The Pre-Action Protocol for Debt Claims comes into force on 1 October 2017. This note deals with the key elements to be aware of.
While the Protocol is named the Pre-Action Protocol for Debt Claims the first thing to note is that it only applies to businesses claiming payment of debts from an individual (including individual sole traders) and does not apply to business-to-business debts.
In addition, it does not apply where another Protocol exists, such as the Mortgage Arrears Protocol, but it is intended to complement any regulatory regime which a creditor is subject to and should be read in conjunction with industry and government guidance relating to good practice.
Contents of the Letter of Claim
The Protocol is very prescriptive and specifies the information which the Letter of Claim should contain, which is as follows:
- the amount of the debt;
- whether interest or other charges are continuing;
- where the debt arises from an oral agreement, who made the agreement, what was agreed (including, as far as possible, what words were used) and when and where it was agreed;
- 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;
- where the debt has been assigned, the details of the original debt and creditor, when it was assigned and to whom;
- if regular instalments are currently being offered by or on behalf of the debtor, or are being paid, an explanation of why the offer is not acceptable and why a court claim is still being considered;
- 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; and
- the address to which the completed Reply Form should be sent
Information Sheet, Reply Form and Financial Statement
The Letter of Claim should also enclose the following:
- an up-to-date statement of account for the debt, which should include details of any interest and administrative or other charges added;
- the most recent statement of account for the debt and should 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, sufficient to bring it up to date; or
- where no statements are provided, the Letter of Claim should state the amount of interest incurred and any administrative or other charges imposed since the debt was incurred;
- an Information Sheet (at Annex 1 to the Protocol). This gives guidance to the debtor as to what to do next and sets out where debt advice can be obtained;
- a Reply Form. This consists of four sections:
- In section 1, there are four boxes, which can be ticked by the debtor so that they can either agree that they owe the debt, agree that they owe some of the debt, query whether they owe the debt or dispute they owe the debt.
- Section 2 deals with how the debtor will pay if they have agreed that they owe the debt or agree that they owe some of the debt. The debtor has the option to tick the boxes to say that they will pay what they owe now or they will pay but need time to pay.
- Section 3 should be completed if the debtor is getting or intends to get debt advice.
- Section 4 is about documents the debtor is providing to the creditor. Significantly, the debtor is given the option to request more documentation or information from the creditor.
- a Financial Statement form to be completed by the debtor (an example Financial Statement is provided in Annex 2 to the Protocol) but creditors can supply their own.
Sending the Letter of Claim
The Letter of Claim should be clearly dated toward the top of the first page and posted on either the day it is dated or, if that is not reasonably possible, the following day.
The Letter of Claim should be sent by post, but it can also be sent by email. If the debtor has made an explicit request that correspondence should not be sent by post, and has provided alternative contact details, the creditor should use those details when sending the Letter of Claim.
- If the debtor indicates that they are seeking debt advice a creditor must allow the debtor a reasonable period for advice to be obtained.
- If the debtor indicates that they are seeking debt advice that cannot be obtained within 30 days of their reply, the debtor must provide details to the creditor as specified in the Reply Form. The creditor should allow reasonable extra time for the debtor to obtain that advice where it would be reasonable to do so in the circumstances.
- Where a debtor indicates in the Reply Form that they require time to pay, the creditor and debtor should try to reach agreement for the debt to be paid by instalments, based on the debtor’s income and expenditure. In trying to agree affordable sums for repayment, the creditor should have regard where appropriate to the provisions of the Standard Financial Statement or equivalent guidance.
- If the creditor does not agree to a debtor’s proposal for repayment of the debt, they should give the debtor reasons in writing.
When can the creditor start court proceedings?
- If the debtor does not reply to the Letter of Claim within 30 days of the date at the top of the letter, the creditor may start court proceedings, subject to any remaining obligations the creditor may have to the debtor (for example, under the Financial Conduct Authority’s Handbook). Account should be taken of the possibility that a reply was posted towards the end of the 30-day period.
- If the debtor does reply the creditor should not start court proceedings less than 30 days from receipt of the completed Reply Form or 30 days from the creditor providing any documents requested by the debtor, whichever is the later.
- Where the debtor has responded to the Letter of Claim but an agreement has not been reached, the creditor should give the debtor at least 14 days' notice of their intention to start court proceedings.
- If the creditor reaches an agreement with the debtor which is then breached by the debtor, the creditor will be required to send a further Letter of Claim and start the Protocol process again, before it can issue proceedings.
If the debtor requests documents or information then the creditor must provide that document or information or explain why it is unavailable within 30 days of the request.
The Protocol specifies that, where the parties cannot agree about the existence, enforceability, amount or any aspect about the debt, then both parties should take steps to resolve the dispute without starting court proceedings and in particular to consider Alternative Dispute Resolution (ADR), which can include a simple discussion and negotiation, a more formal process such as the Financial Ombudsman Service or, where the debt is large, a mediation.
If court proceedings are started the court can take into account non-compliance when giving directions for the management of the proceedings although they will not be concerned with minor or technical infringements.
On first impressions, the amount of information that the creditor has to provide may appear a lot, but most creditors are already providing details of the debt and the relevant information now required. However, having to send out the Information Sheet as well as a Reply Form and Financial Statement is an extra burden.
One of the biggest changes is the delay that may be incurred, as the creditor should allow 30 days before starting proceedings once the Letter of Claim has been sent. In order to counter this, some creditors may consider sending out their Letter of Claim earlier than they would have previously done.
There is a risk that the debtor's Reply Form, with its many various boxes to be ticked, may be confusing, although straightforward language is used. Further, by having as an option a tick box which states that the debtor disputes the debt, it has also been argued that the Reply Form may encourage more debtors to dispute the debt than would have done. In addition, the option to ask for extra information and documentation may also encourage delay and further disputes. At the very least, it is likely that the process will require additional rounds of correspondence with debtors, to ensure that the Protocol is complied with, before legal proceedings are commenced.
It is likely that this new Protocol will mean that creditors will have to adjust their processes, which will be more onerous.