Pre-Action Protocol (PAP) - What do the changes look like in practice?
With five months to go until the pre-action protocol for debt claims comes into force (1 October 2017), let’s recap the background and what firms need to be thinking about to ensure compliance.
The Ministry of Justice released the final version of the new pre-action protocol (PAP) for debt claims on 21 March 2017, following a lengthy consultation process. The final draft does not include some of the more contentious items initially included, such as the requirement to provide to the debtor detailed statements of account, a full copy of the PAP itself, and a copy of the written agreement the debt is based on. Instead, businesses making a claim will have to inform the debtor that a copy can be requested. Although this looks like a compromise, it may have the effect of reducing attempts by less scrupulous debt advisors to find a technicality.
It’s been confirmed that there will be no transitional arrangements, meaning that the new protocol will apply in its entirety from 1 October 2017.
What will the changes look like in practice?
At the moment, those seeking to make a debt claim must follow the general principles set out in the Practice Direction Pre-Action Conduct and Protocols. The aim of the new protocol is to encourage early communication between the parties and, if possible, resolution and settlement outside of the courts, with the effect that court proceedings would be a last resort.
Part 3 of the protocol sets out that prior to commencing proceedings, a creditor should send the debtor a Letter of Claim. There are requirements about the content of this letter. It must include full details of the amount and basis of the debt. If the debtor doesn’t respond within 30 days, the creditor may start court proceedings. It will apply to any business – including sole traders and public bodies – looking to bring a claim against a debtor - either an individual or a sole trader. It doesn’t apply in business to business debts, unless the debtor is a sole trader, or where the debt is covered by another existing Protocol.
The Letter Before Claim (LBC) needs to be sent by post – the requirement that large parts of the PAP need to be completed in hard copy format was the subject of much consternation during the consultation period – unless otherwise agreed with the debtor.
Once the letter has been sent, firms need to wait for 30 days before court proceedings can be started. If the debtor replies, they must be given a ‘reasonable period’ to seek advice, if required. If the debtor wishes to make a payment, a repayment plan should be drawn up, taking into consideration the debtor’s means. If the debtor makes contact and asks for further documents, these should be sent within 30 days of the request. If the creditor cannot provide a copy agreement, or any other requested document within 30 days, an explanation will be required as to why the document is not available. An extension of time to provide the document/s can also be requested.
If no agreement can be reached about any aspect of the debt, the next step is alternative dispute resolution; either informal discussion, mediation or referral to a relevant Ombudsman.
Changes Required For Compliance
The PAP is intended to complement existing regulatory obligations, meaning that it doesn’t trump any existing obligations in, for example, the FCA Handbook. Compliance, as ever, is crucial. If a matter does proceed, the court will likely take into account any non-compliance.
So, what action needs to be taken now? Businesses who will be affected should consider implementing or revising a standard template letter, and all necessary paperwork, ready for use on 1 October 2017. Where applicable, some staff training may be necessary or worthwhile. Firms should also be proactively updating policies and procedures, so that they’re ready to go in October.
Ultimately, it should be remembered that the new PAP gives our industry the chance to take advantage of the opportunity for positive engagement with customers. We have been asked on more than one occasion whether, under the new rules, it will be permissible to call a customer while the PAP is in effect. The answer to this question is that there is nothing in the PAP that precludes good customer service and dialogue, and therefore, calling the customer at the end of the 30 day period or even towards the end of this period does not represent non-compliance.
RB Compliance will keep you updated with any changes to the new pre-action protocol – watch this space.