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Maria Isanzu
Policy Directorate
The Insolvency Service
Zone B, 3rd Floor
21 Bloomsbury Street
London
WC1B 3QW
SENT VIA E-MAIL:
8 February 2010
Dear Maria,
BBA response to The Insolvency Service Consultation on Reforming Debtor Petition
Bankruptcy and Early Discharge From Bankruptcy
The BBA is the leading association for the UK banking and financial services sector, speaking for
216 banking members from 50 countries on the full range of UK or international banking issues and
engaging with 42 associated professional firms. Collectively providing the full range of services, our
member banks make up the world's largest international banking centre, operating some 150 million
accounts and contributing £50 billion annually to UK economic growth.
We welcome the opportunity to respond to The Insolvency Service (INSS) consultation on ‘Debtor
Bankruptcy Petition Reform and Early Discharge from Bankruptcy’, which builds upon an earlier
consultation on the principle of removing the court as the route for debtors to enter into bankruptcy
and replacing it with an administrative entry process, as well as removing the facility for the Official
Receiver (OR) to grant early discharge in less than one year.
Our response will, first of all, address some general concerns, before we respond to the detailed
questions set out within the consultation document in the attached appendix 2. Our response has
been drafted in consultation with our members. However, some members may also submit their own
individual responses, which may contain variations in the detail, but members are in agreement with
the general BBA position.
Executive Summary
1. We appreciate the need to reform the bankruptcy petition process in order to provide a more
streamlined and efficient process, as an alternative to the courts. We also understand the
need to deliver a more cost-efficient system, which would effectively be self-financing in the
longer-term, although there would be high initial set-up costs for a new central-based
administration centre. We accept the need to free up valuable court time and resources and
believe that a central-based administration process may also help deliver more consistent
and robust decisions on bankruptcy applications.
2. However, we are concerned that an on-line/internet-based application process may be
viewed as an ‘easy route out of debt’ compared to the ‘severity’ of the court process. We are
also concerned that a streamlined bankruptcy process may become commercialised,
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particularly by Debt Management Companies (DMCs) and private Insolvency Practitioner
(IP) firms, who may market the new bankruptcy process as an ‘easy route out of debts’.
Furthermore, bankruptcy may be seen as just another remedy, rather than the remedy of
‘last resort’, and commercial DMCs or IPs may see this as another opportunity to ‘flip’
debtors from one remedy to another (i.e. from a Debt Management Plan (DMP) to an
Individual Voluntary Arrangement (IVA) before, finally, bankruptcy).
3. We accept the need that bankruptcy should be available to those individuals who clearly do
not have the ability to repay and in those cases it would be the ‘best option’, but we do not
necessarily think that this is different to a remedy of ‘last resort’, as it does provide those
debtors with the opportunity to finally clear their debts once and for all. Debt write-off
ultimately affects creditors’ bottom-line and this cost is redistributed across the rest of the
performing portfolio, leading to re-pricing of credit, which is a negative factor around financial
inclusion. During recession, unemployment increases, along with the impact on incomes,
leading to greater incidence of financial difficulties and affecting debtors’ ability to repay.
However, for many skilled and professional people, this may just be a temporary situation
until they find another job and are able to resume debt repayment. Our concern is that the
current suite of debt remedies does not adequately address the needs of both debtors and
creditors. I attach a separate paper in this respect, as appendix 1, which I hope you will find
of interest. Rather than repeating those points here again, I state our over-arching
preference is for a holistic review of debt remedies, across the spectrum, from informal
arrangements to bankruptcy to ensure that we have an effective safety net for consumers in
financial difficulty.
4. We would encourage the development of a rigorous and robust process around the
bankruptcy petition to ensure that the system is not susceptible to abuse. The Decision
Maker’s (DM’s) role will be crucial in this respect and we suggest that only suitably qualified
and experienced individuals, with appropriate skills and qualities, are appointed to this
position to take such important decisions on bankruptcy applications.
5. We would also suggest that the INSS and Government have adequate contingency plans in
place to gear up to deal with any potential increase in volumes of bankruptcy applications,
as a result of the introduction of the new administrative process, in addition to the
expected/forecast rise as a result of cyclical economic trends and that robust and consistent
decisions are maintained irrespective of volumes.
