CONSUMER CHATTEL MORTGAGES – TO BAN OR NOT TO

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CONSUMER CHATTEL MORTGAGES – TO BAN OR NOT TO
BAN – OPPORTUNITY OR PROBLEM?
HOWARD JOHNSON, PART-TIME SENIOR TEACHING
FELLOW, DURHAM LAW SCHOOL
Abstract: The article examines recent proposals by the
Department of Business Innovation and Skills not to repeal the
much criticized Bills of Sale legislation relating to the giving my
individuals of security over personal chattels, largely motor
vehicles, in return for a loan; nor to ban outright the use of chattel
mortgages in consumer credit transactions but instead to rely on a
combination of the powers given to the enforcement authorities
under the Consumer Credit Act 1974, Consumer Credit Act 2006
and the EU Consumer Credit Directive 2008/48/EC supplemented
by industry self-regulation, in the form of a code of practice agreed
with the Consumer Credit Trade Association. The article contends
that the Bills of Sale legislation should be repealed and the
regulation of Bills of Sale outside the area of regulated consumer
credit agreements be left to the common law and where credit
agreements are regulated then the chattel mortgage be fully
absorbed into the consumer credit regime. Far from being banned
the use of the consumer chattel mortgage be put on a modern
footing.
Introduction
The two dicta set out below, uttered 122 years apart, appeal for
legislative action to repeal the Bills of Sale Act 1878 (‘BSA 1878’)
and the Bills of Sale Act (1878) Amendment Act 1882 (‘BSA 1882’)
which govern the entering into of most chattel mortgage
transactions by individuals, but as result of a recent Government
review the largely discredited regime seems destined to survive at
least for the medium term. Repeated calls for reform have been
ignored by governments of all political persuasion.
“My Lords, to say that “the Bills of Sale Act (1878)
Amendment Act (1882) ” is well-drawn, or that its meaning is
reasonably clear, would be to affirm a proposition to which I
think few lawyers would subscribe, and which seems to be
contradicted by the mass of litigation which the Act has
produced and is producing every day. For my own part, the
more I have occasion to study the Act the more convinced I
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am that it is beset with difficulties which can only be removed
by legislation.”i
“The twists and turns of the Bills of Sale Acts have already
been the subject of much judicial and academic comment
(including a recent Law Commission report of July 2005
(number 296) on Company Security Interests). The issues
raised in these proceedings have been complicated by their
outdated provisions. One cannot help but think that the
introduction of a modern system of registration offering
protection and clarity to creditors, consumers and chattelowners alike, is long overdue.”ii
Real property mortgages are common, well known and reasonably
understood in the UK but the chattel mortgage, outside corporate
company lending, is a much more illusive creature – very rarely
used and little understood by individual borrowers.iii Where bills of
sale, the name of the instrument that creates chattel mortgages
are used there are strong arguments that consumers and small
businesses are being taken advantage of by sub-prime lenders,
and that, at least in relation to the financing of consumer
transactions, there use should be completely banned. In part the
cause of this is the use of outdated Victorian legislation – the Bills
of Sale Act 1878 (‘BSA 78’) and the Bills of Sale (1878)
(Amendment) Act 1882 (‘BSA 82) – the latter Act paradoxically
designed as consumer protection legislation but going too far and
creating a complex and technical regime which is not fit for use by
consumers or the credit industry. In December 2009 the
Department of Business, Innovation and Skills published ‘A Better
Deal For Consumers: Consultation on proposal to ban the use of
bills of sale for consumer lending.’ (‘Consult’)iv That of course was
under a Labour Government, the Response published in January
2011 by the Conservative/Liberal Democratic Coalition
Government has rejected an outright ban or revamped legislation
but preferred to down the road of a mixture of a code of practice
administered by the Consumer Credit Trade Association (CCTA)v
and more extensive use of regulatory powers conferred on the
enforcement authorities by the Consumer Credit Act 2006 and the
EU Consumer Credit Directive (‘Response’).vi
It can of course be argued that given the lending secured by
chattel mortgage is an insignificant part of the total consumer
credit market no action needs to be taken – but registrations are
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on the increase with 38,200 being registered in 2009 compared
with 27,900 in 2006 - nevertheless but the overall value of
consumer loans secured is estimated to be in the range of £38£40m with about 18% of this being advanced to small enterprises
and sole traders an insignificant market share of consumer credit
lending.vii The key point, it is suggested, is both that this relatively
small sector of the market gives rise to a disproportionate number
of problems and complaints but also it is stopping a perfectly
acceptable form of security developing a modern fashion
respecting both the interests of the creditor and the debtor. It also
has to be noted that the legislation is full of traps and pitfalls for
bills of sales used by sole traders.
