SCOTLAND must clamp down on its insolvency industry amid concerns of “potential mis-selling”, a new report warns.
More than a thousand debt-ridden Scots went bust last year – many losing their homes – despite entering in to legally binding deals arranged by under-regulated firms, according to the Govan Law Centre.
The Glasgow-based not-for-profit in an analysis of the industry said an “alarming” 15 per cent of all protected trust deeds, schemes designed to prevent full-scale sequestration, the Scottish equivalent of bankruptcy, were failing.
Official figures show that at nearly nine out of 10 deeds arranged by two companies ended in failure while, in contrast, two other companies helped all of their clients out of debt.
Govan Law Centre called for beefed-up Scottish regulation of the sector and an investigation in to why different firms achieved such different results.
It said: “A failure rate of 15 per cent is alarming, but one of 88 per cent is appalling and if related to any other consumer financial product would be a cause for serious concern and potential evidence of mis-selling.”
The law centre’s report comes amid concerns that some firms impose excessive fees on the protected trust deeds they administer – including a statutory interest rate of eight per cent that is well ahead of inflation or current interest rates.
Mike Dailly, the centre’s principal solicitor, said: “For those firms with a high failure rate what is happening is the consumer thinks they are making payments to creditors, but no dividend is ever paid to creditors, with thousands of pounds in each case being charged by the firm as a fee.
“Shockingly, the consumer ends up back in the same perilous position they started with, despite paying thousands of pounds to an insolvency firm.
“Govan Law Centre doesn’t think this is the interest of consumers or creditors. The market isn’t working properly.”
Mr Dailly’s centre has created and funded a pilot non-for-profit personal insolvency unit. The award-winning community law now believes such a unit needs public support to lay the groundwork for further reform.
Protected trust deeds allow a debtor to put all his or her assets in to a trust administered by a firm on behalf of their creditors. All such instruments are overseen by the Accountant in Bankruptcy (the AiB), a government agency, which keeps records on their outcome. Such deals are voluntary, but binding.
The AiB’s annual report for 2015-2016 shows that an average of 15 per cent of all debtors were not discharged of their debts after going through a protected trust deed, more than a thousand people.
The failure rate for the biggest firm administrating the instruments, KPMG, was 12 per cent. This compared with a failure rate of 88 per cent for Knightsbridge Insolvency, an English firm branching out in to Scotland. The Herald asked Knightsbridge to comment but it did not do so.
The Govan Law Centre report stressed that councils chasing local taxes were behind many of the cases that led to customer seeking protection from their creditors. Mr Dailly said: “All too often a few thousand pounds of council debt results in a homeowner being sequestrated and losing a home for their family.
“The cost of this process is massively more expensive than the council tax debt, and the local authority may still have a legal obligation to provide accommodation to the family.
“This isn’t in the public interest – nor indeed the interest of creditors and consumers. Our one-sized fits all system is frequently a sledgehammer trying to crack a nut.”
The Govan Law Centre said it had identified what it called “serious gaps in the regulatory system for personal insolvency”. Insolvency practitioners are regulated by professional bodies such as the Institutes of Chartered Accountants in both England and Scotland and the UK-wide Insolvency Practitioner Association or IPA. However, these bodies deal with individuals and not the firms which employ them.
The report concluded: “We find this regulatory framework hugely unsatisfactory.”
David Kerr, chief executive of the IPA, said his body had a robust monitoring programme in place and that this was regularly updated. He said: “We will continue to do so to address any allegations of inappropriate conduct on the part of those entrusted to act in these circumstances.
“Most practitioners undertake their work with a high degree of skill, professionalism and customer care. Where that is found not to be the case, we have taken and will continue to take appropriate regulatory action in the public interest.”