A pledge against the consumer? A reply

In his article “A pledge against the consumer?” (Journal, August 2022, 18), Alan McIntosh argues that unless amended, “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”. He observes that this “may have not been the intention of the Scottish Law Commission”.

It certainly was not. Consumer protection issues are covered throughout the Commission’s Report on Moveable Transactions (Scot Law Com No 249, 2017). An example is the recommended prohibition on consumers assigning future salary, which I assume Mr McIntosh supports. The preceding discussion paper (Scot Law Com DP No 151, 2011) has several questions on consumers. It is of course legitimate to question whether the policy conclusions reached are correct. The broad concern expressed, however, is that consumer issues were not given sufficient consideration. This article attempts to address that concern.

The consultation process

Mr McIntosh writes: “The narrative that has surrounded [the bill], primarily focusing on the impact for businesses… blindsided many consumer rights organisations, who did not participate in its drafting”. It is true that the major focus of the bill is business finance. Nevertheless, the proposals for consumers were included in four preceding consultations: (a) the abovementioned discussion paper consultation in 2011; (b) a draft bill consultation in 2017; (c) a Scottish Parliament Economy, Energy & Fair Work Committee consultation in 2020; and (d) a targeted Scottish Government consultation in 2020-21. As Mr McIntosh acknowledges, Citizens Advice Scotland (“CAS”) responded to (c) expressing concerns. The Scottish Government engaged with CAS in (d). At an earlier stage, the Commission met with the since-abolished Consumer Focus Scotland, who were content with the proposed consumer protections.

The Commission is currently undertaking a project on heritable securities. This is of huge relevance to consumers. I urge all interested parties to engage with the Commission on that project now, rather than only on the resultant bill being introduced to the Parliament.

Security and debt

The Moveable Transactions (Scotland) Bill is primarily a property law measure. It will reform the law of assignation and the law of security over moveable property. A new type of non-possessory security called a statutory pledge will be introduced.

The bill does not deal directly with debt. Therefore interest rates and regulation of lenders are outwith its scope. Statutory pledges will be subject to the general provisions of the Consumer Credit Act 1974, legislation which is a reserved matter under the Scotland Act 1998.

Mr McIntosh’s concerns about sub-prime lenders and logbook loans in respect of vehicles surely relate to the possibility of very high interest rates. But these are for the Financial Conduct Authority to regulate. It already has a price cap power on high cost, short term credit loans. Moreover, its new consumer duty, which introduces higher standards of consumer protection, comes into force next year.

In contrast, the evidence given to the Commission by the Asset Based Finance Association (now part of UK Finance) was that the availability of the statutory pledge would facilitate lower interest rates, which will benefit consumers as well as businesses. Excluding consumers entirely from the statutory pledge because of a risk of predatory lenders would be like prohibiting cup finals and pop concerts because of ticket touts.

Closing a gap

In current property law, non-possessory secured acquisition finance is available through hire-purchase, but a consumer wanting to grant security over a moveable item which that individual already owns has to pawn it. This means relinquishing possession. That of course is impractical in the case of many assets. But take the case of a valuable painting. That can be pawned, but it must come off the owner’s wall. The pawnbroker has to incur costs storing it which are ultimately passed on to the consumer. The ability to have a non-possessory security over such an item is therefore attractive. The FCA’s regulatory powers will still apply.

Our law accepts that consumers, subject to legislative protections, can grant a security over their house without having to give up possession of it. Therefore, it is surely not contrary to public policy for the same to be possible for high value moveable assets such as vehicles, as it is internationally.

Monetary threshold for consumer property

The Commission recognised that it would be unacceptable for ordinary household goods to be subject to a statutory pledge. Consumers should not have such items seized by a creditor. These are excluded from diligence under the Debt Arrangement and Attachment (Scotland) Act 2002. But having considered the nuanced and complex list of exempt goods in that Act, the Commission favoured a simpler approach of a monetary threshold to be set by statutory instrument. Items worth less than that figure would be excluded. In its report, the Commission suggested £1,000, drawing on a figure used in the 2002 Act.

