Update on Pre-action Protocol (PAP) for debt recovery
The Pre-Action Protocol for debt claims was introduced on the 1st October 2017 in respect of any debt claims for members residing in England and Wales.
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 debtor is a sole trader.
The Protocol requires all creditors to make it clear in the Letter Before Action (LBA) that the customer has the right to ask for documentation, including the original agreement/contract, although this should not be prominent as to encourage spurious requests.
There is a requirement for all creditors to include the latest statement of account or copy loan agreement, a template information sheet, reply form and an income/expenditure form in all cases. Although it is recommended that the new Standard Financial Statement (SFS) should be used as the income/ expenditure form, there is no specific requirement to do so. We adopt our own, more concise version, which covers all the relevant data which enables us to consider any offers to repay based upon a members income and expenditure.
The creditor should send a Letter Before Action (LBA) to the member before proceedings are started. The LBA should;
Contain the following information:
the amount of the debt;
whether interest or other charges are continuing;
where the debt arises from a written agreement, the date of the agreement, the parties to it and the fact that a copy of the written agreement can be requested from the creditor;
details of how the debt can be paid (for example, the method of and address for payment) and details of how to proceed if the debtor wishes to discuss payment options;
the address to which the completed reply form should be sent.
Do one of the following:
enclose an up-to-date statement of account for the debt, or
enclose 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, or
Enclose a copy of the information sheet and the reply form; and
Enclose a Financial Statement form.
Form of communication
The letter must be sent by post. “The LBA must be sent by post, unless the customer has explicitly requested that no post should be sent. The creditor may also send it electronically, but that will be in addition to the hard copy.……”.
Debts subject to a personal guarantee
Any debt which is payable by a guarantor, would fall within The Protocol, even if original debt was due from corporate entity. For example a company debt backed by a Personal Guarantee, will fall under the Protocol if a creditor wishes to pursue the guarantor.
Payment arrangements
If a member responds to the original letter and enters into payment plan, but then defaults, a further letter which is compliant with the new Protocol is not required, providing the default occurs within a reasonable period (6 months is deemed reasonable). A letter will be required to notify the member of the default and allow 14 days to rectify or enter into a different arrangement.
Time for customer to reply
The Protocol requires creditors to allow 30 days for the member to respond to the LBA under Clause 3.4. However it also indicates that creditors may wish to allow additional time for postage of replies. Consideration should be given to allow an additional short period before issuing a claim.
Duplication of process
If creditors enclose a statement of account and/or copy invoice as part of their credit control cycle prior to sending a letter before action (either internally or externally), this will not remove the requirement to enclose a copy statement and/or invoice with the LBA. It is a specific requirement of the Protocol that a copy statement or other alternative (as outlined above) should be sent with the letter.
Without doubt, the process of recovery of debts from consumers has become more onerous for creditors:
Creditors are required to provide more documentation to customers in specific formats;
There is increased scope for customers to delay payment beyond the initial 30 day period;
Creditors will need to be more pro-active when engaging with customers to ensure information is properly exchanged and allow specific time periods to reply;
Creditors will need to ensure that Statements of Account are up to date;
A review of existing internal credit control processes and timescales may be necessary.
Failure to comply with the Protocol may result in:
Further delay in collection of debts if any legal proceedings are stayed to remedy failures to comply with the Protocol;
Additional costs sanctions in terms of payment of the debtor’s legal costs or a failure to recover costs from the debtor;
Inability to recover interest from a debtor or recovery at a reduced rate.
Creditors will need to be more pro-active when engaging with customers to ensure information is properly exchanged and allow specific time periods to reply;
Creditors will need to ensure that Statements of Account are up to date;
A review of existing internal credit control processes and timescales may be necessary.
As debt recovery providers, we have made all necessary changes to our letters to ensure we adhere to any regulatory requirements. There may be some requirement for creditors to amend their internal credit control letters and we can advise you if you are required to make such changes. A general review of your internal credit control letters is something which all creditors should do periodically and we can provide advice in terms of content and compliance.
