Explanatory Memorandum(Circulated by authority of the Attorney-General, the Honourable Philip Ruddock MP)
CORRECTION T0 THE EXPLANATORY MEMORANDUM
Section 186N - Return of certificate of registration
At the end of paragraph 103 add:
"In line with the provisions currently applying to registered trustees, this will be an offence of strict liability. It is appropriate that debt agreement administrators be subject to the same standards as registered trustees. The registration system for administrators is largely based on that applying to trustees. It is important that a trustee or administrator who is no longer registered, perhaps because they have been deregistered for failing to properly perform their duties, cannot use the certificate to hold themselves out to be still registered".
SECTION 1 - GENERAL OUTLINE
1. The amendments to be made by this Bill are designed to improve the operation of debt agreements under Part IX of the Bankruptcy Act 1966 .
2. The objects of this Bill are to:
- provide for enhanced regulation of debt agreement administrators;
- specify the duties of a debt agreement administrator;
- encourage creditors to make decisions based on the debtor's capacity to pay;
- provide more effective means of dealing with default by the debtor; and
- simplify, streamline and clarify a range of provisions to improve the operation of the legislation.
3. Schedule 1 contains provisions relating to the registration of debt agreement administrators. These amendments will commence on Royal Assent to enable existing and prospective administrators to be registered prior to 1 July 2007. This will ensure they are able to administer debt agreements which will be subject to new rules from that date - most importantly, the Official Receiver will not be able to accept debt agreement proposals nominating an unregistered debt agreement administrator from that date unless the administrator is administering no more than 5 active debt agreements.
4. Schedule 2 contains amendments which apply in relation to debt agreement proposals and resulting debt agreements from 1 July 2007. This Schedule contains all the amendments other than those relating to registration of administrators.
Financial Impact Statement
5. The amendments will increase the compliance and regulation responsibilities of the Insolvency and Trustee Service Australia (ITSA). This requires additional funding to be provided to ITSA. This funding is approximately $0.2m in 2006-07 and approximately $1.8m per year for 2007-08 and later years. Of this, approximately $0.12m will be recovered in fees and charges in 2006-07 resulting from application and registration fees payable by debt agreement administrators. Approximately $1.0m will be recovered in fees and charges in 2007-08 and later years resulting from application of the realisations charge to debt agreements (dealt with in the Bankruptcy (Estate Charges) Amendment Bill 2007), fees payable to the Official Trustee for administering debt agreements and ongoing application and registration fees payable by debt agreement administrators.
Regulation Impact Statement
6. Debt agreements were introduced in 1996 as a relatively low cost, informal and flexible alternative to bankruptcy. They were primarily intended for use by consumer debtors with lower levels of income and debt. They have proven to be very popular in recent years and there are currently about 8000 proposals made each year.
7. It was originally intended that debt agreements could be administered by anyone including the debtor personally or a friend or family member. However, in practice, most debt agreements are administered by a commercial administrator who charges a fee for the service. Debt agreement administrators are largely unregulated.
8. Although debt agreements now represent in the order of 20% of new personal insolvency administrations each year, the failure rate is high. About one-third are formally terminated and about one-third are not successfully completed but are not formally terminated.
9. Creditors have expressed a significant lack of confidence in the system which derives largely from their lack of confidence in debt agreement administrators who are involved in informing and advising debtors about their options as well as in administering the agreements once made. In particular, the concerns relate to the active promotion of debt agreements without proper consideration of other options, uncertainty about whether the debtor is making the best possible offer in the circumstances and the sustainability of offers made by many debtors. Administrators charge for setting up a debt agreement which provides a financial incentive to have the agreement accepted by creditors regardless of whether it is viable in the long term. Where the debt agreement fails, the debtor is usually in a worse financial position than at the start of the process.
10. There is currently no requirement for administrators to be licensed. However, since May 2003, the Inspector-General in Bankruptcy has had the power to declare an administrator ineligible for failing to perform their duties properly. Since May 2003, there have been 10 administrators declared ineligible which is significant when there are only about 40 active administrators currently operating.