The contention advanced in this article is that the Bills of Sale
legislation be repealed and that outside the area of regulated
consumer credit agreements the chattel mortgage be controlled by
contract law and personal property law but that in relation to
chattel mortgages given in relation to regulated consumer credit
transactions consumer credit legislation be amended to take
account of them and provide a regime fit for modern use. It is the
contention of this article that far from being banned their use
should be recognized as a valid component of modern lending and
more reputable firms encouraged into the market by a regime that
is fit for use in the 21st century which might have the by-product of
reducing the notoriously high rates of interest in this sector of the
market.viii
History
The rationale for the regulation of Bills of Sale legislation is set out
well by Lord Herschell in The Manchester, Sheffield & Lincolnshire
Railway Company v The North Central Wagon Company:
“It must be borne in mind that the object of the earlier Bills of
Sale Acts was entirely different from that of 1882. The former
enactments were designed for the protection of creditors,
and to prevent their rights being affected by secret
assurances of chattels which were permitted to remain in the
ostensible possession of a person who had parted with his
property in them. The bills of sale were therefore made void
only as against creditors or their representatives. As between
the parties to them they were perfectly valid. The purpose of
the Act of 1882 was essentially distinct. It was to prevent
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needy persons being entrapped into signing complicated
documents which they might often be unable to comprehend,
and so being subjected by their creditors to the enforcement
of harsh and unreasonable provisions. A form was
accordingly provided to which bills of sale were to conform,
and the result of non-compliance with the statute was to
render the bill of sale void even as between the parties to it.
But, this being the object, the enactment is, as we have
seen, limited to bills of sale given “by way of security for the
payment of money by the grantor thereof.”ix
The legislation pre-dated electronic asset registration systems,
such as Hire Purchase Information Ltd and the more sophisticated
anti-avoidance devices of modern insolvency legislation.
Consumer lending is concerned with conditional bills of sale that
cover any assignment or transfer of personal chattels to a person
by way of security for the payment of money. Physical possession
of the property (unlike a pledge to a pawnbroker) does not change
hands. The property itself does not change hands but the lender,
as the owner, has personal rights of seizure. A bill of sale can
only be enforced if it has been properly registered in the prescribed
form and it shows the correct Court seal. All bills must be
registered by the lender within 7 clear days of their making at the
High Court otherwise they may not be accepted except in
extenuating circumstances (s8 BSA 1878).x This presents
problems with providing any form of cooling off period. If the
consumer, lender or the goods are outside London, a copy of the
bill of sale must be sent to the local district judge (see Annex D of
Response for illustration of the process). Anyone wishing to make
a search of the register, either centrally or locally, must pay a fee.
