Consultation outcome

Goods Mortgages Bill: Consultation

Updated 14 May 2018

1. Introduction

Bills of sale are a way in which individuals can use goods they already own as security for loans, while retaining possession of those goods. They are now mainly used for “logbook loans”, a form of high-cost credit where a borrower transfers ownership of their existing vehicle to the lender for the duration of the agreement. The borrower may continue to use the vehicle while they keep up the repayments, but if they default they can lose it relatively easily.

Bills of sale are currently governed by two Victorian Statutes, the Bills of Sale Act 1878 and the Bills of Sale Act (1878) Amendment Act 1882. In September 2014, the Treasury asked the Law Commission to review this legislation and make recommendations for its reform. The desire for a comprehensive review reflected the government’s significant concerns about consumer detriment in the logbook loan market, in particular the lack of protections available to consumers who take out a logbook loan, as well as innocent third party purchasers who unknowingly buy a vehicle that is subject to a logbook loan.

The number of bills of sale increased significantly from 2,840 in 2001 to 52,580 in 2014, although this fell to 30,124 in 2016. Logbook loans account for the vast majority of all bills of sale. In 2014, the Financial Conduct Authority (FCA) estimated that the logbook loan market was valued between £59 million and £76 million. The FCA has noted that some stakeholders consider that the antiquated nature of bills of sale legislation was driving up the cost of borrowing, leading to a lack of transparency for consumers and failing to adequately protect consumers in areas including repossession and third party purchasers.^{[footnote 1]}

The government has been modernising regulation of the consumer credit market to ensure that it is fit-for-purpose. As part of this agenda, the government transferred responsibility for consumer credit regulation from the Office of Fair Trading (OFT) to the FCA in 2014. Responsibility for the regulation of consumer credit has enabled the FCA to tackle some concerns about logbook lenders such as aggressive debt collection practices, but the FCA does not have the power to update the out of date legislation.

The Law Commission initially consulted on the reform of the existing legislation in 2015 and its final report and recommendations to reform the Bills of Sale Acts were published in September 2016. It concluded that the current law is archaic, and wholly unsuited to the 21st century. It recommended that the Bills of Sale Acts should be repealed in their entirety and replaced with a new “Goods Mortgages Act” to govern the way that individuals may use their existing goods as security for a loan or other obligation.

As a result, the government proposes to use the special Parliamentary procedure for Law Commission Bills to introduce a Goods Mortgages Bill. The Law Commission consulted on draft clauses intended to form part of this Bill in July 2017.

This consultation is seeking views from stakeholders on whether they agree that reform of the law in this area is required and that the Bill is appropriate for the special Parliamentary procedure. The government is also proposing to modify the approach to registration suggested by the Law Commission, and this consultation is seeking views on the revised approach. The government is also seeking input from consultees on the regulatory impact of the proposals, in particular registration.

2. Goods Mortgages Bill

For much of the twentieth century, bills of sale were hardly used. However, in recent years they have been revived in the form of “logbook loans” or vehicle mortgages. This is where a consumer uses their car as security for a loan while keeping possession of the car.

The aim of the new legislation is to replace the outdated Bills of Sale Acts with a modern legal framework which enables a wide range of individuals to use goods that they already own to secure loans and other obligations.

The draft Bill will:

• provide increased protection for consumers who use goods that they already own as security for loans – so they are better informed about their loan and provide safeguards if they get into financial difficulty

• provide protection for innocent third parties who unknowingly buy a vehicle subject to a logbook loan that may be at risk of repossession

• remove unnecessary burdens on firms that raise the cost of lending

• create new opportunities for small, unincorporated businesses to access finance

The key aim of the reforms is to improve consumer protection: there is a clear need for appropriate protection for vulnerable borrowers, especially those taking out logbook loans on their vehicles. However, the draft Bill also provides a legal framework by which a wide range of individuals, including more sophisticated borrowers and unincorporated businesses, can secure loans and other obligations on goods. The draft legislation intends to reconcile these different aims by distinguishing between those borrowers who need protection and more sophisticated borrowers who are able to seek advice, and who can choose to opt out of some of the protection measures.

As the vast majority of bills of sale are used for logbook lending, the reform will support the government’s work to ensure the UK’s consumer credit regime is modern and fit for purpose.

3. Previous consultation

In September 2014, HM Treasury asked the Law Commission to review the Bills of Sale Acts and make recommendations for its reform.

