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Review of Debt Agreements under the Bankruptcy Act 1966 | 22 August 2011

REVIEW of DEBT AGREEMENTS

UNDER THE

BANKRUPTCY ACT 1966

SUBMISSION

By

The Debt Agreement Practitioners Association

Section 4: KEY ISSUES

The regulation of administrators

DAPA submits that there should be no threshold in regard to the Inspector-General’s ability to inspect and obtain information regarding trust accounts maintained by administrators.

It is noted that Section 185LD merely requires an administrator establish a ‘separate bank account’ into which debtor’s monies must be paid. The bank account is not required to be subject to external audit or inspection.

In the event that the ‘no audit’ rule is to remain in situ we recommend that the Inspector-General be vested with the power to

investigate trust account veracity, including making enquiry with bankers at any time, but more appropriately at the time of regulatory inspections of

administrators.

Duties of administrators

DAPA submits that no additional statutory duties

need to be imposed on administrators for the following reasons:

• A debt agreement proposal is one submitted by a debtor and the elements of a proposal are supported by a declaration executed by the debtor – not the administrator.
• The administrator has a legislative duty to evaluate the information proffered by a debtor; and
• We draw attention to the extensive revision of Guidelines, Practice Statements, Inspection Regimes and Professional Codes of Conduct which ensure due diligence, compliance and validity of processes.

The registration of administrators

DAPA submits that:

• Option 6 partly reflects the necessary requirements for new entrants to the profession, insofar as we are of the opinion that many applicants commence employment, in a practice, and in a role not directly associated with administration of debtor portfolios. In particular such roles may encompass the marketing of insolvency regimes and general counselling.
• Administrators engaged in associated products are required to hold an Australian Credit Licence.
• With this in mind, we recommend that any individual employed by an administrator who has any direct dealings with debtors be required to show:
  • Relative employment of not less than 2 years in the proceeding 5 years;
  • Membership of an appropriate professional body; and An examination, prior to the granting of registration that may encompass:
    1. Principal & Agent relationship
    2. Cash & cash controls
    3. Statement of cash flows
    4. Introduction to insolvency
    5. Business ethics – requiring submission of an essay
    6. Administrator’s legislative duties.
• An increase in fees of administrators is unlikely as personal professional education is normally a cost borne by the student, unless subsidized by the employer, but then a management cost.

We submit that Option 7 is an acceptable option provided any applicant for registration can show previous insolvency practice involvement and membership of the Debt Agreement Practitioners Association. Additionally it should be prescribed that such applicants hold Australian Citizenship, a matter overlooked in current legislation.

Unregistered administrators

DAPA submits that unregistered

administrators should be proscribed on the basis of:

• Historical poor standards
• Lack of legislative regulation
• Deficiency in insolvency law and practice
• Lack of subscription to a professional Code of Conduct.

An individual seeking to administer their personal administration should continue to be prescribed.

DAPA opines that those holding an Australian Credit Licence under the National Consumer Credit Protection Act 2009 are not entitled to administer debt agreements. It is clear that such authority lies only under the Bankruptcy Act 1966, as amended. Additionally a debt agreement proposal is required to be certified by a registered debt agreement practitioner; and that precludes an unregistered entity from submitting documentation.

We submit that neither Option 9 nor Option 10 reflect the commercial market place. In reality a number of registered debt agreement administrators operate a two tier system involving a broker or facilitator. This role encompasses the marketing, collation and formulation of a debt solution, not always directed to Part IX. The role is also intended to keep the principal agent relationship at arms length from the administrator.

Facilitators are compelled to hold an Australian Credit Licence.

DAPA submits that only registered debt agreement administrators be mandated to submit, after certification, and then administer debt agreements.

We point out that the role of an administrator is not effective under current legislation until such time as

ITSA has annotated to National Personal Insolvency Index, which is the time at which a proposal has been accepted for processing by the Official Receiver.

There is a distinct grey area wherein a debtor seeks advice on alternatives available to redress their position. It is this specific area that is of concern to DAPA.

Under the National Consumer Credit Protection Act 2009 anyone with a credit licence is authorized to give financial advice and one presumes that includes insolvency advice. DAPA considers the alternatives to be:

• Registering facilitators with sub-licences attached to the registered administrator. This would enable the regulatory body to keep a record of which broker operates for which administrator and also ensure veracity of information being promulgated to consumers; or
• Ensure that those who are involved in financial services advice have an adequate understanding of the available options available to debtors. Given the rising gap between debt agreements and bankruptcy, financial counsellors should be held responsible to ensure that bankruptcy is not the only insolvency option promulgated, or considered.

ITSA’s power to investigate potential misuse of client monies by unregistered administrators

DAPA submits that unregistered debt agreement administrators should be proscribed.