Searching currently requires attendance in person which, to say
the least, is not very user-friendly or accessible system. However
in practice most lenders register their bills of sale with online
electronic asset registers in much the same way as finance
companies register hire-purchase and conditional sale agreements
– but this is not mandatory and the courts have declined to impose
a duty of care to register to prevent lenders or third party
purchasers being mislead.xi
The BSA 1878 was essentially a statute protecting creditors from
unauthorized sales by the mortgagor to a third party by introducing
a registration systemxii, while the BSA 1882 was designed as a
consumer protection measure to stop the abuse of borrowers –
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however the regime produced was so complex that, at least in
respect to consumer transactions, bills of sale fell out of favour –
being replaced largely by the concept of hire purchase – a
bailment accompanied by an option to purchase – hire purchase is
a legal fiction but the concept proved highly successful and
remains in common use today.xiii Indeed to avoid these
provisions some chattel mortgage lending as been dressed up in
hire-purchase garb giving rise to the argument that the transaction
is a sham and the arrangements void for non-compliance with the
Bills of Sale legislation.xiv
The bills of sale legislation only regulates transactions with
individuals – whether acting in a business or consumer capacity.xv
The result of this non-user friendly regime is that chattel mortgages
are not used by mainstream lenders but seem to have become the
province of sub-prime lenders lending money at very high rates of
interest to often vulnerable borrowers. The main area of activity is
the ‘log book loan’ on the security of the consumer’s car, often with
minimal or no credit checks – the lender relying on the security of
the car. The interests are high with ample contractual
opportunities to pad charges by high administrative charges such
as £12 per time for sending reminder and late payment notices
further aggravated by historically by compound interest default
charges. Indeed the terms of the bargain are often very poor from
an economic point of view with lenders willing to lend only half the
value of the chattel (usually a motor vehicle). Agreements will
usually stipulate that the missing of one payment can lead to
enforcement procedures and the lender can take possession of the
vehicle importantly without seeking a court order. However there
is a proviso to s7 which states:
Provided that the grantor may within five days from the
seizure or taking possession of any chattels on account of
any of the above-mentioned causes, apply to the High Court
[local county court in relation to agreements regulated by the
CCA 1974], or to a judge thereof in chambers, and such
court or judge, if satisfied that by payment of money or
otherwise the said cause of seizure no longer exists, may
restrain the grantee from removing or selling the said
chattels, or may make such other order as may seem just. xvi
The bill of sale form says that “chattels”, namely secured property,
shall not be liable for seizure or be taken possession of “for any
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cause other than those specified in section 7 of the Bills of Sale
Act (1878) Amendment Act 1882” – not particularly informative to
the average consumer. Further there is not currently a
requirement for the provisions of s7 BSA 1882 to be set out in the
lender’s agreement with the consumer. The notion however that
the type of vulnerable already cash strapped consumer who takes
out this type of loan will make use of the proviso is largely fanciful.
It is true that by virtue of 7A BSA 1882 the lender must serve a
default notice which gives the debtor 14 days to try rectify matters
and pay off arrears and this may lead to advice being taken and an
application being made to the court to restrain repossession but
again it assumes the court will be sympathetic and that a
pressured consumer will take such steps. Even enforcement
officers may not fully appreciate the scope and operation of the
obscure legislation (see Consult para 37).
It is also true of course that more sophisticated borrowers can
seek to take advantage of the complexity of the Act to try and
evade their debts as the Consultation Document points out:
“The very archaic formalities of the Bills of Sale Acts can also
be disadvantageous for lenders. Even a minor technical error
can mean that the bill of sale is void. This differs from the
Consumer Credit Act 1974 (CCA), where a breach of the
formal requirements for a secured loan does not necessarily
make the agreement unenforceable. Instead, the court is
granted discretion to decide whether or not it remains
enforceable (section 129(1)(b)(i) of the CCA) (Consult para
38).”xvii
In many cases the provisions of the Bills of Sale legislation are
being ignored and borrowers are ignorant of the protections
provided by the legislation.
Even today the scope and boundaries of the legislation is unclear
and can catch even fairly sophisticated business arrangements in
a web of technical requirements. This is illustrated in the recent
case of Chapman v Wilson [2010] EWHC 1746 (Ch) 16/7/2010 in
this case a sole practitioner had entered into a loan facility to fund
upfront expenses connected with conditional fee agreements and
as security the lender took a mortgage over his goodwill, book
debts and work in progress and an assignment of his cases and
client contracts. The solicitor had serious financial difficulties and
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appointed a receiver and the judge had to grapple with a number
of issues under the legislation:
(a) was the loan agreement a bill of sale within s4 BSA 1878;
(b) were solicitors files capable of being ‘personal chattels’
within s4;
(c) could clauses in the agreement covering after-acquired
future property be regarded as within the scope of the Act
(d) what was the effect of non-registration of an agreement
and in particular whether the doctrine of severance could
be applied to save non-void parts of the agreement and
(e) was the Loan Agreement in the correct form to comply
with s9 BSA 1882.
