A leading set in banking, fi nancial services and consumer law, and pre-eminent in consumer credit, Henderson Chambers fi elds a highly experienced team of barristers with both contentious and transactional expertise. Members regularly act for the UK’s fi ve largest banks as well as off shore creditors and regulatory authorities, and write for some of the key practitioners’ books. Chambers is recommended by Legal 500 for banking and fi nance law and is ranked by Chambers & Partners for consumer law.

Author Christopher Adams Goods mortgages: updating consumer protection

KEY POINTS It prescribes a standard form which must ––The Law Commission’s proposals, if implemented in their entirety, would go a long way meet 12 document requirements, failure to redressing imbalances to the detriment of consumers existing under the bills of sale to satisfy any of which renders the security legislation. bill unenforceable by the lender against the ––The Goods Mortgages Act may disadvantage lenders. borrower and third parties. ––Any additional costs to lenders using goods mortgages may be passed on to consumers. Borrowers who take out logbook are in need of protection, typically being on GOODS MORTGAGES: UPDATING CONSUMER PROTECTION CONSUMER UPDATING MORTGAGES: GOODS In its report ‘Bills of Sale’ published in September 2016 (the Report), the Law a low income with a poor , and Commission recommends that the Bills of Sale Act 1878 (the 1878 Act) and the Bills of commonly failing to understand key terms of Sale Act (1878) Amendment Act 1882 (the 1882 Act) be repealed, and replaced by a the agreement. Default charges, interest and new Goods Mortgages Act (GMA), to apply to England and Wales but not to Scotland. the costs of the lender taking possession of and The government has accepted the recommendations subject to some qualifications, so selling the vehicle can add significantly to the after further discussions the Law Commission is likely to introduce a draft GMA Bill into borrower’s account, creating a shortfall between Parliament to come into force by 2019. As well as updating procedures and reducing the price achieved on the sale of the vehicle and the complexity of the archaic Victorian legislation, the proposed changes would the amount outstanding under the . The offer greater protection to consumers. This article examines the ways in which the Bills of Sale Acts fail adequately to protect proposed GMA seeks to address problems under the existing bills of sale legislation for borrowers and private purchasers because: borrowers and third parties, other than trade or finance purchasers, who unknowingly ––the language used in the Acts is old- buy goods which have been used to provide security for a loan (private purchasers). fashioned and difficult to understand; ––although the prescribed standard form for security bills is complex and parts BILLS OF SALE With certain exceptions including ships of it are duplicated on separate credit Bills of sale are documents which and aircraft, security bills may be registered agreements required by consumer credit ■transfer ownership of goods from one against any tangible moveable goods, but most legislation, lenders are unwilling to person (A) to another in circumstances where are registered against vehicles. A security bill simplify the wording in case this renders A retains possession of the goods. They are transfers ownership of the borrower’s goods the security bill void; regulated by common law rules overlaid with to the lender subject to two conditions: ––they provide few protective measures to statutory provisions contained in the 1878 and ––the lender is only permitted to take prevent lenders taking possession of goods 1882 Acts. There are two types of bills of sale: possession of and sell the goods for one of subject to security bills in the event of ––security bills (also known as conditional four reasons specified in s 7 of the 1882 default by the borrower, and lenders can bills), which are granted to secure the Act, including default by the borrower on take possession of the goods even if the repayment of a loan; and payments under the loan agreement; and loan has almost been paid off; ––absolute bills, which are granted for ––ownership of the goods is transferred ––they offer no protection to private purposes other than to secure the back to the borrower once the loan has purchasers, who acquire no rights to repayment of a loan. been repaid. the goods in the circumstances set out above; and Absolute bills are rarely used, and would By allowing borrowers to retain the goods, ––the High Court register is paper-based not be governed by the GMA. As the Report bills of sale create the potential for lenders and and difficult for private purchasers to recommends deregulating them entirely, this purchasers to be misled by borrowers granting use, since it can only be searched by the article will not discuss them further. Security worthless security on goods they do not own. borrower’s name and postcode or the bills, however, are used in the context of logbook The 1878 Act therefore requires bills of sale number of the security bill. loans, where the loan is secured on a vehicle to be entered on a public register held at the owned by the borrower. The number of logbook High Court which is searchable by lenders THE NEW GOODS MORTGAGES ACT loans has increased dramatically from below and prospective purchasers. The 1882 Act Despite the problems with the existing 3,000 in 2001 to over 37,000 in 2015. protects borrowers by regulating security bills. legislation, the Report concludes that logbook