The Law Commission published its initial consultation on reforming the existing legislation in September 2015. It received 38 responses to this consultation from logbook lenders, industry representatives, consumer groups, law firms and academics. The majority of respondents did not believe that bills of sale should be banned, but there was broad agreement that the legislation needed updating as it was complex and not fit for purpose. There was strong support for an increase in borrower protection as well as support for the principle of protecting innocent private purchasers. Many respondents also favoured a simplification of the registration regime for bills of sale.

The Law Commission published its final report in September 2016 which stated that this Victorian era legislation was unsuitable in the 21st century. It recommended that the Bills of Sale Acts be repealed in their entirety and replaced with the Goods Mortgages Act to govern the way that individuals use their existing goods as security.

In response, the government published a Written Ministerial Statement on 7 February 2017. This set out the government’s support for the Law Commission’s conclusion that consumers and unincorporated businesses should continue to be able to use their existing goods as security while retaining possession of them, but that the Bills of Sale Acts no longer provide an appropriate legal framework and should be reformed. The government accepted the overarching thrust of the Law Commission’s recommendations but felt that some issues needed further reflection. It committed to working with the Law Commission to bring forward the new legislation.

The Goods Mortgages Bill was announced as part of the Queen’s Speech in June 2017.

In July 2017, the Law Commission published a further consultation, seeking views from stakeholders on draft clauses and the suitability of Bill for the special Parliamentary procedure for uncontroversial Law Commission Bills. The Law Commission received 17 responses. However, the Law Commission did not consult on the draft clauses on registration, and the government is seeking views in this consultation on a revised approach to registration

4. The draft Bill

The Law Commission has today published a response to its consultation setting out its proposed changes. They have also published updated draft clauses which reflects these changes.

This consultation is seeking stakeholder views on whether they agree that reform of the law in this area is required and they support the proposed approach set out in the draft Bill published today.

4.1 Territorial extent of the reforms

The Law Commission’s proposed reforms and the draft bill published today by the Law Commission apply to England and Wales. The Bills of Sale Act 1878 and the Bills of Sale Act (1878) Amendment Act 1882 currently apply in England and Wales.

The Bills of Sale Acts do not apply in Scotland. The Scottish Law Commission is currently working on a project on security over moveable property, which may in future lead to reform in Scotland.

Separate legislation exists in Northern Ireland, the Bills of Sale (Ireland) Act 1879 and the Bills of Sale (Ireland) Act (1879) Amendment Act 1883. We would welcome views from stakeholders about the operation of this legislation and the case for ensuring that the provisions of the draft Bill are also taken forward in Northern Ireland.

Question 1: Do you agree that reform of the law in this area is required?

Question 2: Do you support the approach as set out in the draft Goods Mortgages Bill published today?

Question 3: Do you have views on risks and benefits of also implementing the proposed provisions of the Goods Mortgage Bill in Northern Ireland?

5. Approach to registration

One of the Law Commission’s key recommendations was the modernisation of the registration regime. The Law Commission highlighted in its report that the current High Court registration regime adds between £35 and £51 to the cost of each logbook loan, yet it fulfils very little purpose. It is costly, paper-based and in urgent need of modernisation.

In its final report and recommendations, the Law Commission proposed a distinction between how vehicle mortgages and other goods mortgages should be registered. For vehicle mortgages, there should be no requirement to register at the High Court. Instead, vehicle mortgages would be registered with suitable asset finance registries designated by HM Treasury.

For goods mortgages over other assets, the Law Commission recommended that the requirement to register with the High Court should remain for the time being, but that the High Court register should be simplified. The Law Commission expressed hope that such registrations would move to an electronic register in the longer term.

The government shares the Law Commission’s concerns about the current registration system, and its desire for modernisation of the registration regime. However, the government has concerns about the practical implications of the approach proposed by the Law Commission.

There are two key reasons to register a goods mortgage. The first is to verify when the goods mortgage was granted, in order to determine priority. This will be important if two competing interests are granted over the same goods. The second reason is to give notice to third parties interested in the asset. In the case of goods mortgages, trade buyers and other lenders need a quick and simple means to check whether the goods are subject to a mortgage.^{[footnote 2]}

Following further analysis and stakeholder engagement, the government has concluded that a single electronic register of all goods mortgages would be a simpler and more effective solution than splitting the registration of vehicle mortgages and general goods mortgages and designating multiple asset finance registers. The government therefore proposes to establish a single electronic register at the High Court.

