BANKERS throughout the UK are frantically manning the panic stations, but it won't be long before the search for a scapegoat to blame for the whole mess begins in earnest.
What is certain is that the banks must accept their part in this financial fiasco. Insolvency practitioners are in a unique position to see how banks lend, how their administration runs and how they receive payments for outstanding debt – and many banks are found wanting in all three departments.

Of course people should act responsibly when seeking debt, but there is a duty on banks also and they are bound by regulations and basic banking principals only to lend to those who can afford to pay them back.

One name seen frequently in insolvency cases in the last few years was that of Northern Rock, typically in relation to the 125 per cent mortgage product it offered. This may have been a viable product in times of burgeoning house prices and when sold to the right person, but too many people had applications accepted who were unable to meet the repayments. Now that house prices are falling they do not even have the luxury of being able to sell up and square off their debts.

Individuals left facing insolvency have a number of options open to them, including a debt management plan or, better, the Debt Arrangement Scheme, which freezes interest and pays the principal off over a period of time depending on what the debtor can afford. For those who cannot repay their debts in full there is the option of a Protected Trust Deed (PTD), where they pay what is affordable over three years and anything unpaid after that is written off.

When a debtor does go into an insolvency arrangement such as a PTD or bankruptcy, there is a statutory requirement for all creditors to back off and they may not pursue their debts further. Unfortunately, this requirement often seems to pass many banks by and they continue to pursue the debtor, often through third-party debt collection companies.

In spite of this over zealous approach, banks have repeatedly shown themselves incapable of administering and receiving the final payment once an insolvency has run its term and the dividend due to creditors has been calculated. If the dividend is not claimed, it is turned over to the Accountant in Bankruptcy and after seven years falls into the hands of the Crown.

With the wheels coming off firms across the financial markets, the first thing banks should do is tighten their practices and procedures.

Lending decisions have not been sufficiently controlled and insolvency proceedings are lost in the automated systems run by the banks. In turn people have taken on debt they cannot afford, the banks are not flexible enough to administer cases that go awry and are not ready to accept payment when it comes. Until these basic inefficiencies are sorted out, the banks cannot point the finger at anybody else for their current woes.

• John Shields is from Independent Insolvency Practitioners, a company operated co-operatively by 25 independent insolvency firms in Scotland.


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