162 March 2017 Butterworths Journal of International Banking and Financial Law GOODS MORTGAGES: UPDATING CONSUMER PROTECTION Feature

loans are an important source of credit for ––the date of the goods mortgage; ––loans exceeding £25,000 made wholly many borrowers, allowing access to larger ––the names and addresses of the borrower or predominantly for the purposes of a sums over a longer period than payday loans and lender; business carried on, or intended to be in circumstances where they might otherwise ––the obligation secured by the goods carried on, by the borrower; and be subject to higher interest rates or be mortgage; ––subject to certain exceptions, loans of denied credit altogether. It therefore proposes ––a statement that ownership of the goods more than £60,260 made to an individual repeal of the bills of sale legislation and its was being transferred to the lender in borrower where the borrower agrees replacement by a new Goods Mortgages order to secure the obligation; to forgo the protection and remedies Act (GMA). To make the terms easier for ––the name, address and occupation of the available if the agreement were a consumers to understand, bills of sale would witness; and regulated agreement.1 be renamed “goods mortgages” (to include ––a specific description of the goods. “vehicle mortgages” secured on vehicles). The Report concludes that such borrowers are Goods mortgages would exist where an Unlike bills of sale, the goods mortgage not in need of legislative protection, and that individual, defined to include consumers and document would not be required to state a therefore freedom of contract should prevail. unincorporated businesses such as sole traders fixed loan amount or specify the repayment or general partnerships, uses goods he already instalments, allowing goods mortgages Prominent statements owns as security for a loan or other monetary to be used for securing revolving credit Goods mortgage documents securing regulated obligation, while retaining possession of those facilities, and guarantees. The credit agreements would be required to contain goods. The definition of “goods” in the GMA goods mortgage document would state that two prominent statements explaining that: would exclude land, ships, aircraft, agricultural ownership of the goods would be transferred ––ownership of the goods was transferred to charges and intangibles such as shares. to the borrower automatically once the loan the lender until the loan was repaid; and The GMA would apply not only where the had been repaid. Where a goods mortgage ––failure to keep up loan repayments could borrower retained physical possession of the document failed to comply with the above lead to the goods being repossessed. goods, but also where he granted possession of requirements, the lender would lose any right them to a third party. Goods mortgages could to the goods both as against the borrower and The statements would not be mandatory for be used to secure loans of any amount. as against third parties, although the lender goods mortgages securing exempt agreements. would still be entitled to repayment of the loan. Protecting borrowers Requirement for lenders to seek Prohibitions on goods mortgages court orders Provisions under the GMA applicable over essential household goods and Borrowers who encounter temporary financial to all goods mortgages future goods difficulties would be protected by a requirement To ensure that vulnerable borrowers could for lenders to seek court orders in certain Grounds for possession not be forced to grant goods mortgages over circumstances. Currently, s 13 of the 1882 Lenders would be unable to take possession of essential household goods, the GMA would Act provides that the lender must wait five goods subject to goods mortgages except upon: introduce a regulation-making power to days from taking possession before selling the ––default by the borrower on payments prohibit the granting of goods mortgages over goods, during which time the borrower may under the loan agreement; such goods. It would also prohibit the use of apply for a court order restraining the sale. ––default on maintenance or insurance of future goods as security for a loan unless the Logbook lenders who adhere to the Consumer the goods; loan was to be used to acquire the goods. Credit Trade Association voluntary code of ––the borrower’s offering the goods for sale practice wait 14 days before selling a vehicle. or moving them in breach of a term of the Borrower protections applicable to However, the time frame for borrowers to apply agreement; or goods mortgages securing regulated for a court order is short, and applications are ––the borrower’s bankruptcy. agreements likely to succeed only if the loan has been, or is For borrowers subject to goods mortgages immediately about to be, repaid in full. Goods mortgage document securing regulated credit agreements as Consumer credit legislation offers some requirements defined by Art 60B of the Financial Services further protections to borrowers under The requirements for goods mortgage documents and Markets Act 2000 (Regulated Activities) regulated agreements: by s 86B CCA 1974 as would be simpler than those for security bills: Order 2001 (RAO), the GMA would put amended by the CCA 2006, s 7A of the 1882 they would have to be in writing and signed by in place a number of additional protective Act and s 87 CCA 1974, lenders cannot take the borrower in the presence of a witness. Goods measures. These measures would not apply to possession of goods until they have served a mortgages would be simpler for borrowers to goods mortgages securing exempt agreements notice of sums in arrears and a default notice, understand, being required to contain only: as defined in the RAO, for example: and allowed the borrower a 14-day period