Additionally, it is submitted that ITSA’s lack of empowerment to address any issues concerning public monies held by unregistered administrators is inadequate.

Advertising by administrators

DAPA submits that administrators have a duty and responsibility to ensure that the relationship between facilitators, agents and the administrator are clear in all manner of advertising. DAPA members are required to conduct advertising in accordance with its Code of Conduct.

Mandatory membership for administrators may ensure a more transparent approach to advertising.

Option 13. The Trade Practices Act is likely to suffice, having regard for how it defines what constitutes false and misleading advertising and Option 14 prima face appears unwarranted.

DAPA does support the proposition that only registered insolvency practitioners, including their facilitators duly sub-registered, be authorized to give insolvency advice.

Provision of advice by unregulated entities

The National Consumer Credit Protection Act 2009, Division 3 Section 72 expresses the requirement of creditors to facilitate hardship provisions prior to formal options however it fails to ensure the full scope of options available being presented. It should be a requirement that financial counsellors give certainty to debtors by making the Prescribed

Information available in all discussions pertaining to financial distress.

Many consultants employed by facilitators who operate under the guidance of registered administrators are highly qualified.

We reiterate our preference for sub-licencing facilitators which would obviate the necessity for any further legislation in this area.

Insurance requirements for registered administrators

DAPA advises that there is a consensus amongst its members that professional indemnity insurance would be a prudent inclusion in any amended legislation.

Remuneration of administrators – Set-Up Fees

DAPA submits that the large majority of its members do not charge, directly, a set up fee to debtors. It is however common place in the industry for a third party facilitator to charge such a fee. The fee will either be collected in full prior to lodgment of the proposal or the fee will, in the main, be included in the proposal as a creditor for collection over the term of the debt agreement, if accepted.

We consider it reasonable to state that where no set up fee is evident in a proposal the administration fee will be in the higher range.

It is important to recognize that the set up fee compensates the facilitator for:

• Advertising
• Information gathering
• Staffing costs
• Communication costs
• Information technology
• Searches and valuations
• Financial assessment
• Formulation and collation of the proposal
• Goods and Services Tax

It is a requirement that the amount of the set up fee be disclosed in the Explanatory Statement.

The set up fee is agreed between the debtor and the facilitator before there is engagement and in our opinion is a matter of private treaty between the two parties.

The Consultation Paper states “there seems to be little industry-wide correlation between the amount charged for set-up fees and the amount charged as administration fees”. We concede

this point but there are a number of issues that appear to be over looked.

• ITSA is not the best model for comparison. It is funded by the public purse; and
  1. Obtains additional funding from the realizations charge currently at 4.4%
  2. Additionally it charges a non-refundable lodgment fee of $191 for each proposal.
  3. It does not promulgate the alternatives to consumers by any advertising medium beyond its very little know website; and
  4. It promotes the outsourcing of services to alleviate pressure on the public purse.
• The quoted range of $1000-$2000 charged in set-up fees may relate directly to those practitioners or facilitators who demand full payment from the insolvent before submission of the debt agreement proposal.

Where the set-up fee, or balance due, is included in the debt agreement, once accepted, the recipient will only be entitled to the same percentage recovery as all other creditors, on apportionment ie: a 60% offer of settlement will diminish the set-up fee by 40%. To overcome this commercial anomaly it is common place to adjust the set up fee by the percentage amount by which it will be diminished ie based on a 60% return, a fee of $2200 will be included as $3080. In reality, if all contributions are paid by the debtor the amount returned shall be $2200.

It is erroneous for anyone to claim that the $3080 fee charge is extraordinary or an abuse. Having included the fee in the agreement, the intended recipient has given a “fair go” to the insolvent and the affected

creditors and accepted a significant cash flow risk . The medium to long term risk is evident insofar as non-payment of contributions, followed by termination results in the balance of the set-up fee being lost.

Recommendation

DAPA strongly believes that the issue of set-up fees can be readily overcome by adopting the following:

• Collection of set-up fees should be reverted to a priority payment from contributions, after deduction of the realizations charge;
• Pre-payment of set-up fees should be proscribed – this would also limit the interest of unregistered entities from giving advice or formulating proposals.
• Permit the marketplace to level the fees once there is a return to positive cash flow.
• There should be no cap on set-up fees;
• An initial allowance should be made to permit the facilitator to collect out of pocket expenses, perhaps in the range of $300 but then in reduction of the set-up fee.
• Unpaid fees should be recoverable, even in bankruptcy.

Remuneration of administrators – Administration Fee

DAPA submits that there is considerable

disparity amongst administrations, which encompass:

• Educational qualifications
• Insolvency experience
• Accounting ability
• Procedural management
• IT Systems
• Employee training
• Business structures
• Advertising methods
• Cash flow– due to portfolio size

The Association is cognizant that ‘bigger’ does not necessarily indicate ‘better’. It simply indicates larger cash flow that may be diverted to advertising. DAPA is committed to professional development and the Association anticipates introducing a professional education program for both current and intending members covering insolvency, accounting and ethical issues.