11.The broad objective of the amendments to be made by this Bill is to restore creditor confidence in the system by ensuring that debt agreements are used in appropriate cases and that there are capable administrators who can assist debtors and properly account for and handle money on behalf of creditors.
12. More particularly, the aims of the reforms are:
- to ensure debtors are properly informed and make a realistic assessment of what they can offer creditors;
- to ensure creditors are fully informed about offers made by debtors and to encourage creditors to view debt agreements as an offer by the debtor to reach a collective agreement based on their ability to pay rather than an attempt to meet the competing demands of individual creditors; and
- to ensure administrators have the necessary capabilities to perform their duties.
13. In relation to regulation of administrators, the options which were considered were to:
- maintain the status quo which allows the Inspector-General to declare an administrator ineligible in certain circumstances; or
- introduce a registration requirement for administrators to ensure they have the necessary capabilities prior to administering agreements.
14.The first option has been in place since May 2003 and has not proven to be effective in addressing the significant community concerns which now exist. It allows anyone to administer debt agreements until they are found to be unsuitable. By the time the Inspector-General has concluded investigations and made a decision, debtors may have suffered considerable losses and creditors have not received the payments to which they are entitled. In addition, the current regime does not cover the pre-agreement activity undertaken by most administrators. Any failure to perform this pre-agreement activity properly contributes to the failure of debt agreements if the debtor is not properly informed. Administrators who are performing have suffered damage to their reputations based on the failure of those who have been found to be incompetent. There have been attempts to establish a Debt Agreement Practitioners Association to set standards but this has not been successful. Administrators recognise and support the need for a more formal regulatory framework which ensures only those with the required level of competence can enter the industry. In the absence of any suitable body to accredit or license these practitioners, this role is best undertaken by the Inspector-General and they will support this framework.
15. In addition to the registration framework, the amendments will also require an administrator to take fees proportionately over the life of the agreement and not in priority to creditors. This amendment is designed to remove the financial incentives currently inherent in the system which encourage administrators and their agents to focus on getting the debtor's proposal accepted by creditors without proper regard to the debtor's ability to afford the promised payments and awareness of all options available to them.
16. An alternative to legislative reforms relating to fees is to encourage administrators to change their practices in this area. The Insolvency and Trustee Service Australia (ITSA) has facilitated dialogue between administrators and creditors in an attempt to resolve this issue administratively. However, this has not been successful and, in practice, many agreements fail early with the administrator being the only person to have received any payments. In such cases, the creditor is entitled to recover the full amount of their debt and the debtor has made no progress in getting out of financial difficulty - in fact, the debtor is generally worse off because they now have less money to pay creditors and are likely to owe more to creditors as further interest charges will apply.
17In addition to these legislative measures, ITSA will continue to work with practitioners and other stakeholders to improve the way in which debt agreements are operating in practice.
18. The registration framework proposed will involve some additional costs, the impact of which will be detailed in a revised Cost Recovery Impact Statement to be published by ITSA prior to 1 July 2007.
19. The amendments were developed following a comprehensive review of the operation of debt agreements conducted by ITSA and the Attorney-General's Department in late 2005. That review involved extensive public consultation. It also included targeted consultation with the key stakeholder groups with an interest in debt agreements - debt agreement administrators, creditors and financial counsellors. The Attorney-General announced details of the proposed reforms in March 2006 for further public consultation. The Attorney-General subsequently announced final details of the amendments on 27 July 2006.
20. There is widespread support for the proposals to license debt agreement administrators and set out more clearly their duties in the Act. Administrators themselves see this as the most effective means of improving professional standards within their industry.
21. Creditors and financial counsellors support the proposed rules relating to administrators' fees as they expect these reforms to remove the financial incentives which are currently acting against the interests of vulnerable debtors. Administrators have some concerns about the proposal to prevent them taking fees in priority to creditors on the basis that it could affect their cash flow and affect the sustainability of their businesses. However, many administrators are already operating in this way without any difficulty.
