Moveable Transactions (Scotland) Bill

Moveable Transactions (Scotland) Bill 2022

24th July 2022 0 comments

As the Scottish Government look to introduce Virtual Pawnbroking and warrant sales for Scottish Consumers who have their debts secured by a Statutory Pledge, read our submission to the Delegated Powers and Regulatory Reform Committee of the Scottish Parliament.

Read more about the Moveable Transactions (Scotland) Bill 2022 here (Statutory Pledge: A New Debt Security for Scotland)..

1 Do you agree that

the law covered by the Moveable Transactions Bill (raising finance on moveable property like cars, machinery or intellectual property) should be reformed?

Register of Assignations

In relation to the Register of Assignations, I welcome this, as debt purchasing is now a significant industry for consumer debt in Scotland and improved regulation of it is required.
Many clients lose track of who their creditors are as their debts are sold, and this makes it significantly harder for them to manage and address their debts.
The practice of assigning and re-assigning debts also cause significant problems for advice agencies in Scotland who are trying to assist people with problem debt, even once they have entered into a formal debt solution such as the Debt Arrangement Scheme.
A Register of Assignation could help improve this situation, if it was a requirement in Scotland that any debt that has been assigned or re-assigned, after a certain date, must be registered in the Register before it can be constituted through the courts or recovered using the law of diligence. I also believe that it should not be at the discretion of the Assignor to decide whether a consumer should be notified that their debt has been assigned or is being re-assigned.

Statutory Pledges

In relation to the creation of Statutory Pledges, I have serious concerns over the creation of this new security, particularly in relation to consumer debts and where the property is secured over the personal property of consumers.
There is no requirement for a new security to be created for consumers. The arguments that are used in relation to businesses cannot be extended to consumers.
At present consumer credit lenders are usually happy to provide consumers with unsecured fixed sum loans to purchase items such as TVs and settees
and where they want greater security over the moveable property they are able to use regulated agreements such as hire-purchase and conditional sale.
The danger is if we create a Statutory Pledge Security that can be used for consumers, that will significantly change the way lenders lend in Scotland, to the detriment of consumers.
I, therefore, strongly believe Statutory Pledges should not be permitted to secure consumer debts over personal property.

3 Do you have any concerns about the proposed dual system for assignation of claims (for example, to repayment of a debt). This means it will be possible to assign claims either by intimation to the debtor (as at present) or by registration in the new Register of Assignations? This will provide flexibility, but will mean that the new Register will not be comprehensive

I do not believe the Registration of an Assignation should be possible in relation to a consumer debt, unless the Assignor is able to evidence they have notified the Consumer. To do anything less, could mean consumers losing track of who their creditors are and this could significantly impact on their ability to manage their finances.
Currently in the Financial Conduct Authority’s Consumer Credit Sourcebook, Chapter 6.5, there is a requirement on those who have regulated debts assigned to them to have to notify the consumer, if there is an assignation of rights. Equally EU Directive 2008/48/EC in Art 17 imposes a similar duty on Assignees.
As the Moveable Transactions (Scotland) Bill places the duty on the Assignor, rather than the Assignee, to register a debt in the Register of Assignations, I
believe that duty must fall on the Assignor before registration can occur.

4 Do you have any concerns about the interaction between the new security over moveable property – which will be created by registration in the Register of Statutory Pledges – and traditional pledge, which involves delivering moveable property to the creditor? Are there any circumstances in which businesses or individuals might wish to continue to use existing methods of raising finance over moveable property?

I believe in relation to Consumers, Statutory Pledges should not be permitted for consumer debts and over the personal property of consumers.
I don’t believe that the case has been made to show that there is a need for a new security to be created to allow consumers to raise personal finance and the arguments for businesses cannot just be extended to consumers, without serious risk of consumer harm.
I predict that the argument will be that some consumers will have priceless art collections, Steinway pianos or Stadivari violins that they will want to use to raise personal finance, but the reality of this new security is not about this. Its about personal car finance and poor people being offered unaffordable
loans, by lenders such as firms like Loans at Homes, Wonga, Amigo Loans and Provident/Satsuma, who have all now either entered insolvency, or have had to apply to the courts for Schemes of Arrangement, that allow them to reduce the level of compensation paid to consumers, because of their poor
practice of mis-selling unaffordable loans.
In a cost of living crisis the creation of consumer Statutory Pledges will only invite other high cost lenders to abuse the process, and secure loans over the personal property of consumers to their detriment.

