The debt claim process helping people in debt to

The debt claim process: helping people in debt to engage with the problem 5 September 2007 Annex C: initial impact assessment 1 Summary: Intervention & Options Department /Agency: Title: Ministry of Justice Impact Assessment of The debt claim process: helping people in debt to engage with the problem Consultation Paper Version: Date: 5 September 2007 Stage: Consultation Related Publications: Available to view or download at: http://www. Contact for enquiries: Philomena Daniels Telephone: 020 7210 8602 What is the problem under consideration? Why is government intervention necessary? Tackling over-indebtedness is a piority for Government. Research indicates that over-indebtedness cannot usually be dealt with in isolation due to links with other problems such as, unemployment, family breakdown. High proportions of debts are resolved outside of the court system but the numbers coming to courts is increasing. This deals with the symptoms rather than underlying causes. The majority of creditors follow pre-action procedures that include encouraging engagement but it is not clear whether this includes providing the details of free advice providers. What are the policy objectives and the intended effects? The objectives are to encourage debtor engagement and to ensure debtors are aware of sources of free advice enabling them to seek assitance in dealing with debt, and any underlying problems, at an early stage. Providing this level of information to creditors may lead to more negotiated solutions, rather than court action, and a reduction in the 20% of claims issued which do not progress beyond the claim being issued. What policy options have been considered? Please justify any preferred option. Option 1 - Doing nothing; Option 2 - Pre-action Notices (PAN); Option 3 - Strengthen existing preaction requirements in the Civil Procedure Rules (CPR); Option 4 - Pre-action Protocol for Debtors; Option 5 - Claims Payments Order (CPO). Our preferred option is Option 3. Our reasons are set out in the Evidence Base section of this paper. When will the policy be reviewed to establish the actual costs and benefits and the achievement of the desired effects? Initially on receipt of responses from stakeholders to the consultation. A post implementation review would take place 2 years after introduction. Ministerial Sign-off For consultation stage Impact Assessments: I have read the Impact Assessment and I am satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impact of the leading options. Signed by the responsible Minister: .......................................................................................................... Date: 2 Summary: Analysis & Evidence Policy Option: Description: ANNUAL COSTS One-off (Transition) £ COSTS Average Annual Cost (excluding one-off) Yrs Description and scale of key monetised costs by ‘main affected groups’ Creditors Other Government Departments/Courts Advice Bodies Total Cost (PV) £ £ Other key non-monetised costs by ‘main affected groups’ ANNUAL BENEFITS One-off BENEFITS £ Average Annual Benefit (excluding one-off) Yrs Description and scale of key monetised benefits by ‘main affected groups’ £ Total Benefit (PV) £ Other key non-monetised benefits by ‘main affected groups’ Key Assumptions/Sensitivities/Risks Price Base Year Time Period Years Net Benefit Range (NPV) £ NET BENEFIT (NPV Best estimate) £ England & Wales April 08 MOJ/HMCS £ Gen.running cost Yes No £0 £0 No Small Medium Large What is the geographic coverage of the policy/option? On what date will the policy be implemented? Which organisation(s) will enforce the policy? What is the total annual cost of enforcement for these organisations? Does enforcement comply with Hampton principles? Will implementation go beyond minimum EU requirements? What is the value of the proposed offsetting measure per year? What is the value of changes in greenhouse gas emissions? Will the proposal have a significant impact on competition? Annual cost (£-£) per organisation (excluding one-off) Micro Are any of these organisations exempt? Impact on Admin Burdens Baseline (2005 Prices) Increase £ Decrease Key: No Net No £ N/A N/A (Increase - Decrease) £ Annual costs and benefits: Constant Prices (Net) Present Value 3 Evidence Base (for summary sheets) [Use this space (with a recommended maximum of 30 pages) to set out the evidence, analysis and detailed narrative from which you have generated your policy options or proposal. Ensure that the information is organised in such a way as to explain clearly the summary information on the preceding pages of this form.] General There were 1,575,000 specified money claims issued in 2006/07. Of these 980,000 were issued at the Claims Production Centre (CPC). A further 117,000 were issued via the electronic Money Claims on Line (MCoL) system and 477,000 at the local county courts. Taking the total number of defences and default judgments from the total claim volumes we estimate that in 2006/07 around 20% (310,000) of all money claims issued did not proceed any further. Using a sample from 2003/04 it is thought that 20% of claims issued at the local county courts are by individuals. In addition, data from MCOL for July 2004 - June 2005, shows that 27% of claims were issued by individuals themselves (rather than through a solicitor). Assuming that these figures are still representative of the current claimant base, it is estimated that around 127,000 claims (8% of all money claims) were issued by individuals in 2006/07. We are told that the majority of creditors operate under codes of practice, are indepenantly regulated or choose to operate pre-action systems designed to encourage engagement. It is anticipated