The registration process will be simplified: lenders will only be required to submit essential details (notice filing) in place of the current system which requires lenders to file the full document (document filing). Submitting essential information to an online register will be sufficient to “give notice” of a security interest to third parties, and to establish priority. This will reduce unnecessary bureaucracy for firms. Notice filing systems also tend to be substantially cheaper than document filing systems, particularly when combined with online registration.

As the Law Commission explained in its final report,^{[footnote 3]} the High Court registers a security bill against the borrower, not the vehicle. To search the register, a third party needs the name and postcode of the borrower, and must pay a £50 fee. The Law Commission noted that logbook lenders do not check the High Court register before agreeing a logbook loan. Instead a voluntary system of registration through private asset finance registers has developed.

Having a single electronic register for all goods mortgages searchable by borrower and by asset will make it easier for third parties such as lenders and third party purchasers to search the register and establish whether a good such as a vehicle has a goods mortgage attached.

Question 4: Do you agree with the proposal to establish a single electronic register of all goods mortgages which is searchable by asset or borrower?

6. Regulatory impact

The Law Commission’s September 2016 report set out the costs and benefits of reforming the Bills of Sale Acts. In line with the Law Commission’s analysis, the government expects that the benefits to business of these proposals will significantly outweigh the costs.

Based on the Law Commission’s analysis, the costs and benefits associated with reform of bills of sale are likely to arise from the reformed registration of goods mortgages, the reformed registration of general assignment of book debts, the court order provision, the protection of innocent private purchasers, and familiarisation costs. This consultation is seeking feedback on whether these are the main costs and benefits that firms and consumers will face, and whether there are any further costs or benefits to the proposed reforms.

6.1 Reforming the registration of goods mortgages

The government proposes to simplify the High Court registration process for goods mortgages. This will reduce burdens on lenders and consumers. The reforms include abolishing the requirement for an affidavit, abolishing the requirement for original documents, and allowing online registration of goods mortgages. Modernising the registration of goods mortgages will lead to efficiencies and lower overall costs of registration for lenders and consumers.

The government expects that the overall costs of registration will fall significantly, generating substantial benefits for lenders. However, the government expects that the benefits of the reformed goods mortgage registration process will be lower than the Law Commission’s estimate of £2 million per year, as lenders will be required to pay a fee to cover the costs of registering through the reformed High Court process.

6.2 Reforming the registration of general assignments of book debts

The government also proposes to reform the registration of general assignments of book debts. In line with the Law Commission’s recommendations, the reforms include abolishing the requirement for an affidavit, abolishing the requirement for original documents, and allowing online registration of general assignment of book debts. These reforms would significantly reduce the cost of complying with the streamlined High Court registration regime, bringing significant benefits to the invoice financing industry and those who use its services.

6.3 Introducing a court order provision

Currently, a court order is not required to repossess goods subject to a bill of sale. The government proposes that mortgagees will be required to get a court order before obtaining possession, where the mortgagor opts in to the court order process. This applies in cases to non-exempt goods mortgages where the mortgagor has paid at least one third of a monetary obligation, or where the goods mortgage relates to a non-monetary obligation which cannot be quantified.

The main cost to firms of the court order provision will be the associated court fees. The cost of court fees can be recovered from borrowers where a firm successfully obtains a court order for possession of the goods. In such cases, firms will be required to engage enforcement agents to enforce the order, which will also bring costs to firms.

6.4 Protecting innocent private purchasers

The government proposes protections for innocent private purchasers who purchase a vehicle subject to a vehicle mortgage. At present, lenders may require innocent private purchasers to repay the borrower’s “logbook loan” or else face losing the vehicle. The government’s proposals will mean it will no longer be possible for logbook lenders to repossess vehicles from, or to reach financial settlements with, such purchasers. While there are relatively few disputes involving private third-party purchasers, the protection of innocent private purchasers will bring increased costs to lenders.

6.5 Familiarisation costs

Reforming the Bills of Sale Acts will lead to some familiarisation costs. The government expects that the main transitional costs will be in training staff about the provisions of the new legislation, and developing a new standard goods mortgage document. The Law Commission’s final report estimated that the transitional costs would be less than £50,000 for each logbook lender.

Question 5: Do you agree that these are the main costs and benefits that firms and consumers will face? Are there any further costs or benefits to the proposed reforms, beyond those costs and benefits outlined by the Law Commission and the government?

