The Scottish Government on the 25th 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.