“Bank rules eased for bankrupts” goes the press coverage, but will the planned legislative change really open the way for bank accounts for bankrupts?  Why does there need to be a change in the legislation?  And how will it affect IPs?  The government response to the consultation and the impact assessment (“IA”) – at: http://www.bis.gov.uk/insolvency/Consultations/BankAccount – provide some answers.

The Legislation – current and future

S307 of the Insolvency Act 1986 currently provides for a Trustee to claim after-acquired property, however he is not entitled to such property where a banker passes it on in good faith and without notice of the bankruptcy order.  The flipside of this is that banks feel there is a risk that, if they are aware that an account-holder is an undischarged bankrupt and after-acquired property moves through the account, the Trustee could seek remedy from the bank.  “Insolvency legislation as drafted leaves bankers unwilling to countenance the risk of claims from a trustee in bankruptcy.  Although such a claim is unlikely, the likelihood of a court upholding the claim (if challenged) is unlikely and there is no evidence that such a claim has previously been brought, the perception of the risk is sufficient to discourage banks from transacting with undischarged bankrupts” (paragraph 68, IA).

Despite the existence of a perceived, rather than a real, risk, the conclusion of the consultation process is: change the Act.  Although my first instinct was to feel that this was a disproportionate response, if it solves the problem, then it makes sense.  After all, if (to my knowledge) there has never been a claim made, the change will have little impact on IPs or on creditors’ prospects, will it not?

The planned change will redraft S307 so that “liability would only transfer to a bank after receipt of notice from a trustee regarding the potential claim” (paragraph 70, IA).  Although it is only a small issue – particularly given the few, if any, claims made on banks – it seems that this change would remove the ability to claim against a banker that acted in bad faith prior to receiving notice from the Trustee of a claim to after-acquired property.  “Banking respondents generally felt that risks were minimal as banks have to work to codes of practice anyway” (paragraph 75, IA).  Oh well, that’s alright then, isn’t it?!

Will the change really work?

Jo Swinson, Minister for Employment Relations and Consumer Affairs, seems pretty certain: “I am pleased with the positive response from the banking sector, in particular from those that offer basic bank accounts.  They have said that a small change in insolvency legislation will prompt them to change their policy on access for people who have become bankrupt” (Ministerial Foreword, government response, my italics).  The government response hints at some of the discussions leading to this conclusion: “It was not clear from initial responses whether more banks would change their policies as a result.  Further consultation with the main banks has provided assurance that a change in insolvency law to prevent trustees from claiming against them in respect of after-acquired property will result in banks looking again at their policy”.  Although agreement to look again at a policy is not agreement to change policy, it is evident that there is significant political pressure stacked against banks to make a change.

The argument for financial inclusion may well be the principal driver, but the IA identifies other pressures: recipients of the new Universal Credit scheme payments will need to have access to a bank account and new European Commission proposals include giving everyone the right to have a basic payment account with a bank.

Political pressure aside, will this change really prompt a change to bank policy?

Banking respondents explained that providing basic bank accounts is often done at a loss.  Withdrawing access to cash machines for basic account users appears to me to be a recent step taken by some banks towards reducing such losses.  In discussing the rationale for banks providing basic accounts, the IA states: “a significant benefit is that the customer is likely to remain with them for future years with only 12 months (the duration of bankruptcy) in a basic account and then free to operate whatever account suits them at which point the bank will be able to run a profitable account service” (paragraph 126, IA).  However, I suspect that this benefit has become less realistic as switching accounts between banks has become easier.

I think it is particularly telling that one of the two banks that offered accounts to bankrupts recently withdrew the service.  This bank responded to the consultation stating “that it already holds a disproportionate share of the basic bank account market and that, given that accounts were provided at a cost to them, it was an unsustainable situation” (paragraph 55, IA).  I would not be surprised if the consultation prompted the bank to review its policy and consequently it questioned why it was in the clear minority in providing this service.  It seems that those two banks’ responses came with a threat: “They considered that any increase in applications, or any change made which did not increase the number of providers, came with a risk that their policies would be changed, which would worsen the current position for undischarged bankrupts” (paragraph 108, IA).

Thus, clearly the banks have no real incentive for providing accounts to bankrupts – quite the opposite – and yet they put the focus on the S307 risk simply being too great.  If that were truly the case, then what is stopping banks providing accounts to debtors in DROs?  The CAB reported that some debtors find their accounts closed as a consequence of them entering into a DRO and many are refused new accounts because of the DRO… but the fact is that there is no S307 equivalent for DROs.  The IA acknowledges that “it remains a commercial decision whether or not to offer a bank account, but this proposed amendment should ensure that bankrupts are on an equal footing with other account holders and applicants” (paragraph 13), but if DRO debtors are also having difficulties in keeping or getting new accounts, then will anything change for bankrupts?  “Analysis of responses indicates that market behaviour is based on a range of factors and suggests that where bankrupt individuals are unable to open a bank account, it is mainly because of their credit record, and not specifically because of a risk of a claim by a trustee in relation to after-acquired property” (government response) – but their credit record will not change with the change of S307, so why should that result in improved access to accounts for bankrupts?

It seems to me that, if it were not for the political pressure, it would be highly unlikely that any change to S307 would improve bankrupts’ access to bank accounts and, whilst it seems a little disingenuous to suggest that S307 is the overriding reason for restricting access, it is difficult to criticise banks for their risk-averse stance and the best approach must be to remove this alleged barrier and then watch for the banks’ reaction.

When will the change be made?

Ah, the all-purpose “when Parliamentary time allows”!  Of course, this is primary legislation and opportunities to change that do not come around very often at all.  I recall many changes to the Insolvency Act proposed by the Insolvency Service over the past few years and as far as I am aware remain on the cards; they must form quite a stack by now.  It’s a shame that this has just missed the boat of the Enterprise and Regulatory Reform Bill – the repeal of Insolvency Act’s provision for early discharge from bankruptcy managed to slip into the Bill, but then of course that is counted as an ‘Out’ in regulatory reform terms, whereas this measure is an ‘In’… and with effect from January 2013, the government is planning to operate a ‘One-in Two-out’ process (http://news.bis.gov.uk/Press-Releases/-One-in-two-out-Government-to-go-further-and-faster-to-reduce-burdens-on-business-and-help-Britain-compete-in-the-global-race-6838c.aspx), which will make it even trickier to get the S307 change through.

However, let’s hope that this proposal does not sit of the shelf too long, because in the meantime bankrupts are left with only one bank (which seems twitchy about being the sole provider) and a few expensive alternatives.