Statutory pledges: Unintended consequences?

Our banking team recently gave an overview of the new statutory pledge proposed by The Moveable Transactions (Scotland) Bill (the "Bill"), here we will focus in on the implications for both consumers and businesses that statutory pledges could have if they are introduced.

Currently, the only form of secured lending available to individuals over moveable property (e.g. jewellery, paintings etc) is pledge. Pledge is the legal name, but colloquially it is known as pawning. You will be familiar with how it works - an individual takes their goods to the pawnbroker, the pawnbroker gives them a loan (cash) based of the value of the goods and retains the goods as security for the loan. If the individuals repays the loan (together with interest) within any agreed timescales the pawnbroker returns the goods to the individual. If they fail to adhere to the repayment terms of the loan then the pawnbroker is entitled to sell the goods in repayment of the loan.

The Bill introduces a new type of security, statutory pledge. It operates by allowing an individual to use their goods as security for a loan without having to relinquish possession of it. If enacted it would allow borrowers to use the equity in an asset they own to raise finance without having to physically give them up i.e. using a valuable painting as security against a high value loan. This means that a borrower could potentially obtain more lending than they might otherwise be given without providing security.

Generally speaking – and excluding mortgages over homes - the majority of lending to individuals is on an unsecured basis e.g. credit given to purchase home furnishings and cars etc. If a debtor defaults on an unsecured loan the lender has to raise a court action to recover the debt and then attempt to enforce the decree through the various means open to them. In Scotland, a lender cannot – without authority from the court - enter into a debtor's home and take possession of property to pay debts owed. In certain circumstances the court may be prepared to grant an exceptional attachment order, but obtaining such orders is quite unusual.

The creation of a statutory pledge may mean that lenders become less willing to offer unsecured loans, preferring instead to use statutory pledge, given that it provides them with a mechanism to recover moveable property sell it and claim any balance from the debtor. A possible consequence may be an increase in secured lending for items previously purchased with unsecured lending.

The results might be seen to be quite harsh on the debtor as it could mean that the debtor has the property (e.g. a couch) repossessed by the lender but they still owe money that the lender can use other means to recover. The current position is that they would owe the debt but at least keep possession of the couch.

The introduction of a statutory pledge has the ability to shift the entire landscape of personal lending in Scotland. As a result, we consider there will be further consultation and consideration of the consequences of enacting statutory pledge.