6. One way to ensure that there is a safe and sound process around bankruptcy petition, that
would instil creditor confidence, is to link it into the money advice process, similar to the Debt
Relief Order (DRO) regime. Whilst we appreciate the current resource constraints within free
money advice services, we note that 94%1 of bankrupts had sought debt advice prior to
presenting their own petitions. We also appreciate that the DRO regime is small scale, with
only a limited number of debtors meeting the eligibility criteria, but it does nevertheless
provide a useful pilot, as a precursor for a more large scale process such as bankruptcy.
There may also be more potential for abuse with bankruptcy applications, as it has less
stringent eligibility criteria than the DRO. Therefore, we request that The Insolvency Service
and/or Government do not rule this possibility out just yet, as free money advice resources
may improve when the proposed new bankruptcy petition process is finally due for
implementation. We appreciate that this would be a large scale IT project, which would
1
Survey of Debtors Petitioning for Bankruptcy, The Insolvency Service, 2007 – see page 12 of the consultation
paper: Reforming Debtor Petition Bankruptcy and Early Discharge from Bankruptcy.
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likewise incur large costs, but there would be benefit of doing this and ensuring that the IT
infrastructure is set up in one given opportunity.
7. Finally, we welcome the removal of the facility for the OR to grant early discharge from
bankruptcy in less than 1 year. We believe that a standard 1 year discharge will mean greater
simplicity, less confusion in understanding the implications of bankruptcy and prevent the
dilution of the severity of bankruptcy any further, in comparison to the benefits that early
discharge may provide.
We hope that you will find these comments and suggestions helpful in shaping the new debtor
bankruptcy petition process, but should you have any questions or require further information from
us regarding any of the issues we have raised, please contact Shahid Rahman on 020 7216 8849 or
shahid.rahman@bba.org.uk in the first instance.
Yours sincerely,
Eric Leenders
Executive Director
T +44(0)20 7216 8857
E eric.leenders@bba.org.uk
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Appendix 1 - Debt and the moral hazard
A deep recession will put pressure on individual consumers, banks and the financial system as a
whole. The present economic climate suggests higher unemployment, with the attendant effects on
debtors’ ability to repay, but increased incidence of financial difficulty will increase the rewards for
those seeking to profit from it. One of the unintended consequences of the emerging market is the
‘Moral Hazard’ of creating a culture where repayment of debts is optional.
Much policy thinking has been given to individual remedies and this includes regulated Debt
Management Plans (DMPs). Debt management exists to ensure not only relief for consumers who
can no longer meet debt obligations, but also an efficiently functioning credit market. There is an
argument that neither objective is being met.
Debt management poses significant challenges to the credit provision market. Credit provision is
made on the assumption that we have a culture in which the repayment of debt is a moral obligation.
When this breaks down, the effects are ultimately felt in increased credit pricing and more limited
access to funds.
Increasingly, new remedies are mandating creditor concessions such as debt composition (write-off),
compulsion (compelled to join/abide) and interest/charges forgiveness. This forces pricing
adjustments across the remainder of the performing portfolio, puts upward pressure on interest rates
and moderates risk appetite – all negative factors around financial inclusion.
Debtors typically have three broad needs:
1. Cessation of collections and recoveries activities (calls, field agent visits and litigation);
2. A permanent solution to their debt problems; and
3. A path back into the credit market.
At the same time, creditors require the maximum return on capital on a net present value basis,
protection from the unscrupulous, and effective solutions to ensure that ‘won’t pays’ honour their
debt responsibilities.
Equally, a debtor might only need short term support as a ‘can't pay’ and any solution needs to take
account of changing circumstances. That is, if ability to repay improves, solutions need to be flexible
enough to move with it and the repayment to the creditor needs to improve.
Any requirements to re-shape debt should at all times respect pre-existing contractual arrangements.
The creditor should be allowed to exercise any forbearance at their sole discretion, bearing in mind
that commitments have already been given for the sympathetic treatment of those in financial
difficulty.
Many creditors would support offering a better range of debt management options that assist debtor
rehabilitation and allow reasonable prospects for returns to creditors. Currently, a DMP is the only
informal option (other than a consolidation loan) that allows full repayment of debts. But proposals
for regulated debt management schemes do not appear to offer significantly better ways (than that
already in existence) of encouraging repayment or helping the over-indebted manage their debts.
And it seems counter-intuitive to be thinking about further changes to income based remedies at the
very time when a loss of income is the main driver behind rising levels of financial difficulty.