Butterworths Journal of International Banking and Financial Law March 2017 163 Feature

after service of the latter to remedy the default. court fee. Where the lender took possession The private purchaser of a vehicle subject However, where a valid default notice has been of and sold the goods, the borrower would to a security bill has no legal right to pay served, consumer credit legislation does not remain liable for any outstanding amounts only the outstanding amount of the loan: the prevent the lender taking possession of the under the loan agreement. lender can insist on payment for the vehicle vehicle. Although the borrower may apply to If the lender wrongly took possession of even if the value exceeds the outstanding the court under s 129 CCA 1974 for an order goods in circumstances where it was required to loan amount. The purchaser’s right to recover requesting more time to pay, the expense and seek a court order, the credit agreement would be financial losses from the logbook borrower burden of making the application lies with the terminated and the goods would be returnable who sold him the vehicle will be useless if the borrower, who may not be aware of the remedy. to the borrower, who would have no further borrower has disappeared or does not have Under the GMA, lenders wishing to take liability to pay any outstanding loan amounts. the financial means to pay compensation. In possession from private premises of goods If the goods could not be returned because they practice, such purchasers are usually given subject to goods mortgages securing regulated had been sold, the borrower would be entitled the choice by logbook lenders of paying off agreements would always be required to seek a to compensation. The borrower could also apply the logbook loan, surrendering the vehicle court order. In all other cases, after the borrower to the Financial Ombudsman Service (FOS), or buying it at a discount. Although on a GOODS MORTGAGES: UPDATING CONSUMER PROTECTION CONSUMER UPDATING MORTGAGES: GOODS had repaid one third of the total amount of the which would have power to award compensation relatively small scale, this perceived unfairness loan the borrower would be given the choice of up to a maximum of £150,000.2 to innocent private purchasers has created opting in to a process requiring the lender to seek bad publicity for the logbook loan industry. a court order to take possession of the goods. Right of voluntary termination Borrowers would be given the chance to opt in by To protect borrowers with no realistic Private purchasers acting in good both a default notice and a formal opt-in notice prospect of paying off the , the faith and without actual notice in a prescribed form, which the lender would GMA would provide that borrowers subject The GMA would extend protection to private be required to serve immediately before taking to goods mortgages securing regulated purchasers by providing that where they buy enforcement action. It would be mandatory agreements would also have the right to goods subject to a goods mortgage, whether or for lenders to notify borrowers of their right to terminate the goods mortgage voluntarily not in connection with a regulated agreement, require a court order on both notices, and to in full and final settlement of all amounts they would acquire ownership of the goods prove delivery of the opt-in notice. outstanding under the loan. The right of provided that they act in good faith and The opt-in notice, which would have to voluntary termination would be available without actual notice of the goods mortgage. be returned by the borrower within 14 days, unless the goods had sustained intentional This right would apply both in relation to would give him the choice between: damage or the borrower had failed to take sales of goods as defined by s 2(1) of the Sale ––requiring the lender to seek a court order reasonable care of them such that their resale of Goods Act 1979, and to contracts for the (with an indication of the likely costs); value was adversely or significantly affected. transfer of goods as defined by s 8 of the ––voluntarily terminating the goods It would be available from the time the goods Consumer Rights Act 2015. mortgage in full and final settlement of mortgage was granted until court proceedings the loan; or were issued, or (if a court order was not Duty of disclosure for borrowers ––indicating a desire to seek debt advice. needed) either agents were The GMA would also impose a legal duty on instructed or the lender’s employees visited borrowers to disclose the existence of goods Where the borrower indicated such a the borrower to take possession of the goods, mortgages when selling goods, and require the desire, the lender would be unable to take whichever took place first. goods mortgage document to contain possession of the goods for six weeks from the a prominent statement warning that a date of delivery of the opt-in notice. Protecting private purchasers borrower who sells goods subject to a On an application by the lender for a The bills of sale legislation fails to protect goods mortgage without revealing the court order, the court would have powers private purchasers who buy goods, in goods mortgage to the purchaser may be to order the borrower to repay the loan in particular vehicles, unaware that they are committing a criminal offence. instalments and at such times as the court subject to a bill of sale. Unlike hire purchase deemed reasonable. It could also amend the agreements, where private purchasers in Registration of vehicle mortgages credit agreement in any way it considered similar situations obtain the right to the The bills of sale legislation requires security just to both parties, such as by reducing the vehicle provided that they act in good faith bills to be entered on a register at the High rate of interest. The GMA would specify and without notice of the agreement, a Court, which is searchable only by the name that lenders’ legal fees and other ancillary private purchaser of a vehicle subject to a and postcode of the borrower or the security costs could not be passed on to borrowers security bill does not acquire ownership of it bill number. Logbook lenders also register unsuccessful in obtaining a court order, and the logbook lender can take possession security bills voluntarily with online asset although the borrower would be liable for the of it from the purchaser at will. finance registries, which are easy to search

