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Draft Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management
  • Financial institutions

23-07-2020

In August 2019, we wrote that HM Treasury had announced its final proposals on Breathing Space and Statutory Debt Repayment Plans and we examined the key provisions and the impact on lenders (see article). The next step in bringing these proposals to fruition has now been taken with a draft of The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 being published on 15 July 2020. If approved these Regulations will come into force on 4 May 2021.

These draft Regulations have wide ranging implications for anyone dealing with consumer debt and are likely to impact all providers of credit, secured and unsecured creditors, LPA receivers, debt recovery agencies and debt advice providers in England and Wales.

Summary

In summary, these regulations give eligible people who receive professional debt advice access to a 60-day period in which interest, fees and charges are frozen and enforcement action is paused.  For people receiving mental health crisis treatment, the moratorium may be accessed for the duration of their crisis treatment.

If the creditor does not notify its agents of the existence of a moratorium, the creditor will be liable for any losses incurred by the debtor or the agent and any action taken contrary to the Regulations shall be null and void.

Breathing space moratorium - Process

An individual wishing to avail themselves of the protection afforded by the Regulations must apply to a debt advice provider[1] for a breathing space moratorium. An application may not be made unless the individual has first obtained advice, whether in person, over the telephone or by electronic means.

Having considered the application, the adviser must initiate a breathing space moratorium if they consider that the individual meets the eligibility criteria[2], the requisite conditions are met, and the debts to be included in the moratorium are qualifying debts[3].

Certain debts are excluded from the Regulations[4]. Importantly, for secured lenders, secured debts are excluded from the Regulations but non capitalised arrears are not. So a debtor in arrears on their mortgage will be entitled to the protection afforded by the Regulations in relation to their arrears but not their ongoing liability to make mortgage repayments which the debtor must continue to pay during the moratorium period.

In order to initiate a breathing space moratorium, the adviser must provide to the Secretary of State confirmation that the individual meets the eligibility criteria and the requisite conditions are met.  The  Secretary  of  State  must then make an entry on the register and send a notification of the start of the breathing space moratorium to those creditors and agents whose contact details have been provided.  The moratorium will then start the next day and continues for 60 days unless it is cancelled or the individual dies.

There is a requirement on the advisor to review before day 35 of the moratorium, to determine whether it should continue or be cancelled.

Mental health crisis moratorium - Process

A mental health crisis moratorium is available to an individual who is receiving mental health crisis treatment[5] i.e. where they have been detained in hospital under various sections of the Mental Health Act 1983 or removed to a place of safety by the police.

Only certain people may submit an application to a debt advice provider for a mental health crisis moratorium[6]. The application must include evidence from an approved mental health professional that the individual is receiving mental health crisis treatment, a declaration by the approved mental health professional that the individual is receiving mental health crisis treatment, and a signed statement by the approved mental health professional that the evidence is, to the best of their knowledge and belief, correct.

When considering an application for a moratorium, the advisor must assess whether the debts included in the application are qualifying debts, and obtain information relevant to the financial standing of the debtor from at least one credit reference agency. If an advisor considers that the individual is eligible, the process to initiate a mental health crises moratorium mirrors that of a breathing space moratorium but the duration differs. A mental health crisis moratorium does not end until: 30 days after the individual stops receiving mental health crisis treatment; 30 days after the debt advice provider makes a request to the individual’s nominated point of contact but does not receive a response; the moratorium is cancelled or the individual dies.

Within 30 days of the start of the moratorium, the advisor must request confirmation of whether the individual is still receiving mental health crisis treatment from their nominated point of contact. There is also provision for an advisor to cancel a moratorium in certain circumstances.

Protection

During the period of the moratorium, a creditor is prevented from taking any steps to:

  • require an individual to pay interest that accrues on a moratorium debt during a moratorium period (for secured debts this applies only to interest that accrues on any arrears during the moratorium and not the interest on ongoing liabilities);
  • require an individual to pay fees, penalties or charges in relation to a moratorium debt that accrue during a moratorium period;
  • take any enforcement action in respect of a moratorium debt (unless a court or tribunal orders otherwise); or
  • instruct an agent to take any of the actions mentioned above.

Enforcement action includes taking a step to collect a debt, starting legal proceedings, presenting a bankruptcy petition, applying for judgment, enforcing a judgment, obtaining a warrant and taking control of a property. It also includes serving a notice to take possession of a property let to a debtor on grounds 8,10 or 11 of Schedule 2 Housing Act 1988 or under S157, 181(2) or 187(2) of the Renting Homes (Wales) Act 2016; or taking possession after serving such a notice.

After the end of the moratorium, a creditor or their agent (including a creditor’s solicitors) must not  require an individual to pay interest, fees, penalties or charges that accrued during the moratorium, or treat  the  non-payment  during  the  moratorium of  interest,  fees, penalties or charges as a default by the individual.

Existing legal proceedings

If at the start of a moratorium a creditor has any court or tribunal action pending in relation  to  a  moratorium  debt,  they  must  notify  the  court / tribunal  of  the moratorium. During a moratorium, a court/ tribunal must take all necessary steps to ensure that any action or proceedings to enforce a court order or judgment concerning a moratorium debt does not progress during the moratorium period. Any action taken contrary to Regulations shall be null and void[7].

Obligations

The Regulations oblige individuals to take reasonable care to provide accurate information to the debt adviser and not deliberately withhold relevant information. During a breathing space moratorium an individual must: inform their adviser of any material change in circumstances or financial position; make any payment due in relation to an ongoing liability; not obtain additional credit exceeding £500; and engage with the debt adviser in such a way as the adviser considers to be appropriate.

A creditor who receives notification of a moratorium may request that the adviser reviews the moratorium to determine whether it should continue or be cancelled if the moratorium unfairly prejudices the interests of the creditor, the individual did not meet the relevant eligibility criteria when the application for the moratorium was made, the moratorium debt is not a qualifying debt, or the individual has sufficient funds to discharge or liquidate their debt as it falls due.

A creditor’s request for a review must be made within 20 days of the moratorium starting and a debt advice provider must conduct the review within 35 days of the moratorium starting. The debt adviser must inform the creditor of the outcome of the review, and if the adviser considers that a moratorium should be cancelled, consult the individual and notify the Secretary of State and the individual of the cancellation. A creditor can also apply to the court to cancel a moratorium if the debt advice provider has carried out a review but the moratorium has not been cancelled.

Next steps and comment

The draft Regulations give rise to a number of questions and issues. For example, will debt advice providers be able to cope with a significant increase in demand for their services and will they have the ability to adhere to the tight timescales for conducting reviews, particularly in circumstances when they must not charge a debtor a fee in connection with a moratorium?

The draft Regulations do not explain what will happen if the debtor fails to provide details of a debt to the secretary of state, or a creditor does not receive notice of the existence of a moratorium and, through no fault of its own, continues with action. Similarly, what happens in cases of individuals who suffer long term mental health issues?

If the draft Regulations are approved, it is intended that they will come into force on 4 May 2021.

Before then, all creditors will need to start planning how they will adapt their systems, policies and processes to ensure that (1) no action is taken against individuals who are subject to a moratorium; (2) no interest, fees and charges accrue during the moratorium; (3) debtors are not contacted regarding the debt during the period of the moratorium and (4) any action to challenge the grounds for applying a moratorium, is taken before the deadline to do so expires.


[1]                 Paragraph 3 of the draft Regulations

[2]                 Paragraph 24 of the draft Regulations

[3]                 Paragraphs 5(1) – 5(3) of the draft Regulations

[4]                 Paragraph 5(4) of the draft Regulations

[5]                 Paragraph 28 of the draft Regulations

[6]                 Paragraph 29 of the draft Regulations

[7]                 Paragraph 7(12) of the draft Regulations