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As a fundamental first step, we call for a comprehensive strategic review of all debt remedies
(including those yet to be introduced). A holistic review of debt remedies should identify any gaps;
highlight inconsistencies and overlaps in existing provisions; and a situation analysis of the emerging
and future debt market. The needs of both debtors and creditors can be addressed by mapping the
coverage of each remedy and addressing any identified gaps or overlaps. The primary objective of
such a review would be to test whether all debtors and creditors are being well served by the present
regime and what changes – if any – could be made to improve the system. Any new measures
should be introduced in a way that helps to clarify the ways in which formal debt management
remedies are provided.
Based on this analysis we would support a blueprint for cohesive, streamlined, understandable and
accessible remedies, giving sympathetic support for ‘can’t pays’. At the same time the regime should
deliver the desired recovery outcomes for debtors and creditors alike, with sanctions developed
where ‘won’t pays’ are ‘gaming’ the regime.
We recognise that none of the above is straightforward, but if the authorities were to act now to
ensure there is a proactive response to emerging market developments, that both protects
consumers and preserves creditors’ rights to collect debt, then there would be unequivocal long term
benefits for all.
Ends
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Appendix 2 – responses to the detailed questions set out in the consultation paper
1. What skills and experience do you think it is appropriate that a Decision Maker should have
in order to make bankruptcy orders administratively?
We believe that a Decision Maker (DM) should have the following key qualities:
i. be appropriately qualified, equivalent to an Official Receiver (OR), an
Insolvency Practitioner (IP) or other similarly qualified individual;
ii. have relevant skills and experience, either previously having practiced as an
OR, IP or another suitably qualified and experienced individual;
iii. an individual with a high level of personal integrity (i.e. someone who has
previously not been made bankrupt, not been in the process of being made
bankrupt, not been involved in another insolvency or debt remedy procedure or
possesses a criminal record for fraud, etc.);
iv. not have a vested interest or potential conflict of interest in acting as the DM,
such as a practicing OR, a private IP, be involved in, have shares in, or has a
family member involved with an insolvency practice, IVA provider or Debt
Management Company (DMC), etc.
We would expect the above prerequisites as a minimum, although there would need to other
qualities, skills and experience that would need to be defined within the job description/specification,
such as the ability to assimilate large amounts of complex information in order to reach a balanced
decision, amongst other requirements.
We agree that the role of the DM should be distinct to the OR, to avoid any potential conflicts of
interest.
2. Should the Decision Maker role sit within The Insolvency Service or elsewhere?
Yes – we agree that the DM’s role should sit within The Insolvency Service (INSS) for efficiency
reasons and also to ensure that sufficient stature for the role is maintained outside the court process,
where the decision to grant a bankruptcy order would have been taken by a Judge or District Judge.
We suggest that the DM’s role is of an equivalent standing to the OR but, as mentioned above, the
DM should not be a practicing OR, to avoid any potential conflicts of interest.
3. What links should there be between the Decision Maker and other bodies?
We do not think that the DM should have any links or connections with other bodies, as mentioned in
our answer to question 1 (and 2) above, to avoid any potential conflicts of interest, but we think that
the DM should be aware of who to contact at relevant organisations, such as creditors, advice
bodies and other Government departments or agencies to cross-reference any details within the
bankruptcy application for checking/validation/verification purposes.
4. Would a requirement on debtor applicants, to confirm both that the consequences of
bankruptcy have been read and understood and that they still want to submit the application,
be sufficient to ensure that those who apply for their own bankruptcy appreciate the
seriousness of taking this step?
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No – we consider that this in itself would not be sufficient to ensure that debtors appreciate the
seriousness of bankruptcy and this is unlikely to influence the debtor’s decision regarding whether or
not to submit the application, as many people might view this as a formality without reading or
understanding the implications. We believe that debtors should always seek professional
money/debt advice first, before applying for bankruptcy.
5. Would information about other debt relief mechanisms, provided as part of the application
process, be enough to ensure that debtors have sufficient opportunity to consider whether
opting for bankruptcy is the right decision for them?
No – we consider that this in itself would not be sufficient to ensure that debtors can decide whether
bankruptcy is the right option for them, but we would support the provision of objective information,
such as the INSS’s ‘Debtor’s Guide’: In Debt - Dealing with Your Creditors, to ensure that debtors
are aware of the alternative options available to them. However, this in itself would not be sufficient
to ensure that bankruptcy is the ‘best option’ for the debtor. We believe that debtors should always
seek professional money/debt advice first, before applying for bankruptcy.
