Posted August 17, 2023
The Government’s call for evidence on its much-needed review of the personal insolvency framework in England and Wales ran from July 2022 to October 2022. Earlier this month, the Insolvency Service published a summary of responses along with next steps. Whilst we have broadly welcomed the response, what does it actually say, and how far away are we from reform of the personal insolvency framework, something we have long called for?
What has the government said?
Back in October 2022 we sent in a mammoth 84 pages in response to the call for evidence. This set out the problems we identified in detail, our fundamental concerns with the insolvency framework and our proposed solutions. In our previous blog we set out a number of proposals for change which have been recognised throughout the government response.
We are particularly pleased that the government has recognised that “there are shortcomings in how the current regime operates and that it needs reform to reflect changes in the way society operates and attitudes towards personal financial difficulty during the last 40 years”.
The government response acknowledges that there was a “strong message” from respondents that some people are not able to deal with their debts because of a variety of factors, such as:
- barriers to entry being too high
- shortfalls in the current procedures, and
- inconsistencies in the treatment of individuals and the quality of service provided, across the insolvency framework.
We agree with this assessment, and I am particularly pleased to see an acceptance that if people cannot resolve their debts it can have “detrimental ramifications for society”, as well as an impact on “the welfare system, mental health and well-being, NHS resources, charities, business and the economy”.
Timescale for reform is too long
Fundamental reforms to the insolvency framework are needed as soon as possible. We appreciate that it takes time to design a complete overhaul of the system, such as a single gateway into insolvency options. Currently the government intends to publish proposals for reform early in 2024. Radical proposals, however, will need primary legislation and it is not clear what the timescale will be for the required parliamentary time especially given the upcoming election. Either way, we are still a long way away from the implementation of any reforms.
Meanwhile, we are still waiting for the outcome of the Insolvency Service consultation on moving to a single regulator for Insolvency practitioners (IPs) and to introduce regulation of IP firms. This needs to be put in place as soon as possible alongside an effective, independent complaints process.
Making a start now
With millions of households already struggling due to the impact of high costs, tackling these barriers, to ensure people can access safe routes out of debt, is now more important than ever. It is vital that the Insolvency Service looks at what can be done now to help address the harm experienced by consumers in debt who are facing extreme hardship due to the cost of living and rising bills.
This should include urgent action on Debt Relief Order (DRO) and bankruptcy fees, which act as a barrier to people accessing suitable debt options. We’ve proposed that DRO and bankruptcy fees could be waived for people on income-related benefits, and significantly reduced for everyone else.
We’d also like to see the Government using secondary legislation – which can be implemented more quickly – to introduce more flexibility to DROs. This should include increasing asset limits, enabling people to add in missing debts and amending the six-year time limit on how often people can access a DRO.
Free, independent debt advice is key to people getting good outcomes, and finding the most appropriate solution for them. Alongside more wholesale reform, the Insolvency Service could look more immediately at how they can amend their rules to require people to seek independent debt advice before applying for bankruptcy.
When it comes to IVAs, fundamental reform is needed. But more could be done in the meantime to tackle misleading adverts, IVA mis-selling, poor practice, and the way the fee structure works. We’d also like to see stronger action against IPs who do not issue IVA termination certificates immediately, preventing people from moving into a DRO instead, and a ban on IPs paying for lead introducer cases. With the recent introduction of the FCA’s new Consumer Duty, there’s also an opportunity to better track outcomes for people who end up in an unsuitable IVA because their creditors have voted it through.
The Government’s summary of responses shows an understanding of the drawbacks of the current insolvency framework and the need for reform. This is of course a welcome sign that change is on the way. Given the current challenges brought about by the pressure of high household bills, however, there is no time to waste. And whilst we look forward to seeing the proposals in 2024, we also need to see action now to improve options for people in financial difficulty, and to make sure everyone can access a safe route out of debt.
Read our full response to the Insolvency Service’s Call for Evidence.
Meg is the Money Advice Trust's Policy Lead and has more than 35 years' experience in the debt advice sector. She is on the Quarterly Account editorial board and a range of other forums. View all posts from Meg van Rooyen.