The Pre-Action Protocol - An Update

The Pre-Action Protocol for debt claims came into force on 1 October 2017 meaning it shouldn’t be too long until the first claims are heard under the new protocol. But what has changed?

Previously, those seeking to make a debt claim followed 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.

Who must follow PAP

Contentiously the protocol applies to any business – including sole traders – looking to bring a claim against a debtor - either an individual or a sole trader. Therefore, sole traders seeking payment from an individual or consumer must follow this protocol, it will be interesting to see how practical that is!

There is no mention of whether it applies to those seeking recovery against a partnership, in the absence of information many are assuming it does not need to be followed in this instance. However, it is clear that the protocol applies where a partnership is looking to bring a claim against an individual or sole trader. It doesn’t apply to commercial debts, unless the debtor is a sole trader, or where the debt is covered by another existing Protocol.

What it says

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.

The letter before claim (LBC) needs to be sent by post – the requirement that so much of the PAP should need to be completed in paper formats 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.

The pre-action letter must contain certain key information such as the amount of debt, whether charges and interest are accruing, the fact that a copy of the agreement may be requested (where the contract has been made in writing), details of how the debt can be paid, if instalments are being offered, why the offer is unacceptable and, if the debt has been sold, where the debt has been assigned to and who the original creditor was. We are not interpreting this to mean that should the debt have been assigned multiple times, each assignment needs to be listed. What is important is that the debtor understands who the original creditor was and the role of the party bringing the claim.

An up-to-date statement of account or wording indicating that a statement is available must also be included, amongst some other terms, alongside a “reply form” which has attracted a lot of criticism from both the debt advice sector and creditors.

The reply form is a lengthy form, resembling a court claim, which could give debtors the impression that a claim has already been brought! The length of the form is a concern for both sectors as, while customers do not have to use the reply form to respond to the pre-action letter - it is one of three options they have - should a debtor wrongly interpret the existence of the form as a required method of responding it may leave many ignoring the issue.

What happens if you don’t follow the PAP?

It 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 with the Protocol. Having said that it would not give the debtor a defence but it would be taken into consideration when awarding costs.

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.

Are your pre-action letters compliant?

We have reviewed numerous pre-action letters and while the basics of the protocol are always considered we have identified, through our keen eye for detail, misleading statements in many of the letters reviewed. We suggest you take another look at your letters to ensure they are totally clear and not misleading.

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