6. Should debtors be encouraged to consider alternative debt resolution procedures before
submitting an application for bankruptcy?
Yes – please see our response in answer to questions 4 and 5 above.
7. Is there a need for the Decision Maker to be given power to direct someone into an
alternative debt relief mechanism?
No - whilst we appreciate that the court can make an interim order for the purpose of considering
and facilitating implementation of a debtor’s proposal for an Individual Voluntary Arrangement (IVA),
we do not agree that there is a need for the DM to be given the power to direct someone into an
alternative debt relief mechanism. We believe that the DM’s role should be solely confined to the role
of accepting/rejecting the bankruptcy application or requesting further information. Any further
powers or duties may create additional subjectivity to creep into the role or potential conflicts of
interest to arise. However, if the bankruptcy application is rejected, then we believe that the DM
should be able to refer the debtor to free money advice agencies to seek further money/debt advice
in order to help them to resolve their outstanding financial problems.
8. Should there be any exemptions or remissions of the application fee?
No – we believe there should be no exemption or remission of the application fee. This would also
help avoid frivolous applications and reduce the potential for abuse of the system.
However, we request that the INSS gives further consideration to the possibility of payment of the
application fee and deposit in installments, as an alternative to upfront fees, given that it is likely that
those debtors who require this remedy the most may be the people who are least able to access
bankruptcy due to their ability to meet the costs involved. Delaying the inevitable benefits neither the
debtor nor creditor.
We do, however, appreciate the impact of payment by installments on cashflow and that the new
bankruptcy regime needs to be self-financing, as well as ensuring that any change in fee/charging
structures does not have any unintended consequences on bankruptcy volumes, particularly from
those of a frivolous nature.
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9. If yes, how would you suggest that the cost of any fees forgone could be met in order to
keep the application process self-financing?
Please see our response in answer to question 8 above. If payment in installments is introduced in
exceptional circumstances/cases of financial difficulty, costs could then be recouped over time,
rather than upfront. The possible threat of the bankruptcy order being revoked if payment is not
made/received in full should act as a sufficient deterrent for those who may consider abusing the
system.
10. Do you think that there should be differential pricing of a bankruptcy application,
according to whether it is made electronically or on paper?
No – for the purpose of simplicity and potential issues with discriminatory pricing models, we suggest
that the bankruptcy application process should operate on standardised pricing and any cost
differential via different application modes/channels should simply be cross-subsidised to cover the
necessary costs.
11. Should there be a facility to enable debtors to make their bankruptcy applications on
paper forms?
Yes – some debtors may not have access to alternative modes/channels of application, and to avoid
any discrimination and/or ‘access to justice’ issues, a paper-based application form should be made
available. Furthermore, we expect that the INSS would need to comply with the provision of
‘reasonable adjustments’ or alternative options for people who require different forms to be made
available for their special needs (e.g. people with disabilities, etc.) anyway.
12. Should there be a facility to enable payment to be made on line at the same time as the
application form is submitted?
Yes – but we would do not think that payment should enable use of credit facilities, such as payment
by credit card. However, a direct debit would be considered an acceptable method of payment.
13. Is a maximum of 10 days an appropriate period of time to allow between receipt of
acknowledgement of the application and payment of the fee that covers both the cost of
administering the application and the deposit?
Yes – but please also see our response in answer to questions 8 and 9 above.
14. If you have answered “no” to the previous question, what period do you consider
appropriate and why?
Not applicable – please see our response in answer to question 13 above.
15. Should the application form automatically expire if payment is not made within a specified
period of time?
Yes – an application for bankruptcy should not be considered (or the bankruptcy order revoked) if
payment is not made within the specified period of time.
16. Have we suggested any powers for the Decision Maker that you think are unnecessary? If
so, which powers and why might they be unnecessary?
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No – we agree that the DM’s role should be solely confined to the role of accepting/rejecting the
bankruptcy application or requesting further information. Any further powers or duties may create
additional subjectivity to creep into the role and lead to potential conflicts of interest to arise.
17. Are there any additional powers that the Decision Maker should have? If so, what powers
and why do you think these are necessary?
No – we have not identified any additional powers that the DM should have.
18. Within what set period of time should a debtor be required to provide further information,
after which time the application will be deemed withdrawn? Please provide reasons for your
choice.