We submit that government has promoted private enterprise to engage in debt agreement administration. The purpose – to alleviate the public purse. The correlation between the cost recovery of government and private enterprise is not valid because private enterprise carries all the risks associated with commercial activity.

It is submitted that it is not in the interests of commerce for government to place any cap on fees that may diminish the highly competitive nature of the marketplace and the superiority of professionalism

applied by some administrators. There has been a marked increase in the number of debt agreement administrators; and trustee since 2007.

What effect does the level of fees have on acceptance rates?

DAPA submits that the individual fees of facilitators and administrators have little or no effect on acceptance rates. Debtors have a number of registered organizations to which they may turn for assistance, and many shop around prior to making a final decision.

Creditors retain the right of rejection if they consider the fees to be excessive.

However, if the set-up fee was reverted to priority payment this may trigger a far more acceptable solution to all involved.

Increasing the information available to debtors

DAPA submits that neither Option 19 nor Option 20 will serve any useful purpose whatsoever.

What the proposition will do.

• Benefit the largest practitioners who may choose to undercut the market for no other reason than to increase volume;
• Disenfranchise small operators, whose business structure may differ from larger practitioners but who may operate highly professional practices.
• Confuse the consumer further with statistics.

Market forces should dictate how private enterprise settles on its fees.

What the proposition won’t do

• Highlight the better qualified practitioners
• Highlight practitioners who subscribe to the DAPA Code of Practice
• Provide useful information to intending proposers

Recommendation

DAPA does not consider the issue of fees to be one of substance having regard for the foregoing.

Mandatory registration and a requirement for practitioners to become members of the professional association where there is peer oversight and a Code of Practice would seem to be more relevant than government attempting to manage private enterprise.

Expenses recovered by administrators

DAPA observes that administrators are currently bound by Guidelines and Practice Statements expressing what monies are defined as ‘expense’ or ‘outlay’.

There is little scope to determine, in advance, the behaviour of debtors or the actions of creditors who seek to dispose of their debt ledgers by way of sale.

Administrators are not empowered to enforce compliance on debtors even though they may have a vested interest in ensuring the successful completion of obligations.

We consider it appropriate that practitioners be compensated from the creditor, either the buyer or the seller, from contributions, before payment of dividends. Debt sales regularly involve the transfer of many hundreds of client files within an administrator’s system.

Primary examples of expenses that seriously diminish the administration fee return are:

• Tracing absconding debtors;
• Work entailed in transferring assigned debts from one proprietor to another within the administrators’ systems. Transfers can number in the hundreds on any occasion. And, it is anticipated that debt sales will increase rather than diminish.
• Re-issuing creditor disbursement cheques that have been lost or mislaid.

It is submitted that a comprehensive list should be drawn of all likely expenses that may be incurred over the term of a debt agreement and a monetary value applied to each by way of a Schedule. Further, that the Explanatory Statement be amended to incorporate the likelihood of such expense; or provision be made entitling the administrator to recover the expense from contributions.

Access to debt agreements

DAPA supports Option 23 which reflects the ongoing changes in income and living expenses within the community.

How long should former bankrupts be barred from proposing a debt agreement?

DAPA submits that:

• The 10year bar period should be abolished.
• A bankrupt who commits an act of insolvency during bankruptcy should be obliged to propose either a debt agreement or a personal insolvency agreement.
• A debt agreement proponent who fails to honour the obligations imposed by a debt agreement should be obliged to file a debtor’s petition within a set period of time after termination.
• A debt agreement proponent who honours their obligation to the agreement should been titled to propose a further debt agreement after 2 years of completion of the original.

Consider introducing additional services to debtors

Information obtained by DAPA under the Freedom of Information Act indicates that some $57M was allocated to community based services and financial counsellors for the financial year to 2009.

The Association questions the value to the community of this expense and the accountability of the monies outlayed in providing financial counselling to consumers particularly as there has been an historical increase in bankruptcies.

Concerns are also held by the Association as to the scope of promulgation of the range of formal and informal options being made available to debtors by financial counsellors.

It is opined that there must be a requirement of proof placed on financial counsellors, preferably a debtor executed Prescribed Information document.

This paper has been formulated by the Executive Committee and submitted on behalf of Members of The Debt Agreement Practitioners Association Limited.

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109 Upton Street
Bundall, Qld 4217

Telephone: (07) 5555 5955

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Download Original Extract: Review of Debt Agreements under the Bankruptcy Act 1966 | 22 Aug 2011

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