Implementation and review
22. ITSA proposes to continue working closely with key stakeholders, particularly administrators, to provide information and education about the new arrangements. That consultation commenced soon after the Attorney-General announced the amendments on 27 July 2006 and will continue until the amendments have been fully implemented. This will be necessary to ensure administrators have a comprehensive understanding of their duties and how these relate to the registration and compliance process. ITSA already facilitates discussions between administrators and creditors to identify areas where current practices could be changed or improved. The reforms will provide a focus for these discussions but they are not the complete solution. In tandem with implementing the reforms, ITSA will continue to facilitate this dialogue as many current issues are better dealt with by exchange of information and changes to practice rather than further regulation. For example, the reforms relating to administrators' fees will not address ongoing concerns that creditors are not getting value for money. Instead of attempting to prescribe or cap these fees, the concerns are better dealt with by creditors and administrators gaining an insight into mutual expectations and the services actually provided by administrators.
23. There will be a review of the effectiveness of these arrangements three years after they take effect. Typically, debt agreements are designed to run for a minimum of three years which means any earlier review would not properly consider the effect the reforms have had on returns to creditors and the rate of failure of debt agreements.
Section 2 - Policy objectives
24. The principal purpose of the amendments to be made by this Bill is to improve the operation of debt agreements under Part IX of the Bankruptcy Act 1966 .
25. Debt agreements are an important feature of the personal insolvency system. They provide debtors with unmanageable debt who can afford to make some payments to creditors with an opportunity to do so. Many debtors want to consider making a debt agreement as it gives them an opportunity to recover a damaged financial reputation and avoid bankruptcy.
26. When debt agreements were introduced in 1996, it was envisaged that they could be administered by anyone including the debtor personally or a relative or friend. However, in practice, practically all debt agreements are administered by a fee-for-service provider who may or may not provide other services. This has led to calls for greater regulation of that industry to ensure vulnerable debtors are protected and proper standards of practice are met.
27. The reforms proposed are designed to ensure that debt agreements continue to be available as a viable means of dealing with unmanageable debt. They will ensure that debtors are properly informed about all options and that debt agreements are used by debtors for whom they are a suitable option. The reforms will also ensure that there are high calibre debt agreement administrators available to assist debtors in assessing their options and that debt agreement administrators also meet high standards in relation to handling money and administering the agreements.
28. The proposed reforms have been developed following a comprehensive review of the operation of debt agreements conducted by the ITSA and the Attorney-General's Department in late 2005. Details of the proposed reforms were announced on 29 March 2006 for further public consultation.
29. The overall purpose of the amendments is to:
- provide a system of registration of debt agreement administrators based on their ability to perform duties as set out in the Act;
- remove financial incentives for debt agreement administrators by ensuring they focus on developing proposals which are affordable and in the interests of both debtors and creditors;
- encourage creditors to make decisions on debt agreement proposals based on the debtor's capacity to pay rather than what rate of return they expect to receive;
- ensure creditors have sufficient reliable information to make informed decisions about debtors' proposals;
- provide more effective mechanisms for dealing with default by the debtor; and
- simplify, streamline and clarify the provisions to make debt agreements work more effectively.
30. The amendments will generally apply in relation to a debt agreement proposal given on or after 1 July 2007. The Inspector-General will be able to register administrators prior to that date (following Royal Assent).
Section 3 - Notes on sections
Section 1 - Short Title
31. The Bankruptcy Legislation Amendment (Debt Agreements) Bill 2007 (the Bill) proposes amendments to the Bankruptcy Act 1966 . Section 1 of the Bill provides that, when the Bill has been enacted, it will be known as the Bankruptcy Legislation Amendment (Debt Agreements) Act 2007 .
Section 2 - Commencement
32. Section 2 will provide a table setting out when the amendments to be made by the Bill will commence. Sections 1 to 3 and anything else not covered by this table will commence on the day on which the Bill receives Royal Assent.
33. Schedule 1 will commence on the day after the Bill receives Royal Assent.
34. Schedule 2 will commence on 1 July 2007.
Section 3 - Amendments
35. Proposed section 3 is a drafting device to allow all the amendments proposed to be made to the Act to be set out in Schedules. The items in the Schedules will amend the Act and will have effect according to their terms. Notes on the Schedule items follow.