The judge concluded the arrangement re seizure of the files was
not a bill of sale, a security arrangement, but merely a contractual
right to take possession of the files. The judge concluded that if
the loan agreement had contained a bill of sale even if other parts
of it were not covered by the legislation an those parts were not to
be held void even if the bill of sale element was (para 80).xviii The
solicitors files were either ‘personal chattels’ as pieces of paper or
“other articles capable of complete transfer by delivery’ within s4
BSA 1878 (para 88). Surprisingly at this late stage in the history
of the legislation the position of clauses covering ‘after-acquired’
property was still openxix and after canvassing the authorities and
not following the view of the great commercial law lord Lord
McNaghtenxx the judge concluded that after acquired property
clauses could come within the scope of the legislation (paras 92101). In this he preferred to follow the decision of BrowneWilkinson VC in Welsh Development Agency v Export Finance Co
Ltd [1991] BCLC 936 @ pp 956-57
Key concerns are that:
 current legislation does not provide consumers who used
bills of sales loans with sufficient protections, especially
when compared to similar Consumer Credit (CCA)
regulated agreements;
 wording in a bill of sale agreement is complex and difficult
for consumers to understand;
 there is unfair treatment by some lenders of consumers
who experience difficulties or fall into default;
 many consumers do not understand that they no longer
own the asset (the car) whilst the loan is outstanding.
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Nor do they understand the implications that a bill of sale
loan may have on their car insurance and
 the lack of protection for innocent third parties who
unknowingly buy a car with a bill of sale attached.xxi
The consumer credit regime does impact on the field:
 mortgage lenders will have to hold a consumer credit
licence and the OFT has extensive powers to act in cases
where they are unhappy with the conduct of the mortgage
lenderxxii;
 borrowers can argue that the transaction is unfair
because of the high rate of interest and related
chargesxxiii;
 lenders have to issue a default notice before they can
take steps to enforce the agreement (ss87-89 CCA 1974);
In practice judges have been prepared to uphold chattel mortgage
agreements with quite high rates of interest because of the degree
of risk the lender is taking with minimal credit checks and a
willingness to lend to borrowers with very poor credit records. For
example in Nine Regions (t/a Logbook Loans) v Sadeer, Case NO
8QT25415, Bromley County Court, 14/11/2008 (Case 2 on OFT
Unfair Transactions Page) the judge declined to hold that a loan
secured by a bill of sale for £880 repayable over 58 weeks at 7%
per month (384.4% APR) unfair as a breach of s140A CCA 1974.
Although the rate of interest was high such loans were ‘last resort
ones’ made to borrowers with poor credit records; the only security
was a second hand car which by definition depreciated in value
over time; the rate of interest was competitive in the area and
although the entitlement of the creditor to seize the car if the
instalments were not paid and without a court order was harsh the
borrower had been told in advance and had been given a large
number of chances, which were not taken advantage of, to prevent
recovery and sale.xxiv In Morrison & Morrison v Betterpace Ltd (t/a
Log Book Loans), Case No 9 LO 00559, 1/9/2009 (Case 7 on OFT
Unfair Transactions Page) there were two successive log book
loans, the first to the husband at 343.4% APR and then a second
roll-over loan to his wife for £2340 repayable over 58 weeks at
485.25% APR – the judge treated them as related transactions
and ruled that seizure of the couple’s car was fair within s140A
CCA 1974 and refused to order its return under s140B(1)(b) CCA
1974 – the husband had made no payments for 10 months and not
contacted the lenders at all during that time. However the judge
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found the circumstances of the loan to the wife was out of the
ordinary – no new money was being advanced and the wife was
taking over responsibility for repaying the husband’s debt. The
creditor did not explain to the wife that the interest charged on the
loan would not be 343.3% as charged to the husband but 485.3%
which was the rate applicable to new loans at the time of the
second agreement. The judge concluded that this was a
significant increase and unfair and so ordered a reduction to the
original 343.3% under s140(b)(1)(f) CCA 1974.