5 The Bill contains detailed provisions on how the registers will be set up and searched. Do you have any suggestions for improving the approach set out in the Bill?

I believe those who are involved in advising and assisting consumers with their debts, should have free access to both the Register of Assignations and also the Register of Statutory Pledges.
This will assist them to help identify their clients debts and also whether a debt has been secured and over what. It will also help them find solutions to
their client’s problem debts.
I believe it will also assist them in administering debt solutions (whether formal or informal) in that it will help help them verify who creditors are when a debt is assigned during the operation of the solution.
I don’t believe the cost of this free access should be paid for by the public purse, but should be paid for by the Creditors that are assigning debts, otherwise the cost will be an additional burden borne by other creditors and publicly funded advice agencies.

6 The proposals in the Bill would apply to consumers as well as businesses. Do you think there are enough protections in place for consumers?

I don’t believe the Bill creates or can create enough protections for Consumers if Statutory Pledges are used to secure consumer debt over personal property.
The reason for this is many of the types of the debts that they will be used to secure will arise from regulated consumer credit agreements which this Bill cannot change, and are reserved matters .
However, a potential unforeseen consequence of this Bill is it is likely to change the way consumer borrow money in Scotland and not for the better.
We are likely to see an increase in the use of fixed sum loans, secured by a Statutory Pledges for items normally kept in the home, which will make it easier for creditors to repossess the items and circumvent the protections that were introduced for household items by the Debt Arrangement and Attachment (Scotland) Act 2002 and in relation to Exceptional Attachment Orders (which replaced Poinding and Warrant Sales).
Equally for car finance (and other items) we could see a reduction in the use of Hire Purchase and Conditional Sale agreements, which will significantly reduce the rights of consumers, in that fixed sum loan agreements secured by Statutory Pledges, will not contain the same protections for consumers
than regulated agreements contain, such as the right to Voluntary Termination.
I believe there could also be a growth in the use of such securities for consumers in relation to non-regulated consumer credit debts and could include private residential landlords the opportunity to use them to secure rent against not only tenants but the property of tenant’s family and friends.
I also believe we could see an increase in their use by debt collectors, where the debt being recovered does not relate to the purchase price of the item, but other unrelated debts, with collectors insisting on securities over items like cars before agreeing to repayment plans. This would effectively allow them to circumvent the protections introduce by the Debt Arrangement Scheme (Scotland) Act 2002 and also the Home Owner and Debtor Protection (Scotland) Act 2010 in relation to cars.

7 Do you have any other comments on the Bill or this area of policy?

Extreme caution should be exercised by this Committee over this Bill. I don’t believe the Explanatory Notes and Policy documents do enough to highlight the potential consequences of it in relation to consumers and personal borrowing in Scotland.
I am prepare to provide additional oral evidence to this Committee on why this Bill requires significant reform in relation the Register of Assignations and also in relation to why Statutory Pledges should not be allowed for consumer debts (regulated and unregulated).
The Bill is fatally flawed in that it does not take a balanced or proportionate approach to both consumer and business finance and effectively conflates
both, which is clearly wrong.

Statutory Pledges: A New Debt Security for Scotland

22nd July 2022 0 comments

The Scottish Government on the 25^th May 2022 laid before the Scottish Parliament the Moveable Transaction (Scotland) Bill 2022.

The Bill essentially aims to do two things:

Reform the law relating to the assignation of obligations and particularly debts (selling of debts) and create a new Register of Assignations; and
Create a new form of security that lenders can create over the moveable property of both businesses and individuals who owe money, without them having to relinquish possession of the property accompanied by a new Register of Statutory Pledges to record them.

However, although the Bill sounds technical and innocuous, the potential for it to have far reaching effects and significantly impact on consumer lending in Scotland cannot not be overstated. Nor should the risk of serious consumer harm flowing from the Bill be underestimated.

In this article, only Statutory Pledge Securities for consumers will be looked at; and why the creation of these for Consumer debts and Consumer property is a grave mistake by the Scottish Government.

What is the Risk Statutory Pledge Securities Present?