We agree that debtors should be given a time limit, in order to respond to any queries or requests for
further information, which would help encourage them to respond promptly. We think that 14 days
would be considered a reasonable initial period of time. However, we appreciate that sometimes 14
days may be considered a too short a period of time for some types of requests or in certain
circumstances. We think it would be reasonable to issue a further reminder, warning that this would
be the final opportunity to provide the requested information and if the information requested is not
submitted within another 14 days, then the bankruptcy application will be annulled with the loss of
the bankruptcy application fee and deposit (i.e. provide a maximum of 28 days from the information
request to annulment).
19. Should the Decision Maker have a general power to stay a bankruptcy application? If yes,
would you please explain your reasons and outline the circumstances in which you think
such a power would be useful.
Yes – the DM should be able to act on all applications received and have the power to stay the
application pending the request for further information. However, this should only be utilised in
exceptional circumstances, as the information request should be sufficient to cover most cases.
20. Should the Decision Maker have the power to appoint a trustee? If yes, would you please
explain your reasons and outline the circumstances in which you think such a power would
be useful.
No - we are comfortable for the DM not having the power to appoint a trustee without consulting
creditors first.
21. Do you think that assets may be at risk in the period between a bankruptcy application
being accepted and a bankruptcy order being made?
Yes – there may be some risk here.
22. In order to ensure that assets at risk are protected, should the Decision Maker have the
power to appoint an interim receiver in the period between a bankruptcy application being
accepted and a bankruptcy order being made?
Yes – that seems reasonable, although it is not clear how this potential ‘risk’ will be assessed, when
an interim receiver should be appointed or how any cases that fall through this ‘safety net’ will
subsequently be dealt with.
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23. If you have answered “no” to the previous question, can you describe a better way of
ensuring that such assets are protected?
We suggest that the INSS gives further consideration to ensure that there is a robust and rigorous
process for dealing with any cases that may potentially fall through this ‘safety net’.
24. Do you agree with the duties we have outlined for the Decision Maker?
Yes – please see our response in answer to questions 16 and 17 above.
25. Have we suggested any duties that you consider are unnecessary? If so, which ones and
why?
No – please see our response in answer to questions 16, 17 and 24 above.
26. Are there any other duties the Decision Maker should have? If so, what are they and why
do you think they are necessary?
No – please see our response in answer to questions 16, 17, 24 and 25 above.
27. Do you think that two working days, from when an application is deemed to have been
submitted, is an appropriate period of time within which to require the Decision Maker to
make a decision?
No – we think that 2 working days seems too ambitious and may be challenging to achieve in
practice/reality, especially during periods of high seasonal trends or when experiencing unexpected
volumes. We would much rather see a well considered decision, compared to a quick or rash
decision, made in order to hit set targets. It would seem more acceptable to issue an
acknowledgement within 2 working days and then aim to reach a decision on whether or not to grant
the bankruptcy order within 14 calendar or 10 working days.
Bearing in mind our response to question 18 above and questions 29 and 30 below suggesting 14
days for requests for further information and a subsequent final reminder of another 14 days, the
bankruptcy process should take a maximum of 6 weeks in total.
28. Do you think that the two working days within which the Decision Maker is required to
make a decision should be stayed if the Decision Maker stays his or her consideration of a
bankruptcy application pending receipt of further information and/or evidence?
Yes – please see our response in answer to question 19 above.
29. Should failure to respond to a request for further information be treated as the application
being withdrawn by the debtor?
Yes - please see our response in answer to question 18 above.
30. Would 14 days be sufficient time to give to the debtor to ask the Decision Maker to review
his/her decision? If not, why? How long do you think it should be?
Yes.
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31. Do you think that early discharge should be repealed?
Yes - we agree that early discharge should be repealed. A standard 1 year period for discharge from
bankruptcy in all cases would:
i. create simplicity;
ii. reduce any confusion in understanding the implications of the bankruptcy process;
and
iii. prevent the severity of bankruptcy from being diluted any further.
In practice, we doubt the bankruptcy application and investigation process would take much less
time to complete, so there is very little benefit to be gained from early discharge. Therefore, we
believe that repeal of early discharge from bankruptcy would be reasonable.
32. If you do not think that early discharge should be repealed, what specific benefit do you
think there is in keeping early discharge? Please provide figures if you can.
Not applicable – please see our response in answer to question 31 above.
Ends
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