that the larger issuers (those using the CPC) will fall into these categories. We have asked for confirmation of pre-action systems in the consultation paper but it is unlikely that individuals issuing claims take any recognised pre-action steps. Increased engagement may impact on the the 20% of claims that are issued and do not proceed and may see reductions in other areas. However, as creditors have the right to refuse offers made, this will not follow automatically. POLICY OPTIONS Option 1 Do nothing; Option 2 Pre-action Notices (PAN); Option 3 Strengthening exisiting pre-action requirement in the Civil Procedure Rules (CPR) Option 4 Pre-action Protocol for Debtors and Option 5: Claims Payment Orders (CPO) Our preferred option is Options 3. Option 1 - The "Do Nothing" approach would mean maintaining the status quo and would not involve changes for any sector. However, adopting this approach would do nothing to encourage greater debtor engagement, nor would it improve debtor awareness of the range of free advice providers available to them. Therefore the potential benefits to all parties of the earlier resolution of debt problems without the addition of court costs and without having judgments registered on the Register of Judgment, Orders and Fines (RJOF) would remain untapped. Option 2 – Pre-action Notices (PAN). The PAN was intended to encourage engagement, provide informaton on sources of free independent advice and assistance and warn of the possible consequences of inaction. A recent pilot was designed to test whether the receipt of 4 communications from a court had more impact on the debtor than simply receiving a creditor’s letter. The results were inconclusive showing little difference in engagement rates regardless of the method used suggesting that the involvement of the court at this stage does not necessarily influence the debtors’ action. A study undertaken by Exeter University in support of the PAN pilot found that while most debtors were aware that Citizens Advice (CA) could provide fee help and assistance they were generally unaware of other free advice providers. As mentioned in the consultation paper this may lead to debtors being unable to make appointments for advice until after the 14 days for admission/defence has expired and therefore not engaging. Providing debtors with details of alternative sources of advice may improve this situation. Costs The introduction of such a system would incur costs for the Ministry of Justice/HMCS, creditors and the advice sector. These would be a ‘one off’ cost to creditors and MoJ/HMCS in respect of IT and system changes together with ongoing training costs. Creditors would have further ongoing costs because of the issue fee, which would ulitimately be recovered from debtors, where claims were settled. It is impossible at this stage to assess costs other than to say that costs for MoJ/HMCS are unlikely to be significant and would be recovered from the fees charged in any event. Creditors and the advice sector have been asked to estimate costs and benefits as a part of the consultation. Benefits The introduction of the PAN might lead to improved engagement. If this ultimately led to increased settlement rates there would be a benefit to creditors in not having to prepare cases for issue in the court and not having to pay the court fee. However, creditors who uses solicitors throughout the debt recovery process would then not be able to claim fixed costs on issue and, where these would have been recovered from the defendant, this would need to be offset against savings. We have no information about the costs generally or to individual creditors in trying to recover debts and it is therefore impossible to estimate savings/benefits. Those debtors who did respond and were able to reach agreements with creditors would benefit from a reduction in court fees and costs but it is impossible to predict what engagement and agreement rates would be. It is therefore not possible to estimate savings. Conclusion Given the lack of evidence of increased engagement and the potential additional costs we do not feel that there is justification for the introduction of this mandatory system. We are however happy for creditors to continue to use the PAN formatting and wording in their letters if they choose to do so. Option 3 – Strengthening the existing pre-action requirements in the CPR A study undertaken by Exeter University in support of the PAN pilot found that while most debtors were aware that Citizens Advice (CA) could provide fee help and assistance they were generally unaware of other free advice providers. As mentioned in the consultation paper this may lead to debtors being unable to make appointments for advice until after the 14 days for admission/defence has expired and therefore not engaging. Providing debtors with details of alternative sources of advice may improve this situation. Under this option creditors would have to issue a final notice before action and this would need to include, at least, the following specified information: • details of how the debt can be paid; 5 • names/numbers to enable debtors to contact them to try to negotiate a settlement when immediate full settlement is not possible – either direct or via an independent third party; and • details of specified free advice and assistance providers. Debtors would be given a period (probaby 14 days) to make initial contact either directly or through an advice provider. Where this happened, creditors would be expected not start proceedings until advice had been received. Failure to comply could involve costs sanctions against creditors depending on the circumstances of individual cases. We believe that this will ensure that the 