A pledge against the consumer?

“Sub-prime lending”, “logbook loans”, “lending malpractice”, and “consumer detriment” are all terms associated with the use of bills of sale in England & Wales. 

After falling into desuetude for almost a century, bills of sale in England made a comeback in recent decades when adopted by logbook loan firms, who largely made them their own to such an extent they are now often described as logbook loan securities.

They are also the nearest equivalent in the UK jurisdictions of the statutory pledges that the Moveable Transactions (Scotland) Bill proposes to introduce into Scotland.

Principal proposals

Introduced to the Scottish Parliament on 25 May 2022, the bill proposes to do two things:

• first, to modernise Scotland’s law in relation to the assignation of claims and create a new Register of Assignations; and
• secondly, to create a new non-possessory, fixed security over moveable property, known as statutory pledge, with a new Register of Statutory Pledges.

Much has already been written about the bill, including the article “Getting it right over reform of moveables” (Journal, June 2022, 20) by Andrew Steven, who was the lead Scottish Law Commissioner on moveable transactions.

Like most articles, Professor Steven’s primarily focused on the benefits of the bill for businesses.

This article, therefore, looks at the bill from the perspective of individuals, who it is believed will be impacted by it. This appears to be acknowledged by the Scottish Law Commission in its Report on Moveable Transactions, on which the bill is based, where it states: “vehicles are likely to be frequently the subject of the new statutory pledge, not least in relation to private individuals” (vol 2, para 21.22).

Register of Assignations

The first concerns about the bill relate to how lenders will be able to assign debts owed by consumers.

Section 3 of the bill proposes that a claim will only be transferred when the assignor notifies the debtor, or the assignation document is registered in the new Register of Assignations.

This is different from the existing rule in Scotland, where there is always a requirement to intimate to a debtor the assignation of a debt. However, the Commission justifies this departure from the traditional position, citing the problems this creates for the high-volume assignation of debts, which primarily relates to consumer debts.

Removing this requirement to intimate, however, will create significant problems for consumers and advice agencies who are assisting clients with debt problems: if you don’t know who you owe, how do you manage your finances?

It also suggests a departure from the spirit of chapter 6.5 of the Financial Conduct Authority’s Consumer Credit Sourcebook (and article 17(1) of EU Directive 2008/48/EC), which places a duty on an assignee to notify the consumer of an assignation. Now, although such requirements will still apply in relation to regulated consumer credit debts, that won’t be true where the debt is an unregulated consumer credit debt, such as credit union debt, rent arrears, factor fees and many buy-now-pay-later debts. There will be no mandatory requirement on either the assignee or the assignor to notify the debtor.

It may well be, however, that the creation of a Register of Assignations could assist such consumers, and therefore should be welcomed. It could allow advisers to search the register to discover who a client’s creditors are. However, this will only work if advice agencies, many of whom are publicly funded, are given the ability to carry out free searches of the register, and there is also a requirement on creditors to register all debts that are assigned after a certain date. This could be facilitated if, after that date, debts that are assigned can only be enforced in court or have diligence executed for them if they are accompanied by an extract from the register.

Statutory pledges

The second part of the bill deals with the creation of a non-possessory, fixed security over moveable property, which has been described by Mike Dailly of Govan Law Centre as “virtual pawnbroking”. This is an accurate description, as any online search of logbook loan firms shows there is no shortage of firms offering same day payouts for those who wish to offer their car up as a security. This suggests, in a Scottish context, that the fact that statutory pledges are not currently available creates no significant difficulty for lenders, who can use the quasi-security of hire purchase or conditional sale agreements to lend over cars, which is how logbook loan firms currently lend in Scotland, even when those loans are not for the purchase price for the item.

This leads to the question, what is the need the Scottish Law Commission has identified for such securities to be created for consumers at all in Scotland? Clearly there are no practical difficulties for lenders using hire purchase or conditional sale if they can offer a same day payout.

I suggest the most likely beneficiaries of these new securities, in terms of consumer lending, will be sub-prime lenders and logbook loan companies. Again, the Scottish Law Commission appeared to acknowledge this in its original Discussion Paper on Moveable Transactions in 2011, when it stated: “and it may be that the automobile finance sector might find the moveable security to be preferable to hire-purchase” (para 17.5).

This will almost certainly be the case when you consider that a fixed sum loan, secured over moveable property with a non-possessory fixed security, offers significant advantages to a lender over using the quasi-securities of hire purchase and conditional sale. For one thing, with fixed sum loans there is no right of voluntary termination such as exists in s 99 of the Consumer Credit Act 1974, which allows a consumer who is experiencing financial difficulties to return a vehicle and, by s 100, restrict their liability to only half the full amount owed under the agreement.  

This means that with property securing a fixed sum loan, if it is sold, the debtor can be left fully liable for any shortfall arising from the difference between the price the property is sold for and the amount still owing under the agreement.

Also, s 91 of the 1974 Act contains significant statutory penalties for lenders if they repossess an item without a court order, in that the debtor is released from all further liability under the agreement and the lender can be made to repay, in full, all monies previously paid under the agreement.

The 2002 Act protections

In addition to this, there is a concern that with statutory pledges, lenders will be able to seize and auction articles currently exempt from diligence under the Debt Arrangement and Attachment (Scotland) Act 2002. This includes many household items and cars valued up to £3,000, where there is a reasonable requirement for the car.

Now it may be asked whether the law of securities is the correct place to introduce consumer protections, but that question has been answered, as such protections already exist in relation to standard securities; and even in the Moveable Transactions Bill, the Scottish Law Commission has proposed protections for individuals.

The first of these is to impose a restriction that where the granter is an individual, only property with a value over £1,000 can be used as a security, although this does not extend to sole traders. This protection is significantly less than that provided for in the 2002 Act and could mean essential household items like settees could become the subject of securities. It could also mean that cars which would be protected under the 2002 Act will be used as securities, and if a borrower defaults, could see them being seized and sold. If an unsecured fixed sum loan was used at present, for such property, this could not happen; and although it could happen under a quasi-security such as hire purchase or conditional sale, the debtor would have the option to terminate voluntarily.

Another protection the Act introduces is that where individuals are involved, a court order will aways be required before the item is repossessed, but again this protection does not extend to sole traders.

This wisdom of the exclusion of sole traders must be questioned in a society where the gig economy is growing, and many low-income consumers are being forced to become self-employed. In not extending these relatively modest protections to sole traders, many gig economy workers will be left vulnerable.

The only conclusion that can be drawn from reading the Moveable Transactions Bill and its accompanying documents, is that it is a bill that is overly focused on the interests of business and falls short of containing the level of consumer protections that you would expect to see in a modern consumer credit society.

The narrative that has surrounded it, primarily focusing on the impact for businesses, also blindsided many consumer rights organisations, who did not participate in its drafting, although Citizens Advice Scotland did express concerns in 2019 that statutory pledges would be possible against private individuals – a concern also raised by the Faculty of Advocates (see the Commission’s report, para 19.33).

Even sensible proposals from others, including Brodies and the Law Society of Scotland, that it should not be possible to secure debts over items exempt from diligence (report, para 19.40) were not adopted.

In conclusion, it may not have been the intention of the Scottish Law Commission, but unless changes are made, the Moveable Transactions (Scotland) Bill could easily become a charter that leads to an expansion of sub-prime lending and logbook loans in Scotland, targeted at the most vulnerable.