In Shaw v Nine Regions Ltd [2010] EWHC 3514, 18/11/2009 (QB)
A loan was secured by a bill of sale for £3,000 repayable over 156
weeks at an interest rate of 119.16% per annum (341.9% APR).
Reversing a decision of the Recorder the judge concluded that
(allowing for the statutory rebate that was available on early
repayment under the agreement) the agreement was not unfair
and the borrower remained liable for the total amount subject to
any deduction for early repayment and the creditor was entitled to
recover the costs from the borrower. This was typical of the type
of short term arrangement which characterizes the area as
Roderick Evans J stated at paras 8-9:
There is no doubt that the claimant fully understood the terms of the
Loan agreement into which he entered. Not only did he sign the
statement when he entered the agreement saying that he had read and
understood the Terms and Conditions of the Agreement, (and also
stating that he found them to be fair and reasonable, a matter upon
which the Recorder ultimately placed no weight), but the claimant had
also, wisely, carried out research in the sub prime market before he
took out this loan.
The claimant wanted the money immediately so that he could go on
holiday. It was the ease by which the money could be obtained which
attracted him to this kind of agreement, and before taking out the loan
he had already formed the intention to repay it as soon as possible
from the proceeds of an insurance claim which he anticipated would be
settled in the near future.
However the borrower’s was unable to pay off as rapidly as he
wanted when the insurance claim was settled promptly. The
borrower paid off the capital but refused to make further payments
contending the agreement was unfair, arguing that an APR of 30%
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would have been reasonable. Ultimately the interest rate was not
reduced on appeal – as the Recorder had stated:
“…….. claimant was prone to very bad financial judgment,
but concluded, also, that he was a sophisticated,
articulate and intelligent man who knew exactly what the
terms of the Agreement were after having given them
careful consideration. He accepted the loan was for the
purpose of going on holiday, rather than because of any
financial pressure upon the claimant and that the
claimant could afford this loan.” (@ para 29)xxv
In addition under the BSA a borrower can apply to the court for
relief from seizure of their property.
Most of the players in the consumer field are operating in the sbuprime market and there have been growing concerns about market
abuses and the taking advantage of desperate vulnerable
borrowers - one major player in the field has been the subject of a
‘minded to revoke’ notice, issued by the Office of Fair Trading in
respect of their consumer credit licence. The firm is challenging
and some preliminary issues were ruled on in the First Tier Tibunal
(Grand Regulatory Chamber) decision in Nine Regions (trading as
Log Book Loans)xxvi The loan business was carried on by Nine
Regionss (NR) as ‘franchisee’ of Log Book Loans (LBL) through
chains such as Cash Convertors and Cash Generators who were
alleged to be ‘agents’ of NR for these purposes. The actual
transaction was initiated usually by telephone by an ‘underwriter’ of
NR – the agreements were signed usually at one of the agent’s
stores – though sometimes in an adjacent car park or a small local
independent newsagent. At these meetings it was the only
occasion on which a customer would have to consider the precontract information, as well as the agreements. The OFT alleged
that the bills of sale had not been properly witnessed under s10
BSA 1882 which requires: The execution of every bill of sale by the
grantor shall be attested by one or more credible witnesses, not
being a party or parties thereto.’ - the Tribunal agreed that the
‘underwriters’ were not acting in a personal capacity but as agents
of NR and therefore could not be regarded a either a ‘credible
witness’ who was not a party to the transaction. Further the
Tribunal agreed with the OFT that the firm was in breach of
ss48/49 CCA 1974 in canvassing debtor-creditor agreement off
trade premises – as using their agents stores as places where
discussions and signatures of the agreement took place could not
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be regarded as either permanently or temporarily carrying on
business there themselves.xxvii There were failures to ensure that
the bills of sale were registered within the appropriate seven day
period required by the legislature. Use of expressions in telephone
text messages such as ‘loan guaranteed’ or ‘pre-approved’, with
no accompanying APR shown were inn breach of regs 8(1)(d)xxviii
and 9(1)(d) of the Consumer Credit Advertisement Regulations
2004xxix
Government Consultation
The initial consultation document issued by the Labour
Government in December 2009 offered four options for the future
of bills of sale:
 do nothing beyond current legislative and regulatory
activitiy;
 introduce a voluntary code of practice or other nonstatutory regulations;
 reform of the Bills of Sale legislation; and
 ban the use of bills of sale for consumer lending.