8% (overall) of creditors who are individuals follow recognised pre-action steps thus encouraging engagement and possible settlement. It is also possible that it will impact, to some extent, on the 20% of cases that are issued and do not progress further. Costs It is not possible to accurately assess costs to creditors at this stage and we have asked for assessments of costs and benefits. However, by explicitly recognising the current steps taken by, for example, regulated creditors, we expect that any costs would be minimal. The advice sector would, of course, be impacted by any additional numbers of debtors seeking assistance but resources have already been provided, for example, to National Debtline, to allow them to expand advice capacity. The cost impact on HMCS to implement this change would also be small and will, in any event, be met from within current resources. Benefits Strengthening the existing pre-action requirements in the CPR is intended to lead to improved engagement. If this ultimately led to increased settlement rates there would be a benefit to creditors in not having to prepare cases for issue in the court and not having to pay the court fee. However, creditors who uses solicitors throughout the debt recovery process would then not be able to claim fixed costs on issue and, where these would have been recovered from the defendant, this would need to be offset against savings. We have no information about the costs generally or to individual creditors in trying to recover debts and it is therefore impossible to estimate savings/benefits. Those debtors who did respond and were able to reach agreements with creditors would benefit from a reduction in court fees and costs but it is impossible to predict what engagement and agreement rates would be. It is therefore not possible to estimate savings. If the strengthening of the CPR requirements is successful in encouraging engagement and early settlement/out of court agreements there will be a reduction in the numbers of claims issued providing a corresponding saving in staff resource. However, there would also be an impact on fee revenue. Option 4 – Pre-action Protocol for Debtors - This protocol would lead to debtors facing possible costs sanctions if they failed to engage. This protocol was suggested by key stakeholders and MoJ/HMCS agreed to consider it. After doing so we do not believe that this option is operable as it is impossible to ensure that all debtors would be aware of such a protocol or any obligations they face as a result of it. It is generally accepted, and we have anecdotal evidence, that many debtors fail to read letters from creditors and courts often because of limited language and literacy skills. The difficulties envisaged in ensuring that debtors were aware of the protocol and the actions that they would be expected to take, the costs involved and the question of whether it is just to impose further costs on those already struggling to meet commitments have led us to the conclusions that we should not proceed with this option. 6 Option 5 Claims Payments Order –The CPO, based on the European Order for Payment and the system that has operated in Germany for some time, was developed alongside the PAN and could probably only be introduced if the creditor was under an obligation to provide the debtor with key information and advice sources and made statement of compliance on the claim form. The introduction of this option would mean that creditors would need to provide debtors with a notice, containing the information mentioned above, and warning of the potential consequences of inaction shortly before action was commenced. In situations where debtors still failed to engage the CPO procedure would enable creditors to apply to the court for the issue of an order for payment (enforceable order) rather than having to issue a claim and wait to see whether there was response from the debtor. We also discuss the possibilities of ‘kitemarked’ creditors (those creditors who are either regulated or who follow recognised codes of practice) being able to issue the enforceable orders without court involvement, only registering them with the court if there was a need for enforcement action. However, as mentioned in the paper this would require primary legislation and would need to be the subject of a further full public consultation. Costs We anticiapte that the introduction of this option would have significant cost implications for MoJ/HMCS, creditors and the advice sector for changes to IT systems and procedures and for re-training. Cost and benefit assessments have been requested in the consultation paper. Benefits Creditors would benefit from the introduction of the CPO because they would be able to obtain an enforceable order more quickly against those who continued not to engage. However, the majority of creditors have indicated that they would be uncomfortable with a system which in their view limits a debtor’s opportunities to engage. There are few obvious benefits to debtors other than they will have greater certainty because they will be aware of when they must start complying with an enforcable order earlier than sometimes happens at present. PREFERRED OPTION: Option 3 - strengthening the exisiting pre-action requirements in the CPR : This is our preferred and recommended option. The study undertaken in support of the PAN pilot confirmed the benefits of creditors following a clearly structured approach to contacting debtors immediately before beginning court action in a last attempt to encourage engagement. The study also indicates that if unsupported, debtors will not necessarily identify solutions that will address the underlying cause of their difficulties at an early stage. The holistic approach adopted by independent debt advisors is best placed to do this before the situation worsens. It is believed that clearer sign-posting of debtors towards the most appropriate scheme to their needs will allow for better informed choices to be made leading to increased engagement. In order to increase awareness of appropriate debt advice sources we believe that it would be beneficial to the parties if some form of minimum standard level of information to be provided was introduced. In broad terms we envisage that it would operate in the same way as was proposed for the PAN, although without the need for the court to issue the final notice. 