Charging Peter to pay Paul

While many of the proposals to simplify and update the law of diligence are laudable, I expressed some concern about the thinking on arrestments and set off.

As matters have developed, it has become clear that the enactment of these proposals would have very serious consequences for the provision of credit, the level of interest rates, and even the level of homelessness in Scotland. Don’t just take my word for it – this is the view of the Committee of Scottish Clearing Bankers with whom I met recently.

None of these, surely, can be the true intention of the Executive.

Set off: hitting mortgage payers

The proposed section 73G of the Debtors (Scotland) Act 1987 (draft bill, clause 99) provides:

“(2) The–

(a) service on [a] bank or other financial institution of a schedule of arrestment; or

(b) service… on that bank or institution of a copy of a final decree,

shall not, notwithstanding any agreement between the bank or institution and the debtor to the contrary, have the effect of making any sums owing to the bank or institution by the debtor immediately payable.”

This would have the effect of restricting set off against any debtor balance, not just mortgages. This is a curious result as the corresponding explanatory paragraph in the consultation paper (9.60) clearly envisages that the legal changes would apply only to mortgages.

If this clause is passed:

(1) the cost of borrowing will increase, as interest arrangements are often reached based on the bank’s ability to set off balances;

(2) banks will have to maintain more capital to meet capital adequacy, which again will increase the cost of borrowing;

(3) it will be very difficult, if not impossible, for any offset type mortgages to continue in Scotland, thereby decreasing the flexible mortgage products on offer;

(4) lenders will no longer be able to regard a mortgage as in default if any diligence is used against a customer. This will inevitably lead to more cautious lending;

(5) banks will not be able to use set off to the customer’s advantage by ensuring a mortgage is paid, so potentially increasing repossessions and homelessness.

So, while I often write from a creditor’s perspective, I hope it is clear that these proposals will be to the detriment of many Scottish consumers, not just the banks. Moreover, if the banking climate is less favourable than in England, that will surely not be good news for Scotland as a financial services centre – jobs will be lost.

Arrestment: costs all round

The provisions relating to arrestments would have less of a dramatic effect for the community but are still likely to lead to increased costs for most Scots.

By the new section 73E(2) and (4) the arrestee shall send to the creditor information as to the nature of any property attached, and its value so far as known to the arrestee. Under section 73F the sanction for failure to comply would currently be a payment of £304 by the arrestee to the arresting creditor. This cannot be recovered from the debtor. It might be said that this is the banks’ problem, but that ignores the reality of how banks do business. Costs will be passed on to all customers.

In my opinion, the following criticisms can justifiably be made of these and other provisions in the draft bill relating to arrestments:

(1) the 14 day compliance period is far too tight, having regard to the number of arrestments served (around 700 per business day, perhaps at branch offices);

(2) many banks advise if arrestments (in execution) have been successful or not, or if a connection cannot be located;

(3) there are different formulae for sums caught by arrestments on the dependence and in execution;

(4) there is inconsistency about the rules on prescription of arrestments;

(5) there will be a need to cross refer to the 1987 Act to identify how much will be exempt from the effect of the arrestment;

(6) extra administration costs will inevitably result, and be passed on to all customers;

(7) there is the potential for adverse effect on small businesses who may have busy or even closed periods, as with the construction industry;

(8) there seems little point in the 14 day rule when the Executive also proposes an automatic release of arrested property after 28 days – the arrester will know then if he has succeeded.

Many of your clients – whether creditors or debtors – will be affected adversely by these provisions, as will the public at large. Although the consultation is currently closed, I hope the Executive will be persuaded not to pursue these lines and, if you agree, urge you to tell it your views.

Mark Higgins, Partner, Golds, Glasgow