Question 6: What impact would the government’s proposals for registration have on the costs and benefits estimated by the Law Commission in its September 2016 report?

Question 7: What would be the cost to firms of engaging enforcement agents to repossess goods, where a court order has been granted?

7. Special Parliamentary procedure for Law Commission Bills

As set out in the Queen’s Speech 2017, the government is intending to bring forward primary legislation to enact these reforms. The government is proposing to use the special Parliamentary procedure which is available for Bills that implement Law Commission recommendations.

In October 2010, the House of Lords approved a special procedure for uncontroversial Law Commission Bills, to be used exclusively for those that attract a broad consensus of support in Parliament for the package as a whole.

Read the details of the procedure

Question 8: Do you consider the Bill suitable for a Parliamentary procedure designed for uncontroversial Law Commission Bills?

8. Potential risks

8.1 People with protected characteristics

This consultation will consider whether the proposed policy would have any negative impact in relation to advice for consumers in vulnerable circumstances.

We will consider if there are any groups of people with protected characteristics under the Equality Act 2010 that might be impacted as a result of the proposed policy. The protected characteristics relate to age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex, and sexual orientation.

Question 9: Are people with protected characteristics under the Equalities Act 2010, or any consumers in vulnerable circumstances, impacted by the policy proposed?

9. How to respond and next steps

Once this consultation has closed, the government will review the responses and decide whether the draft Bill is appropriate for the special Parliamentary procedure.

9.1 How to respond to this consultation

The government welcomes responses to the questions raised in the document. Responses will inform the Goods Mortgages Bill. The consultation begins with the publication of this document and will last for a period of 3 weeks. Please respond by Friday 13 October. Responses to the consultation should be sent, preferably by e-mail, to:

GoodsMortgagesBill@hmtreasury.gsi.gov.uk

Assets, Savings and Consumers, HM Treasury, 1 Horse Guards Road, London SW1A 2HQ

When responding please state whether you are responding as an individual or as part of an organisation. If responding on behalf of a larger organisation, please make it clear whom the organisation represents and, where applicable, how the members’ views were assembled.

9.2 Confidentiality

All written responses will be made public on HM Treasury’s website unless the author specifically requests otherwise. In the case of electronic responses, general confidentiality disclaimers that often appear at the bottom of emails will be disregarded for the purpose of publishing responses unless an explicit request for confidentiality is made in the body of the response. If you wish, part, but not all, of your response to remain confidential, please supply two versions – one for publication on the website with the confidential information deleted, and another confidential version for the team managing the consultation.

Even where confidentiality is requested, if a request for disclosure of the consultation response is made in accordance with the freedom of information legislation, and the response is not covered by one of the exemptions in the legislation, the government may have to disclose the response in whole or in part.

9.3 Consultation principles

This consultation is being run in accordance with the government’s consultation principles. The government will be consulting for 3 weeks. The shortened consultation period reflects the short focussed nature of the consultation.

9.4 Confidentiality disclosures

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes (these are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act (DPA) and the Environmental Information Regulations 2004). If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals, among other things, with obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality will be maintained in all circumstances.

An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on the department. The department will process your personal data in accordance with the DPA, and in the majority of circumstances, this will mean that your personal data will not be disclosed to third parties.

9.5 Freedom of Information

Any Freedom of Information Act queries should be directed to:

Correspondence and Enquiry Unit, Freedom of Information Section, HM Treasury, 1 Horse Guards Road, London SW1A 2HQ

Tel: 020 7270 4558 Email: public.enquiries@hmtreasury.gsi.gov.uk

10. Glossary

Affidavit – A statement of fact sworn under oath or affirmation before a person authorised by law to administer affidavits

Bill of sale - A document that transfers ownership of goods from one person (A) to another in circumstances where A retains possession of the goods

Book debts - Sums owed to a business by its customers

General assignment - The transfer of a class of rights, both present and future, from one person to another

Lender - A person to which another person owes money or its equivalent

Mortgagee – The lender who receives the security and grants the loan

Mortgagor – The borrower who grants the goods mortgage

Trustee in bankruptcy - A person that takes control of an insolvent person’s assets in order to sell them and share the proceeds among the creditors

1. View the FCA Feedback Statement on high-cost credit ↩

2. Registration will also be necessary to give effect to the goods mortgage against a trustee in bankruptcy ↩

3. Para 2.29(7) – Law Commission Final Report - September 2016 ↩