In the current economic climate, Scotland cannot afford to sleepwalk into passing the Moveable Transactions (Scotland) Bill. The dangers it poses for consumer borrowing in Scotland is significant and real.

It is likely it will result in an erosion of consumer rights that have been built up over the last 40 years, through the introduction of both Scottish and UK legislation.

What are Statutory Pledge Securities?

Statutory Pledge Securities will allow creditors to secure their debts over the moveable property of both businesses and consumers.

Up until now this has only been possible if the borrower delivered the item the debt is secured over to the lender. Traditionally, this is what pawn brokers do, using a form of security called pledge. For those who offer this type of security, the disadvantage is you must surrender possession of your property if you wish to use the item as a security and it is only returned when you pay off the debt.

However, what the Scottish Government is proposing is a new type of Pledge Security, known as a Statutory Pledge Security, which allows you to keep possession of the item the debt is secured over and allows you to keep using it. However, if you can’t pay the debt, the creditor can come and take it away. If you don’t agree to let them, then they can obtain a court order to come and repossess the item.

What’s wrong with that?

Many people may think that is quite reasonable; however, the problem it creates is once introduced, this new security is likely to change the way lenders choose to lend money to people.

So, for example, at present if you go and purchase a sofa or TV and take credit out on the item to buy it, lenders will usually offer you an unsecured fixed sum loan agreement. This basically means a loan that you pay back, but ownership of the item becomes yours. This means if you experience financial difficulties and cannot repay the loan, the Lender has no greater right over the item borrowed than anyone else you owe money to. They must take you to court, get a court order and then serve on you a Charge for Payment, which is a legal demand for payment giving you 14 days to pay the debt. If you still don’t pay, they then must explore if a wage or bank account arrestment is feasible and if not they have to return to court to apply for what is called an Exceptional Attachment Order. This allows Sheriff Officers to come into your home to see if there is anything they can take. However, because of a law called the Debt Arrangement and Attachment (Scotland) Act 2002 was passed, many items in you home cannot be taken: this includes sofas and TVs.

What Statutory Pledge Securities allow lenders to do, however, is to secure their debt over the item you buy. This means when you experience financial difficulties, Lenders can ask for your permission to come and take away the item or can apply to the court to come and get it.

Essentially, the new Security will roll back many of the protections that were introduced 20 years ago to protect items that people have in their home, where they buy it using credit and the lender uses the new Security.

Can the Lender not just do that anyway with a Hire Purchase Agreement?

It is true that a lender can possibly do what is described above using a Hire Purchase Agreement, however, very few consumer lenders currently use Hire Purchase Agreements when it relates to items that people buy for their home.

Also, when Hire Purchase agreements are used it means you don’t own the item until you pay it off. These agreements are provided for in the Consumer Credit Act 1974 and afford borrowers far greater protections than Statutory Pledge Securities do. So, for example, where you have paid more than half the full amount borrowed, you can hand the items back using a process known as voluntary termination. This often means lenders don’t like it when people hand stuff back, as they can lose money and usually they would rather concentrate on getting you paying again.

The problem is when more than half has been paid off, the value of the goods is usually less than the amount owed, so the lenders suffer a loss.

When a lender provides you with a fixed sum loan agreement secured by a Statutory Pledge Security, you cannot do this. The best you could do is sell the item yourself or allow the lender to sell it and you will have to make up the difference in price between what is owed and what the item sells for.

There is, therefore, a danger that Lenders will view giving fixed sum loans and securing them with a Statutory Pledge Security as being less risky.

This means if the Scottish Government introduces Statutory Pledge Securities, more lenders may change from offering unsecured fixed sum loans to buy items to offering secured fixed sum loans.

What about Cars? Will it affect them?

The real danger it is expected will be in the way cars purchases are financed. At present in Scotland, it is believed over 90% of all new and second-hand cars are purchased using credit in the form or Hire Purchase and Conditional Sale Agreements and variations of these types of agreements, called PCP Plans.

Some are also purchased using unsecured fixed sum loan agreements.

The main difference between these types of agreements is with Hire Purchase and Conditional Sale agreements, you don’t own the car until it is paid off, but you do get to have possession of it and use it. With unsecured fixed sum loan agreements, like with Sofas and TVs you do get to own the car and you just have to pay off the money off that you borrowed.

