Insolvency industry failing indebted Scots - call for greater regulation

A group of activist lawyers has called on the Scottish government to clamp down on the insolvency industry which it claims is causing excessive hardship to the lives of many indebted Scots.

More than a thousand people went bust last year north of the border, with many losing their homes.

And, according to the Govan Law Centre, this happened despite many of them entering into legally binding protected trust deeds arrangements.

Many consumers in Scotland enter into such personal insolvency solutions believing that they will resolve their financial difficulties and secure much needed light at the end of a dark tunnel of unmanageable debt.

However, the Glasgow-based not-for-profit organisation has now said many are run by under-regulated firms and an “alarming” 15 per cent of all protected trust deeds, which are voluntary but binding schemes designed to prevent full-scale sequestration (the Scottish equivalent of bankruptcy), are 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.

The GLC, which cited “unsatisfactory” Scottish regulation for the disparity, said: “The aim is to take back control, repay debts as best as possible, and provide financial rehabilitation and a fresh start for those who have generally been through life crises. In many cases insolvency solutions work reasonably well, but there are far too many cases where things go horribly wrong. In our experience, both consumers and creditors lose out.”

The GLC’s Personal Insolvency Law Unit Unit has been gathering evidence from casework in Scotland since the summer, and has published interim findings. You can download the GLC report here (opens as PDF).

Concerned with the high incidence of poor outcomes for extremely vulnerable consumers, the GLC also appointed Alan McIntosh to head up the first ever pilot Personal Insolvency Law Unit in Scotland.

The project has so far been self-funded by GLC on a pilot basis in order to properly assess the scope, and need, for a dedicated and free specialist service in Scotland.

Addressing the issue as concerns rise that some firms impose excessive fees on the protected trust deeds they administer, the GLC 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.”

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.”

Eileen Blackburn, Chair of the Scottish Technical Committee at insolvency and restructuring trade body R3 in Scotland, said: “We welcome the Govan Law Centre’s focus on the importance of seriously indebted individuals getting the right advice about their situation. Those with financial problems should seek advice as early as possible from a properly qualified professional who can help them find a debt solution appropriate to their situation.

“Protected Trust Deeds can be an excellent tool to help people repay their creditors and get back on their own two feet. In the last two years, almost £60m has been repaid to creditors through a PTD, while the average dividend repaid to creditors has increased in each of the last five years.

“The UK’s insolvency profession is already tightly regulated with oversight provided by both insolvency regulators and, in some cases, by the FCA. When insolvency practitioners do not live up to the high standards expected of them, it is right that there is regulatory action. Any wrongdoing should be reported to regulators so that they can take appropriate steps.

“We would be very happy to meet the GLC to discuss the issues they have raised, and would be happy to work with the Accountant in Bankruptcy to look into this matter further.”