Breathing Space and overdrafts
This article assumes some knowledge of the Breathing Space scheme. For an overview of Breathing Space, read Lorraine Charlton’s article.
All sorts of questions will emerge from Breathing Space, and one that has been asked already is:
Can I leave an overdraft out of a standard Breathing Space moratorium?
Advisers will only consider doing this if it is in the client’s best interests, depending on the circumstances of the case. However, the short answer is no.
Regulation 23(5)(a) of the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (the Regs) covers Standard Breathing Space. It says that any application to a debt adviser must include all debts the client knows about.
Reg 25(1)(b) says a debt adviser must include all the information given by the client under reg 23(5), and reg 25(1)(c) goes further, adding that advisers must include:
information identified by the debt advice provider about any other qualifying debt
This could be additional information given during the advice session, from credit reports or from client letters. As soon as it’s discovered, one way or the other, it must be included.
The Debt Respite Scheme (Breathing Space) Guidance for Money Advisers, para 4.4, also makes clear all debts must be included.
Can I leave an overdraft out of a mental health crisis moratorium?
Reg 29(2) of the Regs covers the mental health route and requires very little to be included in the application to the debt adviser. Reg 29(4) says an application to a debt adviser may (not must) include details of known debts. This might be recognition that in some cases, it will be difficult for whoever is submitting an application to the debt adviser to give details of all of the debts.
Further to this, Reg 30(1)(b) requires the debt adviser to get at least one credit report before starting the moratorium. Usually, any unknown overdraft would be discovered at this stage. The starting point should be all known debts should be included.
Regulation 30(2)(c) says that a debt adviser must initiate a moratorium if they consider that (amongst other things):
…the debts to be included in the moratorium are qualifying debts.
The words ‘to be included’ arguably allow scope to exclude debts. However, this is very unlikely to be the intention of the scheme. It is probably recognition of the fact that some debts are not included on a credit file, and full details may be difficult to gather from a client in crisis care. The debts ‘to be included’ are the debts an adviser is aware of. This is reflected by para 3.31 of the Guidance on mental health crisis breathing space. It’s Expert Advice’s understanding that all known debts must be listed.
What if I leave off an overdraft?
The most obvious point is that there would be no protection from enforcement, and interest will continue to accrue. This applies if any debt is left out of either type of moratorium. Debts that existed at the start of the moratorium can be added later.
The FCA has not introduced any new debt advice rules in CONC 8.3, in respect of Breathing Space. However, page 8 of the FCA’s policy statement PS21/1 makes it clear that advice on Breathing Space is debt counselling, and falls under the rules already in CONC 8. If a debt adviser misses a debt, this could breach FCA rules and principles and lead to a complaint. Complaints can be escalated to the Financial Ombudsman Service as Breathing Space falls within our debt advice work.
My client really needs their overdraft at the moment
When a client is in this position, where they need access to money now, then it might be that a breathing space moratorium is not appropriate. Again, this is a key consideration under FCA rules. Advisers can always assist with the ‘first right of appropriation’ in this instance, and look at another option, or delay entry to a moratorium.
Any decision to discount breathing space, including on the basis of the use of an overdraft, will need to be justified in the case notes. It would need to be a short-term issue so that our advice does not lead to further unsustainable use of an overdraft.
How will banks react to overdrafts being entered in Breathing Space
Banks may all react differently. All the above said, Breathing Space is not a break in payments. Banks could just do nothing and let the account function normally during the moratorium.
Breathing Space primarily prevents enforcement, interest and charges. There is nothing stopping anyone paying a debt if they can, and this would include having income paid into an overdrawn account. If some banks close accounts because a client enters a moratorium, please feed this through your normal policy channels. A bank would have to serve notice before terminating an overdraft.
The FCA’s guidance in ‘PS21/1: Breathing Space Regulations — changes to our Handbook’ confirms that banks can reduce of remove overdraft facilities during Breathing Space (pg.6).
Para 3.1 of the ‘Guidance for creditors’ reminds banks that Breathing Space is meant to ‘…create time and space for a person to get the help they need, without having to worry about their financial situation getting worse.’ The guidance also states that any action taken must be consistent with the scheme and any other regulatory obligations that creditor has, e.g, FCA rules and principles.
A client cannot borrow more than £500 during a moratorium
In a standard Breathing Space, reg 16(2)(c)requires that a client must not borrow more than £500 during a moratorium. If any overdraft balance increased by more than £500 at any point in the moratorium, the client has breached the obligation. This means the Breathing Space might be cancelled under reg 27(5), although there is discretion in reg 27(6) not to cancel.
There are no restrictions related to borrowing for those in a mental health moratorium.
A creditor can seek a review under reg 17 and appeal to the County Court if a debt adviser refuses their request to cancel a moratorium. However, the grounds for a creditor requesting a review are limited in reg 17(1)(2). In this scenario, a creditor would have to show they had suffered ‘unfair prejudice’ because of the moratorium whilst the client continues to use the account. It remains to be seen how widely creditors will use reg 17.
If the overdraft increases, what balance is protected?
The definition of a ‘moratorium debt’ says that the debt is what was owed at the time of the moratorium application. Therefore if somebody does continue to use an overdraft, the balance above what existed at the application date is not protected.
In theory, this means interest could not accrue on the amount owed to the date of the application, but could accrue on any additional debt after that. If direct debits are not cancelled, this scenario can happen very easily.
If this arises, and a creditor continues to add interest we’d argue that FCA rules should still apply to:
under rules in chapter 7.3 of the Consumer Credit Sourcebook (CONC):
- treat customers fairly and consider freezing interest (7.3.2R, 7.3.4R and 7.3.5G)
- suspend recovery for up to 60 days, or whatever is a reasonable period of time (7.3.11R and 7.3.12G)
The same scenario might arise with credit cards, store cards and mail order accounts still in use.
Do what you would normally do
Advisers have to consider a moratorium, but if it does not look like a good option, they do not have to recommend it. Although it’s not a debt solution, it’s advised on in a similar way. Access to an account for immediate needs, and uncertainty about bank account closure, might be a reason to recommend a different option, at least in the short-term.
However, continuing to use an overdraft is not best advice. An overdraft is a debt that will be included in any debt solution that follows Breathing Space. At some point it will need to be dealt with and a basic account opened. As always, advisers are the best place to judge the right approach in the short and longer term.
So in summary:
- You can’t leave a known debt out of standard Breathing Space moratorium
- In a mental health Breathing Space, advisers should list all the debts they are aware of. The regs and guidance acknowledge that it might be difficult to get a full list of debts
- Reg 7(6) prevents interest and charges accruing on a moratorium debt, so omitting an overdraft would increase the overall debt level
- Your client will need to deal with the overdraft at some point
- Banks may not close accounts entered in a moratorium, and clients are able to pay their debts in Breathing Space if they can afford to
- All things considered, breathing space might not be appropriate if a client is unwilling to include their overdraft in a moratorium.
Graham O’Malley is a Senior Debt Expert in the Expert Advice Team at Citizens Advice.
The information in this article is correct as of the date of publication. This article was updated on 8th February 2023.
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