Bills of Sale Consultation Paper—a response

Are the Law Commission’s proposals for a replacement to the historic Bills of Sale Acts fit for purpose? Dorothy Livingston, consultant in competition, regulation and trade at Herbert Smith Freehills, and chairperson of the Financial Law Committee of the City of London Law Society (the Committee), explains what prompted the Committee to publish a detailed response to the consultation and outlines their key concerns with the proposals.

Original news

The Committee has submitted its response to a consultation by the Law Commission on bills of sale. The CLLS opposes the Law Commission’s proposed reforms of current legislation covering bills of sale, setting out its reasons in its response.

Why did the Law Commission decide to open a consultation on the Bills of Sale Acts?

According to the Law Commission website, in September 2014 HM Treasury asked the Law Commission to consider the current law and make recommendations for its reform. This follows on from an increase in the use of the almost obsolete bill of sale as a technique for taking security for personal loans, principally related to vehicles already owned by the borrower (logbook loans).

What were the key proposals emerging from the consultation?

The proposals were for a readily usable replacement for the Bills of Sale Acts which would allow individuals to give security over any of their assets, however small in value, relatively simply without parting with possession of the goods in question. Currently, except where the lender is prepared to engage with the cumbersome bills of sale process, individuals can only give security over goods by pawning them, in which case the pawnbroker takes possession, or placing them with an agent of the lender who holds them for the account of the lender (a process used for some higher value goods, such as fine wines, works of art or valuable coins/gold held as an investment). Consumers can charge assets such as boats and planes which are valuable enough to be registered in the relevant specialist registries and can charge interests in land. Most other assets cannot easily be given as security by individuals at all, and the Bills of Sale Acts, now some 140 years old, have, in practice, meant that goods are rarely given in security by individuals.

The proposals suggested the High Court as a registration body (as currently for bills of sale) except in the case of vehicles where private operators of one or more registers would be established.

There was an additional proposal to simplify the little-used process under which an unincorporated business can give security over its book debts through a similar registration process as for bills of sale.

Why did the Committee respond?

The Committee has made an extensive study over the years of the law on security and on proposals for reform. It has a current project on the codification of the law on secured transactions by UK companies. It has had a long-term view that a change in the law to create easily available security arrangements for individuals has a number of consequences both in terms of cost to the public purse and social implications which require the most careful consideration. The Committee considered that the Law Commission proposals were unsuitable in their architecture to address such a major change in the legal landscape and failed to fully identify or address the implications of the proposals.

And how did the Committee respond?

Architecture

The Committee considered it was not the role of the High Court to be a registration body for an easy-to-use—and therefore widely used—scheme for individuals to give security over goods retained in their possession. The Committee suggested that the role and constrained resources of the High Court should be committed to the administration of justice and that if any such security registration scheme were introduced, one or more privately funded registration bodies authorised and regulated appropriately should be put in place and the High Court should cease to be a registration body.

The Committee considered that the High Court was equally unsuitable to be a registrable body for charges over the book debts of unincorporated bodies for the same reason.

The Committee considered that the case for taking security should be dealt with on a ‘provable need’ basis and in a way which minimised cost and complexity:

While the case for having a method in which a lender could take legal ownership or security over a vehicle already owned by a proposed borrower appeared the closest to being made out (though it was noted that consumer bodies were of the view it would be no great loss if logbook loans on a secured basis were rendered impossible), it was not made out that this required a new form of vehicle mortgage, with a different complex set of consumer protections than those applying to hire-purchase or conditional sale agreements relating to vehicles. It would be more appropriate to explore whether obstacles to use of these forms of finance in respect of a vehicle already owned by a prospective borrower could be removed so that all vehicle financing could be under a single regime with consistent consumer protections. Any register of vehicle ownership/security was a matter for the industry, which already maintained private registers and was working for a scheme of instant ‘provenance’ for all vehicles, but any register should be regulated, as proposed by the Law Commission.

There was no case at all for consumers to be able to charge all their assets, including core household goods, to a lender. Bills of sale were very little used except for logbook loans, and there were significant social implications in creating an easy-to-use system of universal application (see below). If there were such a scheme it would require a dedicated registry and extensive funding. There might be a case as regards high-value items and also stocks and shares (which are incorporeal assets, not goods), but this should be approached on a limited basis, after collecting clear evidence that relevant lenders and borrowers wanted such a scheme and were prepared to use it to an extent that the registration process would be affordable and cover its costs.

There was a case for making it easier for unincorporated businesses to raise finance by giving security over business assets. If there were sufficient evidence that this would be welcomed, again existing structures should be used as far as possible, but the High Court was wholly unsuitable. An ability to register at Companies Registry and obtain a discrete identifying reference when doing so was the simplest. It would also open the way for such businesses to be able to charge other assets effectively where these were of value to an unincorporated business and further the aim of making it easier for them to raise finance.

The proposed requirement for witnessed ‘wet-ink’ signatures to create valid obligations under the new schemes would have to be reconsidered in the light of the existing UK and EU law on electronic signatures (summarised in the DBIS Guide of September 2014) and the strengthening of the law in July 2016 under EU Regulation (EU) 910/2014.

Policy considerations

The Committee had a particular concern that the Law Commission had not fully considered the risks of setting up an easily used security creation and registration system for individuals without regard to the value of the goods in question. This seemed to stem from analysis based on the very small use of bills of sale, with the only numbers of any significance being logbook loans (a tiny part of the overall vehicle financing market). However, as the Law Commission had noted, the Bills of Sale Acts were the end of a long line of measures to prevent abuse of individuals through charges over their goods and had for the last 140 years ensured that this was not a social problem, largely because the bills of sale process was extraordinarily difficult to use and not cost effective. Given the opportunity, the Committee thought that exploitation of consumers could easily become a problem again. The Committee considered that if any general system were introduced it should have a financial threshold for the value of goods and should exclude essential household goods, but it would be better if the right to give a charge over any particular category of high-value goods could only be created after a specific cost benefit analysis and subject to suitable regulation. The system should be constructed in a way that it could be extended to incorporeal assets of significant value such as stocks and shares, which were important assets in the modern world. The Committee also considered much more research was needed into what provision would be needed for a universal system, including comparative research in jurisdictions where individuals could create such charges. Given the size of the UK population the direct and indirect cost and administrative burdens could be considerable.

The proposal that non-monetary obligations of individuals of any type could be secured under the new scheme was particularly open to abuse—the system proposed no protection against abuse in the form of a charge to secure a perpetual obligation—eg to buy goods from a particular source or to work for a particular person, against the threat of having goods seized. History shows how essential it is that the law protect individuals against the risk of such unconscionable bargains.

The proposal that loans and obligations of individuals not regulated under the Consumer Credit Acts could be secured against goods of any type and value again opened up the possibility of abuse, eg in a family setting. It would be better if any secured lending to individuals was confined to regulated lenders.

The proposals regarding small businesses were in accord with policy objectives for these businesses, but could be made much more useful to small businesses if there were a proper examination of what categories of valuable assets they might hold and provision that any of these could be given as security. Also the use of Companies Registry would be logical as many of these businesses would be moving towards incorporation.

What is likely to happen now?

The Law Commission will consider responses from all respondents and, according to its website, will make its report (without draft legislation) in Summer 2016.

Interviewed by Jenny Rayner.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on LexisPSL Banking & Finance. Click here for a free trial.

Relevant Articles
Area of Interest