Why Statutory Pledge Securities may change the way lenders lend money to people to buy cars is with unsecured fixed sum securities, if you don’t or can’t pay the debt, the lender doesn’t have any right to take the car off you over any other lender you owe money to. They must take you to court, get a court order and serve on you a Charge for Payment allowing you 14 days to repay the debt. If you don’t they can then instruct a Sheriff Officer to Attach the car. However, because of rules introduced in 2002 and 2010 in Scotland, where your car is worth less than £3,000 and you have a reasonable requirement for it, it is exempt from Attachment.

With Statutory Pledge Securities these protections will not apply, and Sheriff Officers can come and take away your car and sell it, regardless of its value.

Also, as with sofas and TVs, when the Lender allows you to buy the car using Hire Purchase and Conditional Sale Agreements, if you have paid more than half the amount owed under the Agreement, you may be able to hand the car back and owe nothing more, often meaning the Lender loses out.

Statutory Pledge Securities will change this, as you cannot simply hand the car back and walk away after you have paid more than half the amount owed, and if the lender sells it and it’s not enough to pay what is owed, then you must make up the difference.

So why will Statutory Pledge Securities change the way Lenders Lend?

The reason why the creation of these new securities for consumer borrowing and property threatens to change the way Lenders lend, is because they offer them more rights and powers, than unsecured fixed sum loan, Hire Purchase and Conditional Sale Agreements do. They also significantly reduce the rights of borrowers, placing them in a far worse position and more likely to have the item they bought repossessed and still be left in debt.

This may be more likely to be the case in Scotland, than anywhere else in the UK, as over the last 20 years, the Scottish Parliament has introduced multiple protections for consumers in debt that don’t exist elsewhere in the UK. Lenders may, therefore, in the Scottish Landscape believe using secured fixed sum loans are better for their interests, and many of the advances Scotland has made over the last 20 years, may be eroded overnight with the passing of the Moveable Transactions (Scotland) Bill.

So why has the Scottish Government proposed these new Securities?

Well ironically, for a government that believes in Independence, they are trying to bring Scots Law into line with English law, ignoring hundreds of years of common law protection for Scottish borrowers and not realising the impact these new securities could have on the protections that have been introduced by the Scottish Parliament over the last 20 years.

They are also likely listening to Scottish Government lawyers, who made the same mistake in 2007 with the Bankruptcy and Diligence Etc. (Scotland) Act 2007. They looked at the law in Scotland to see where they thought the gaps were and tried to fill them with what they thought was a solution. So, for, example, they thought there was a gap in how unsecured creditors like credit card companies and unsecured loan companies could recover their debts from people that owned their own home. So, they invented a thing called a Land Attachment, which allowed those unsecured creditors to secure their debts over people’s homes and sell them.

Fortunately, when the law was passed it was never commenced, as it was realised this could lead to people losing their homes, not because they didn’t pay their mortgage, but for not paying a credit card. Also, in 2007 there was the credit crunch, so it was believed due to the economic crisis, it was the wrong thing to do, even though England had a similar law known as Charging Orders. Scotland went its own way.

With Statutory Pledge Securities, the same thing has occurred again. As there is no way to secure a debt over a moveable item like a car, sofa or TV (without surrendering possession) like there is in the rest of the UK, the Scottish Government lawyers think there is a gap that needs filled, again despite the economic crisis, where people will struggle to pay their heating and other cost of living expenditure.

However, what they fail to see and comprehend is the far-reaching effects such a security could create in Scotland and how it could change the way lenders lend and the serious consumer detriment that will arise from it.

Over the coming months expect arguments that these securities are necessary as there are consumers with priceless art collections, Steinway pianos or Stadivari violins, who want to use them to raise finance, whilst retaining possession of their much loved possessions.

The argument will be these new securities are liberators and will allow consumers to access new sources of credit, at low costs, using their valuable possessions as collateral; but what these arguments will ignore, is regardless of the benefits these changes will bring for a few mythical, privileged borrowers, these new securities are about rolling back consumer protections and rebalancing the rights of consumers and lenders strongly in favour of creditors.

Statutory Pledge Securities are not about oil paintings and valuable jewellery being offered up as securities, they are about rebalancing the consumer car finance market in favour of car finance firms and offering unaffordable loans to poor people and making them offer up their possessions as security, so when they can’t pay, lenders can threaten to take them away.