AiB publishes PTD Protocol
By Steven Wood, Practice Support Specialist (Insolvency)
24 September 2021
Steven Wood looks at the recently published PTD Protocol.
Background
At the end of November 2019, the Scottish Parliament’s Economy, Energy and Fair Work Committee (the Committee) sought views as part of its inquiry into Protected Trust Deeds (‘PTDs’). This followed on from concerns raised during its scrutiny of the Debt Arrangement Scheme (Scotland) Regulations 2019.
The Committee subsequently conducted a short, focused inquiry into PTDs in January 2020.
In May 2020 the Committee published a report outlining its recommendations following its inquiry. The Scottish Government subsequently published its response to the Committee’s report in October 2020.
It was agreed that the Accountant in Bankruptcy (AiB), in agreement with trustees and creditors, could introduce operational changes in the short-term to address some of the recommendations in the Committee’s report.
In December 2020, the AiB established a working group to review the recommendations made by the Committee. The working group identified key areas from the recommendations which could be addressed operationally in the short-term without the need for legislative change.
As a result, a PTD Protocol (the Protocol) has been developed which sets out non-statutory changes to operational processes. The AiB advises that the intention of the Protocol is to promote good practice, improve transparency and provide further clarity in support of the PTD Notes for Guidance, better enabling trustees to manage debtor and creditor expectations in a PTD.
Measures introduced by the Protocol
In summary, the measures introduced by the Protocol are:
- Wherever practicable, an interim dividend should be paid to creditors after month 12 from the date the trust deed is granted, and quarterly thereafter.
- Should a trustee decide to withhold the debtor’s discharge from the debts included in the PTD, the trustee must first obtain the AiB’s agreement to that decision.
- Insolvency Practitioners may only accept trust deed referrals from FCA approved lead generator firms.
PTD Protocol working group
When the working group was initially set up by the AiB, ICAS expressed concerns surrounding its composition and offered to be part of the group. Unfortunately, that offer was declined and there was no representation from the Recognised Professional Bodies (RPBs), who are responsible under legislation for discharging the regulatory functions and regulatory objectives.
Although not invited to be part of the working group looking at the Protocol, ICAS is represented on the PTD Standing Committee, and has therefore had sight of the Protocol as it has evolved.
ICAS concerns
The Protocol ultimately issued by the AiB did not have the unanimous agreement of the PTD Standing Committee. During the evolution of the Protocol, ICAS provided constructive feedback and suggestions to address concerns, all of which were dismissed by the AiB.
ICAS is generally supportive of the overall objectives and issues which the Protocol seeks to address.
However, it is not clear what consideration has been given to the policy position for the introduction of the Protocol or why this route has been pursued. It has been highlighted to the AiB on numerous occasions that PTDs are already a heavily regulated area, and one which is complex to navigate, being a hybrid of common law, bankruptcy law and trust law, surrounded by a framework incorporating not only those elements but overlayed by Notes for Guidance, ‘Dear Trustee’ letters and Statements of Insolvency Practice.
The complexity of PTDs and the overall Scottish debt landscape has already been acknowledged by the Scottish Parliament and a commitment was given for a fundamental review of the wider landscape. Against this backdrop it raises the question of why the introduction of yet another area of administrative complexity is considered to be helpful, particularly one which will have no regulatory standing.
Much of the same outcome could be achieved through existing routes, which could be more robust in terms of encouraging appropriate behaviours and enforcement. The RPBs, through the Joint Insolvency Committee, are undertaking a review of SIP 3.3 and consider issues which the Protocol seeks to address may be appropriate for consideration as part of this work.
Comments on the specific measures introduced by the Protocol document are dealt with below.
Interim dividend process for trustees
The Protocol requires that, wherever practicable, an interim dividend should be paid to creditors after month 12 from the date the trust deed is granted, and quarterly thereafter.
It is unclear why this action could not simply be inserted into the Notes for Guidance or incorporated into SIP 3.3. However, as the Protocol itself points out, current legislation (S176 of Bankruptcy (Scotland) Act 2016) does not preclude a trustee from paying a dividend to creditors at an earlier stage and it is difficult to see how this requirement achieves the Committee’s intention or will make any material difference in all but a handful of cases.
The introduction of this measure stems from the Committee’s comment that “when entering any debt solution, the debtor's payments should contribute to reducing their debt from the outset. The detriment to the debtor in a failed Protected Trust Deed is too severe and must be addressed”.
The intention of the Committee is for trustees to start paying out dividends before they hold sufficient funds to do so, per the definition of sufficient funds at S176(2). This essentially asks trustees to make dividend payments before they have made allowance for future fees and expenses and ‘share the pain’ in the event that the Trust Deed is unsuccessful.
The Protocol doesn’t achieve this. It does not (and is not able to) compel trustees to make distributions before they have allowed for their own fees and expenses. As a result, the overwhelming majority of trust deeds will simply be unable to support payment of a dividend of at least 5p in the £ before month 24 from contributions and asset realisations made to that point.
Process for a trustee refusing debtor discharge
Again, this seems to be a requirement that could have been addressed via the Notes for Guidance or as part of the review of SIP 3.3.
In any event, while agreeing in principle with the intention to have a check that debtor discharges are being refused with good reason, it does add another step to an already quite convoluted and ‘form-heavy’ process.
Further, no timings are provided for the AiB processing the ‘Refusal of Debtor Discharge’ form and contacting the Trustee in either the Protocol or Notes for Guidance.
Trustees to only accept referrals from FCA approved lead generators
The drafting of this section is perhaps of most concern and it is, firstly, worth stating that the issue of referrals is largely already provided for within the Code of Ethics and is subject to increased attention through the monitoring regime as well as recent developments with Advertising Standards Agency (‘ASA’).
The issue with the PTD Protocol as drafted is that it only allows for referrals from FCA approved lead generators. Many of the lead generators do not, or claim not, to operate or deal with regulated activity. The resultant wording appears to mean that any Insolvency Practitioner signing up to the Protocol will be prohibited from accepting referrals from sources such as non-FCA regulated solicitors or accountants for example. Requiring referrals exclusively from FCA authorised firms may be disproportionate for non-volume providers and indeed may distort what is already an under-competitive marketplace.
Other questions
The Protocol as drafted poses several unanswered questions. For example:
- Must the Protocol apply to all PTDs for a firm or, depending on case-specific circumstances, can a PTD be designated as ‘non-Protocol compliant’?
- What happens to cases initially commenced by a trustee within a firm that is signed up to the Protocol which are subsequently transferred to a trustee within a firm which is not signed up to the protocol?
- What happens if a firm decides to withdraw from the Protocol?
Ultimately, ICAS is concerned that the introduction of the Protocol is little more than window dressing and could be used to substantiate the need for further unnecessary legislative intervention.
Commencement
The PTD Protocol will commence on 1 October 2021 and further information is available of the AiB website. There is no compulsion for insolvency practitioners to sign up and comply with the Protocol and ICAS encourages its Member and Affiliate Insolvency Practitioners to read and consider the impact of the Protocol in detail before doing so.
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