Mr McIntosh argues that this is not “sensible” when compared with excluding property exempt from attachment. He says that it “could mean essential items like settees could become the subject of securities”. But this would be contrary to the Commission’s policy set out above. There are two mechanisms to ensure the implementation of that policy. First, the £1,000 figure could be increased during the bill’s parliamentary passage or subsequently by statutory instrument. Secondly, the bill also contains a provision allowing ministers by statutory instrument to exclude types of asset being the object of a statutory pledge granted by a consumer.

As Mr McIntosh mentions, vehicles worth less than £3,000 are exempt from diligence. The figure was increased from £1,000 by the Bankruptcy (Scotland) Amendment Regulations 2010 (SSI 2010/367), but the 2002 Act itself was not amended. This underlines that the diligence provisions are complex.

Hire-purchase compared

Concern is also expressed that not all the special rules for hire-purchase in the 1974 Act are applied to statutory pledges granted by consumers. In one major respect, however, the statutory pledge provisions are more protective. A court order will always be required for enforcement. For hire-purchase this is only necessary where one third of the debt has been repaid.

The “one half” rule in hire-purchase, whereby a consumer who has paid half the debt can terminate the agreement and have no further liability (1974 Act, ss 99 and 100), is missing from the bill, having been duly considered by the Commission: Report on Moveable Transactions, paras 27.25-27.26. The rule works easily in hire-purchase, where the property remains owned by the creditor until the final payment is made and the hirer triggers the option to purchase. Meanwhile, the debt is paid off in instalments. (The debt is the purchase price of the asset and interest.) The consumer is entitled to return the property to the creditor/owner and the transaction ends. Sometimes, the creditor suffers a loss due to the different rates of repayment of the debt compared to depreciation in value of the asset; at other times (for example, the current buoyant market for secondhand cars), the creditor makes a profit.

In contrast, with statutory pledges the property is owned by the debtor, like a house subject to a standard security. The debt may be unconnected to the acquisition of the asset. Where, for example, the asset has become worth much less than the outstanding debt it would be unfair on the creditor to have to accept the asset rather than full repayment. Furthermore, there would have to be a mechanism for the creditor to obtain an unchallengeable title to the property, which would be highly problematic to achieve where the debtor was insolvent. The Commission recognised nevertheless that if lenders were actively to use statutory pledges to defeat the “one half” rule for hire-purchase, the position would need to be reviewed. It is more likely, however, that statutory pledges will secure loan transactions where, as at present, consumers are protected by FCA rules, not by any statutory right to repay only part of the loan.

Sole traders

Mr McIntosh argues for certain protections in the bill to be applied to sole traders as well as private individuals. Again this was a policy issue considered by the Commission. Having a monetary threshold for sole traders would prevent a statutory pledge being available over lower value equipment which collectively might be worth thousands of pounds and could secure a loan. The requirement for a court order to enforce against business assets would increase costs for which the sole trader would ultimately be liable. The bill treats sole traders as consumers in relation to their property which is not used wholly or mainly for business purposes.

Assignation

The bill if passed will create a Register of Assignations. Registration will be an alternative to notifying the debtor, which is necessary under the current law to complete an assignation.

Mr McIntosh worries that consumers may be adversely affected by not being notified that a debt due by them has been assigned. This is to overlook the debtor protections in the bill. The net effect of these is that normally, unless there is notification, the debtor can pay the assignor and have no liability to the assignee. (The main reasons for registration are to protect the assignee in the event of the assignor’s insolvency and to allow the assignation of future claims, as is possible in other countries.)

Moving forward

Mr McIntosh’s concerns deserve proper consideration, particularly with the current cost of living crisis. My purpose here has been to show that the Commission duly appreciated the consumer dimension and weighed its policy choices carefully. The overall aim of the bill is to improve access to finance. In including consumers within its remit, but with specific protections, it follows the position with regard to reform of secured transactions laws internationally. It will be for Parliament to determine the exact content of the reform, taking account of the FCA regime, which is primarily responsible for consumer protection.