HM Treasury consultation on Statutory Debt Repayment Plans – the DEMSA view

26th May 2022

On Friday 13th May 2022, HM Treasury (HMT) published their latest consultation around Statutory Debt Repayment Plans (SDRPs), building on their response from June 2019 that followed the October 2018 consultation and 2017 government manifesto commitment. This heralded the introduction of the Debt Respite Scheme in May 2021, probably better known as ‘Breathing Space’.          

This came after Economic Secretary John Glen MP visited Rethink in Solihull on 9 May 2022, to highlight support on offer for people suffering with problem debt. He reflected that one year on from the launch of the Debt Respite Scheme on 4 May 2021, over 60,000 people have accessed the government’s scheme. Final figures show that between the launch on 4 May 2021 and 30 April 2022, there were 63,856 registrations, comprised of 62,843 “Standard Breathing Space” registrations. Only 1,013 of those taking this support entered “Mental Health Crisis Breathing Spaces”, which extends the protections while they receive mental health crisis treatment. Overall, total volumes are significantly below HMT estimates from February 2020, raising doubts around the reliability of projected SDRPs volumes in their impact assessment whilst the FCA Financial Lives surveys continue to project upwardly the volume of consumers needing debt advice.  

John Glen MP said “Mental health is a challenge for us all – but these concerns can be exacerbated for people who are experiencing a mental health crisis and are in problem debt.”

“That’s why I launched the Breathing Space scheme one year ago and will shortly be consulting on proposals for a Statutory Debt Repayment Plan – to give people the confidence, support and clarity they need to tackle problem debts.”

Debt Managers Standards Association (DEMSA) participated in the initial consultation around SDRPs and will actively engage with HMT in the process between now and August 2022. 

This consultation follows closely after the Credit Services Association (CSA) published its ‘wide of the mark’ paper on 3 May 2022. The report entitled ‘Wide of the Mark? Assessing the Delivery & Value of Free-To-Client Debt Advice’ argues that consistent and high-quality debt advice serves a very important role in helping people navigate financial challenges, especially when the cost-of-living is rising, but also believes it is essential that the questions of value for money, efficiency and accountability are addressed. DEMSA agrees with the CSA that consistent and high-quality debt advice (irrespective of channel of advice) serves a very important role in helping people navigate financial challenges, especially during the cost-of-living crisis. There is a major value for money debate around the merits of introducing SDRPs in 2024. 

Larger providers like PayPlan are definitely seeing a substantial rise in creditor referrals, above pre-pandemic levels. This, however, is not consistent across the sector as yet. The SDRP impact assessment speculates on future demand for debt advice and debt solutions, which is very reliant on data from the Money and Pensions Service (MaPS).

DEMSA is on the Standard Financial Statement (SFS) governance group and MaPS has provided a ‘heads up’ on the imminent changes to the SFS spending guideline figures as a result of the continuing rise in inflation. The intention is that these are published on 30 May 2022 and are put into action by 20 June 2022. We are obviously expecting further rises in inflation and energy costs, which put into perspective some of the limited tolerances proposed in the HMT consultation for SDRP variations from May 2024. They are far less flexible than in an IVA or DMP.

Whilst HMT has taken onboard some industry feedback in the period from June 2019 in light of the pandemic, outcomes from the tailored forbearance schemes, the emerging cost-of-living crisis and the experience from the Debt Arrangement Scheme (DAS/DPP) in Scotland from November 2019, urgent industry engagement is required. The impact assessment really does need some critical analysis, especially around creditor, debt advice sector and consumer benefit statements.  

DEMSA continues to highlight a number of fundamental aspects that may influence a successful launch:

  • A robust business case
  • An 18-month implementation window is proposed, building on The Insolvency Service ‘hub’ infrastructure from May 2021, where the requirements become significantly more complex (e.g. payment distribution/reconciliation)   
  • There doesn’t appear to be a path to mapping Debt Management Plans (DMPs) onboarded before May 2024 into SDRPs, which is a large body of customers in England & Wales 
  • A significant minority of DMPs won’t meet current SDRP criteria, as they are not flexible enough, so DMPs will continue to co-exist in volume after implementation and require creditors to administer 3 different types of mainstream managed debt solutions in England & Wales (i.e. DMP, IVA and SDRP)
  • Insolvency reform is ongoing in parallel along with major changes to the regulatory landscape (e.g. Consumer Duty from April 2023)
  • The cost-of-living crisis is requiring more flexibility in future payment arrangements 

Despite the learning from DAS in Scotland, HMT has provided little incentive for ‘Fair Share’ providers to promote an SDRP over a DMP, where the 9% deduction from disposable income (including a payment distribution allocation of 1%) is well below ‘Fair Share’ contributions. The lack of flexibility around missed payments and the rigid plan length parameters will mean more broken plans rather than the increased stick rate suggested in the impact assessment. ‘Improved returns to creditors’ is one of the promises, however, it is unclear on how this will be achieved. There appears more friction in the process than for a DMP and with more participants (e.g. role of The Insolvency Service). It is likely that the proposed solution will require a product specific version of the SFS, which DEMSA has already picked up with MaPS, where MaPS are about to launch an ‘open source’ version of the SFS. 

There appear to be very few incentives for a consumer to choose an SDRP over an IVA or a DMP, especially as the credit reporting aspect hasn’t yet been fully thought through. If you take the average debt balances proposed and look at average disposable incomes (DI) as they get further squeezed then many plans look like they will exceed 10 years, but would fail prematurely because of downward swings in DI or missed payments that cannot be remedied by using the ‘savings’ component of the SFS. Some of the thinking in this area looks naïve and doesn’t appear to have taken account of the knowledge that debt solution providers have been trying to relay, which they also do with the FCA on a regular basis. Downward variations in SDRPs still appears to have a very high administrative burden with less money available to ensure this works efficiently and for the greater good.     

The devil is in the detail and the period to August 2022 needs to be used wisely to determine the value of introducing this new regulated product and how this fits in with the CONC review being undertaken by the FCA. ‘Joined up’ thinking is a must where there is a significant risk of major investment by creditors, service providers and the debt advice sector with no tangible business case to support its introduction.               

Kevin Still, Director at DEMSA