authorities may have to wait longer, but said this was simply a timing issue. They said that COSLA had been represented on the Forum and had raised no concerns. Officials stated that the Bill’s objective of reducing homelessness should in itself reduce costs on local authorities, and that this would outweigh any possible negative effects.²⁵

conclusions

52. The Committee notes with concern the disputes which have arisen over the estimated cost implications contained in the Financial Memorandum, and draws these to the attention of the lead committee.

53. The Committee acknowledges the concern of the Scottish Government to act quickly on measures to address a potential increase in repossession, and notes the comments of officials on the difficulty of conducting the normal public consultation or development of a regulatory impact assessment in the timescale available. However, the Committee also recognises the concerns of those stakeholders who feel that they were not properly consulted.

54. The Committee notes, in particular, the significant concerns raised by insolvency practitioners and by the Edinburgh Gazette. The Committee considers that the failure of the Scottish Government to engage adequately with a number of key stakeholders appears to have been the main reason for disputes about cost implications persisting.

55. The Committee believes that the failure to undertake the normal consultation process in respect of Part 2 of this Bill is unacceptable.

Footnotes: