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The Credit Services Association (CSA)
Blog: Challenging times: Preparing for Pre-action Protocol for Debt Claims
Leigh Berkley is former President and current Board Director of the Credit Services Association (CSA) and Director of External Affairs & Development at Arrow Global. He has been heavily involved in engaging with the Ministry of Justice on the introduction of Pre-action Protocol for debt claims for the past year.
Publication of the Pre-action Protocol for debt claims (PAP) in March finally closed a long-running saga that had more potential endings than a Hollywood whodunit. In the end, there was indeed a final plot twist, but primarily in the timing, for the Protocol is to come into effect in October 2017, leaving creditors and claimants with little time to prepare.
So who does the Protocol apply to, what are its aims, what does the Protocol demand, and what advice can we give to creditors in adopting the new process?
The Protocol applies to any business (including sole traders and public bodies) claiming payment of a debt from an individual (including a sole trader). It does not apply to business-to-business debts (unless the customer is a sole trader), neither does it apply to HMRC.
The Protocol’s aims in its broadest sense are to encourage early engagement and communication between the parties, including early exchange of sufficient information to help clarify whether there are any issues in dispute. It is intended to help both parties to resolve the matter and avoid court proceedings, including agreeing a reasonable repayment plan, obtaining free debt advice or considering Alternative Dispute Resolution (ADR).
The way in which the parties engage is intended to be both reasonable and proportionate, and support the efficient management of proceedings that cannot be avoided. So how does it work?
First off, the creditor is obliged to send a Letter of Claim to the debtor (the Courts have yet to adopt the word ‘customer’ and have defaulted to their terminology throughout the protocol) before proceedings are started. This letter must detail the amount of the debt and whether interest or other charges are continuing.
Where the debt arises from a written agreement, it must include the date of the agreement and the parties to it, and where the debt has been assigned, the details of the original debt and creditor, when it was assigned and to whom must similarly be given. Please note that you do not have to send the original agreement at this stage.
If regular instalments are currently being offered by, or on behalf of, the customer, or are being paid, it must include an explanation of why the offer is not acceptable and why a court claim is still being considered. It must also contain details of how the debt can be paid (for example, the method, and address for payment) and details of how to proceed if the customer wishes to discuss payment options. It must also include the address to which the completed Reply Form should be sent.
Documents to be enclosed with the Letter of Claim
The claimant is also obliged to enclose certain documents including an up-to-date statement of account for the debt, which should include details of any interest and administrative or other charges added; the most recent statement of account for the debt and state in the Letter of Claim the amount of interest incurred and any administrative or other charges imposed since that statement of account was issued, sufficient to bring it up to date; or where no statements have been provided for the debt, state in the letter the amount of interest incurred and any administrative or other charges imposed since the debt was incurred.
A new Information Sheet (a note that explains how the customer can still avoid court and/or signposting them to further advice) and a Reply Form (with a series of simple ‘tick boxes’) must also be included, alongside a financial statement form (for example, the Standard Financial Statement). Details of the protocol itself can be found here.
The Letter of Claim should be clearly dated toward the top of the first page. It should be posted either on the day it is dated or, if that is not reasonably possible, the following day. Letters should be sent by post unless the customer has made an explicit request otherwise, and an alternative channel has been agreed. A condition in a creditor’s standard terms does not constitute an explicit request.
If the customer does not reply to the Letter of Claim within 30 days of the date of the letter, the creditor may start court proceedings, subject to any remaining obligations the creditor may have to the customer (for example, under the Financial Conduct Authority’s Handbook). Account should be taken of the possibility that a reply was posted towards the end of the 30-day period.
So what are the obligations for the customer? The customer is obliged to read the Information Sheet and complete the Reply Form, and request copies of any documents they wish to see and enclose copies of any documents they consider relevant, such as details of payments made but not taken into account in the creditor’s Letter of Claim.
If the customer indicates that they are seeking debt advice, the creditor must allow the customer a reasonable period for the advice to be obtained. In any event, the creditor should not start court proceedings less than 30 days from receipt of the completed Reply Form, or 30 days from the creditor providing any documents requested by the customer (or explaining that they are not available), whichever is the later.
If the customer indicates in the Reply Form that they are seeking debt advice that cannot be obtained within 30 days of their reply, the customer must provide details to the creditor as specified in the Reply Form. The creditor should allow reasonable extra time for the customer to obtain that advice where it would be reasonable to do so in the circumstances.
Where a customer indicates that they require time to pay, the creditor and customer should try to reach agreement for the debt to be paid by instalments, based on the customer’s income and expenditure (I&E). In trying to agree affordable sums for repayment, the creditor should have regard where appropriate to the provisions of the Standard Financial Statement or equivalent guidance. If the creditor does not agree to a customer’s proposal for repayment of the debt, they should give the customer reasons in writing.
A partially completed Reply Form should be taken by the creditor as an attempt by the customer to engage. (The Court will not be taking a pedantic view or rejecting documents on a technicality, rather they appear to be adopting a pragmatic approach.) The creditor should attempt to contact the customer to discuss the Reply Form and obtain any further information needed to understand the customer’s position.
The Protocol suggests that the early disclosure of documents and relevant information can help to clarify or resolve any issues in dispute. Where any aspect of the debt is disputed (including the amount, interest, charges, time for payment, or the creditor’s compliance with relevant statutes and regulations), the parties should exchange information and disclose documents sufficient to enable them to understand each other’s position.
If the customer requests additional documents or information, the creditor must either provide those documents or information requested or explain why it is unable to do so within 30 days of receipt of the request.
If the parties still cannot agree about the existence, enforceability, amount or any other aspect of the debt, they should both take appropriate steps to resolve the dispute without starting court proceedings and, in particular, should consider the use of an appropriate form of Alternative Dispute Resolution (ADR). ADR may simply take the form of discussion and negotiation, or it may involve some more formal process such as a complaint to the Financial Ombudsman Service (FOS) where the dispute concerns a credit agreement.
If a matter proceeds to litigation, the court will expect the parties to have complied with this Protocol. The court will take into account non-compliance when giving directions for the management of proceedings. Various sanctions are available to the Court, as set out in Practice Direction.
Whether the Protocol will have the desired effect, only time will tell, and a number of issues and challenges undoubtedly remain, not least the fact that the industry is yet to fully adopt the Standard Financial Statement and, despite our representations, will have only until 1 October 2017 to implement PAP.
The Reply Form remains, for many consumers, overly complex, and it will be interesting to hear from creditors and CSA members as to how frequently it is used. Given that creditors are obliged to follow a Protocol in the full knowledge that nine out of every ten court claims go uncontested, it may be assumed that nine out of every ten Reply Forms will similarly be ignored.
The greatest challenge, however, is with the timetable. The Master of the Rolls is only giving firms six months before the Protocol comes into force, so businesses need to be testing their systems and processes now to understand how readily it can be accommodated.
The CSA has already been helping members to prepare, with a well-attended webinar still available through the Member Zone on the CSA website, and briefings being organised at forthcoming Creditor Forums, Buyers’ Meeting and DCA Meetings. It will also be seeking further feedback to see how PAP is working in practice for creditors and their customers.