164 March 2017 Butterworths Journal of International Banking and Financial Law GOODS MORTGAGES: UPDATING CONSUMER PROTECTION Biog box Christopher Adams is a barrister practising at Henderson Chambers, Temple. Feature Email: [email protected]

by vehicle registration number and widely Mortgages on goods other than vehicles of consumers existing under the bills of used for vehicle provenance checks by motor would not be enforceable against a third sale legislation. However, the GMA may traders and other lenders. Asset finance party unless they had been registered. They disadvantage lenders. The Law Commission registries are not commonly searched by would be enforceable as against the borrower rejected proposals during its consultation private purchasers, however, because of whether or not they had been registered. process that registration of vehicle mortgages lack of familiarity, high fees and confusion with a designated asset finance registry with alternative “text checks” which do not Greater protection under Consumer be deemed to put private purchasers on provide information about logbook loans. Credit legislation notice. Nor would High Court registration Under the GMA there would be no Although not to be included in the GMA, of goods mortgages other than vehicle requirement to register vehicle mortgages at the Report recommends extending mortgages be deemed to give notice. The the High Court. Failure to register a vehicle protection for private purchasers under GMA would therefore fail to give lenders a mortgage with a designated asset finance Consumer Credit legislation. Lenders means of protecting themselves if a borrower registry, however, would render it unenforceable under regulated agreements are subject to fraudulently sold goods subject to a goods against third parties or trustees in bankruptcy, the FCA and the FOS, which have wide mortgage to a private purchaser. Where although it would still be enforceable against powers to supervise and sanction breaches of the borrower disappeared and the private the borrower. There would be no statutory consumer credit legislation. Pursuant to the purchaser gained the right to possession time limit for registration, but a third party rules and guidance in the Consumer Credit of the goods, the lender would be unable who acquired an interest in a vehicle before the sourcebook (CONC), lenders must treat to recover either the outstanding amounts vehicle mortgage had been registered would take borrowers in arrears with forbearance and under the loan agreement or the security free of the vehicle mortgage. If multiple vehicle due consideration, and have robust policies in for the loan. Any additional costs to lenders mortgages had been granted over the same place to deal with customers whose accounts could be passed on to consumers. Further, vehicle, priority as between lenders would be fall into arrears, particularly where those the Report fails to press for the creation of determined by the date and time of submission customers are vulnerable.3 an electronic register for goods mortgages of the vehicle mortgage for registration. The FCA considers that its scope to other than vehicle mortgages, and leaves as a protect private purchasers is limited to matter for the FCA a possible cap on default Registration of goods mortgages situations where the lender treats the private fees in relation to logbook loans. Although other than vehicle mortgages purchaser as a borrower under the loan the proposed GMA would improve the The Report recognises in the long-term the agreement,4 for example by pursuing the level of protection for borrowers and private desirability of establishing an electronic private purchaser in the mistaken belief that purchasers, there would still be more to do. n register for goods mortgages other than he has acquired the borrower’s rights and vehicle mortgages. However, as the obligations. The FOS may hear complaints 1 Articles 60C and 60H RAO. government has shown little appetite for from consumers treated as if they were 2 FCA Handbook, Dispute Resolution: this solution, the Report recommends as an customers of the lender: it has no jurisdiction Complaints (DISP), 3.7. interim measure updating and simplifying the where the lender tries to take possession of 3 CONC Rule 7.2.1. High Court registration procedure by: the vehicle from a private purchaser without 4 Section 1G Financial Services and Markets ––allowing filing by email; trying to recover any payment. Act 2000 (FSMA) (as amended by the ––removing the requirement for submission The Report recommends that the Financial Services Act 2012), extended in of original documents; jurisdiction of the FCA and the FOS be relation to debt collecting by Art 39M(1)(c) ––removing the requirement for a witness extended to private purchasers, by amending Financial Services and Markets Act 2000 affidavit; the definition of a consumer in the FSMA and (Regulated Activities) Order 2001/544 ––abolishing the time limit for registration; RAO to include purchasers of goods who are (RAO). ––no longer requiring the High Court to not customers of but are pursued by the lender, send goods mortgage documents to local either for the payment of money or possession County Courts where the borrower or of goods. The Law Commission also raises vehicle is located outside London; the possibility of a cap on default charges in Further reading: ––requiring lenders to remove satisfied relation to logbook loans. However, it considers ––Bills of Sale: access to credit for goods mortgages from the register; such a cap to be a matter for the FCA. unincorporated businesses [2016] 3 ––allowing borrowers to remove satisfied JIBFL 156. goods mortgages if the lender refuses to CONCLUSION ––Bills of Sale Acts: ripe for reform? do so; and The Law Commission’s proposals, if [2013] 11 JIBFL 685. ––extending the period for re-registration implemented in their entirety, would go a long ––LexisNexis Loan Ranger blog: Bills of of existing goods mortgages to 10 years. way to redressing imbalances to the detriment Sale Consultation paper – a response.

Butterworths Journal of International Banking and Financial Law March 2017 165