Credit, Collections & Insolvency News
After three months of the Government’s ‘Breathing Space’ debt respite scheme regulations coming into effect, what are the lessons policy-makers can take away at this early stage?
When the regulations were first approved and as the covid pandemic cast a shadow of concern across the economy and consumer wellbeing, it was widely recognised that forbearance in debt repayments for customers in need would be crucial.
As it happens, the credit and collections sector have long used such moratoria as part of their forbearance measures before the Government mandated such considerations – and so the notion of a sixty day breathing space for eligible individuals (accompanied by a mental health scheme offering a moratorium for the duration of a mental health crisis plus a further thirty days) was in harmony with existing practices and received without objection.
While the principle hasn’t been an issue, the operational nuts-and-bolts haven’t been straightforward. Eligibility is supposed to be triggered by debt advisers looking at each particular case, then informing creditors and collections agencies who must cease collections the day after receiving notice, something that has required significant administrative adaptations, especially as the online notifications ‘portal’ was delayed and has only just gone ‘live’. A paper-based approach was never going to be conducive to the smoothest of starts for the scheme.
The biggest issue arising so far was not one anyone anticipated; a very large online debt advice charity chose to facilitate the automatic self-referral for its clients onto a ‘breathing space’, resulting in a wave of moratoria triggered within days of the scheme’s commencement. As a trade body for the recoveries sector, the Credit Services Association was contacted by many of our member firms as they tried to figure out if the deluge was something particular to them or industry-wide.
After raising concerns with the Insolvency Service, the Treasury Minister confirmed that each customer was supposed to have first obtained advice to establish eligibility and that non-compliance with the regulations would be of concern to the FCA. Automatic self-referral is not only outside the scheme rules, it could be detrimental for a customer who uses up their once-every-twelve-month entitlement to the breathing space prematurely. Thankfully, it appears that the debt advice charity in question is now pausing that process and reviewing their approach.
American sociologist Robert Merton argued that there are usually unexpected drawbacks or even perverse results contrary to an original policy prescription not foreseen at the outset, and its fair to say that this example illustrates Merton’s law of unintended consequences quite well. And it is not the only teething issue that has cropped up since the regulations came in.
The tendency for top-down prescribed interventions to generate new problems is nothing new. It’s why the argument for devolution and decentralisation of Whitehall has been made for decades. In the case of financial services regulation, despite a robust framework of principles-based and outcome-oriented frameworks, policy-makers can still tend towards short-term ‘initiatives’ especially if they come under media pressure.
At the Credit Services Association we believe it is essential for regulators and Ministers to stay strategic and reiterate the core principles guiding the current framework; namely that firms should understand their customers and find mutually agreeable solutions responsive to individual circumstances. Both of these principles, by their nature, require engagement and a willingness to vary approaches by acting flexibly, responsively and reasonably. Top-down prescriptive approaches can undermine the tailored forbearance and support that usually works best for customers.
As our new policy paper ‘Tailored Support & The Need for Flexibility In Forbearance’ points out, there are several examples of policies in recent years which have taken a rigid operational approach. This isn’t just something we’ve seen in the ‘Breathing Space’ scheme. An early draft of 2017’s Pre-Action Protocol for Debt Claims initially required bundles of terms and conditions and other technical documents to be sent on paper to customers in sometimes vulnerable circumstances, unwittingly complicating and confusing recipients.
Fortunately a better solution was found, offering the option for the bundle to be received if requested, rather than mandating it. Another example is the Consumer Credit Act framed nearly half a century ago in 1974, prescribing a range of statutory notices which don’t always fit modern circumstances – and, despite language moderation recently, there remain concerns about the lack of flexibility around provision, content and format. For example, some notices must continue to be sent to a last-known address, even where the firm is aware the customer no longer resides there.
It would be a shame if the short-term pursuit of often laudable interventions sees decision-makers forget the core principle of encouraging tailored solutions based on an assessment of individual circumstances. It may not be ‘new’, but the principle is strong, effective and works well. As the Government designs its next wave of reforms – the Statutory Debt Repayment Plans and their requirement for the FCA to consult on a ‘duty of care’ – we must hope that they don’t fall into the trap of prescribing actions and tripping over that law of unintended consequences again.