7 Where an advice provider informed a creditor that they were advising a debtor we believe that the creditor should be expected to allow sufficient time for this to happen and if they did not, their costs would not be guaranteed. Costs We envisage that the costs of strengthening the exisiting CPR requirements would be very low. For HMCS we expect that the only costs would be in terms of publicity, while those creditors who already operate appropriate codes of practice would simply add the details of advice providers to their existing standard letters. For those creditors who do not use a standardised letter, the text of the PAN will be available free of charge to download from the MOJ/HMCS website for use with their own letterheaded paper. We do not envisage any additional costs for system changes or training for the advice sector although there is the likelihood of an increase in the numbers approaching them for assistance. Benefits As mentioned above, creditors will benefit from any increase in engagement that leads to a sustained increase in out of court agreements and debtors will benefit from not having court fees and costs added to their debt. There will be an impact of staff resource and fee income if this option leads to a reduction in the number of cases issued but it is impossible to assess the extent at this stage. Conclusion The concept of strengthening the exisiting pre-action requirements of the CPR appears to offer the delivery of necessary additional information about appropriate sources of debt advice at minimum cost. Q1. Do you agree that strengthening the exisiting pre-action requirements in the CPR would assist creditors and debtors? Q2. Is your code of practice mandatory and who is responsible for its monitoring/regulation? Q3. How many notices (in numbers) do you send to the debtor before you commence legal action? Q4. Are debtors given details of the advice and assistance providers who may be able to help them? Q5. If so, please list the advice providers specified. Q6 How soon after the final warning is action usually commenced? Q7. Is the process re-started in situations where agreement is reached but not complied with? Q8. What is your estimation of the costs involved in compliance with a strenghtened pre-action requirement in the CPR? Q9. What impact would the compliance with such a code have on your business? Q10. Will this option have a disproportionate impact on small business/individual creditors? Q11. We would welcome information and comments about the social, economic and environmental impacts of the options. 8 Competition Assessment 1. The affected people are creditors generally. Debt recovery problems are not limited to any particular section of the market but there may be higher costs for firms who traditionally lend to those with poor credit records. These proposals may effect market structure by encouraging responsible lending which may change the size or numbers of some firms. 2. Providers of Debt Advice (such as Citizens Advice, Consumer Credit Counselling, CLS, Nationals Debtline etc). 9 Small firms Impact Test Most small businesses and individual creditors do not have the facilities for credit referencing and are therefore likely to be highly affected by bad debts. While the CPR currently requires them to try to resolve the problems outside court, they are unlikely to have the time, experience or expertise to operate standardised systems to chase debtors. The proposed change is expected to assist them in this respect. However, it is not possible to quantify this at this stage and we hope to obtain more information on the impact on small business as a result of the consultation. Legal Aid Nil impact. Sustainable Development, Carbon, Other Environment, and Health Impact Assessments Not applicable Race, Disability and Gender Equality We do not believe that there are any significant race, gender or age issues involved in these proposals. However, we intend to change the font on any statutory forms or information sheets in consideration of the visually impaired. Any new forms/information sheets will also be available in Welsh. Human Rights We do not believe that any Human Rights issues are engaged by the recommended proposals Rural Proofing The option will be applicable to all creditors so rural proofing is not required. 10 Specific Impact Tests: Checklist Use the table below to demonstrate how broadly you have considered the potential impacts of your policy options. Ensure that the results of any tests that impact on the cost-benefit analysis are contained within the main evidence base; other results may be annexed. Type of testing undertaken Results in Evidence Base? Yes Yes Yes No No No No Yes Yes Yes Yes Yes Results annexed? No No No No No No No No No No No No Competition Assessment Small Firms Impact Test Legal Aid Sustainable Development Carbon Assessment Other Environment Health Impact Assessment Race Equality Disability Equality Gender Equality Human Rights Rural Proofing 11 Annexes 12 < Click once and paste, or double click to paste in this style.> 13