At that time the initial view was for a complete ban:
“The Government is minded to ban the use of bills of sale for consumer
lending. We believe this will be necessary to guarantee sufficient
consumer protection and prevent the harm suffered by consumers
through poor business practice. In deciding whether to proceed with a
ban or to pursue one of the alternative options, we recognise the
importance of seeking to ensure that credit remains available on fair and
reasonable terms to consumers who want to borrow and can afford to do
so.” (Consult, Executive Summary para 6)
Consumer groups support complete ban on use in consumer
transactions.
The Government’s proposal to consider banning the use of chattel
mortgages in relation to consumer transactions was strongly
supported by consumer groups, such as Citizens Advice
“… lending secured by bill of sale makes up a very small proportion of
both the consumer credit market and the consumer credit and debt
problems seen by the CAB service. However the experience of CAB
clients suggests that consumers can suffer very severe detriment after
entering into a credit agreement secured by bill of sale. CAB evidence
previously sent to BIS has highlighted our concerns about the lending
and arrears management practices of bill of sale lenders. We believe
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that the nature of the bill of sale lending and in particular the almost total
lack of consumer protection is wholly unsuitable in a modern consumer
credit market. Therefore we support the government’s intention to ban
this particular form of secured lending and introduce effective consumer
protection in respect lending secured against chattels more generally.”
xxx
Two, not untypical, problem cases involving consumers cited in the Citiizens
Advice Evidence to the BIS were:
“A CAB in Yorkshire saw a 20 year old woman who had taken out a bill
of sale loan for £900 at 430% APR. After one missed payment, the
agents of the lender repossessed the vehicle in question from the client’s
driveway. The woman said that the agent arrived at her property
asking for the keys to the vehicle to 'check the mileage'. When she
handed over the keys, the agent simply drove the car away. “ (CA
Evidence p3)
“A CAB in Wiltshire saw a 36-year-old woman who had taken out a
loan for £5,000 secured against her car by a bill of sale. The terms of the
loan obliged her to repay £35,000 over 36 months. The woman fell into
financial difficulties and could not keep up with the repayments.
She suffered ill health due to the pressure of the loan and recently had a
heart attack. She came to the bureau with her father who was
concerned about the amount of interest his daughter had to pay back.
The lender had repossessed the woman’s car on the previous weekend
as they said they had not received payment, but the woman had sent
two cheques over the Christmas period. The woman had to pay £3,000
to get the car released. She was in an extremely difficult financial
situation and her indebtedness was increasing at an alarming rate as
interest charges and charges for letters and phone calls were being
added to the balance. She was worried that she might end up losing her
mortgaged home.” (CA Evidence p 3)
However the problems are by no means confined to consumer
borrowers and problems can arise in relation to business
transactions – particularly log-book loans by small businesses or
sole traders to acquire a van for work purposes – the van being
subject to the chattel mortgage as security for the loan – a not
untypical problem case in the business field illustrated by Citizens
Advice is:
“A CAB in Lancashire saw a 49-year-old man who had taken out a
logbook loan for £600 at an APR of 466.94%. The total amount to be
repaid was £880 over 3 months by two payments of £93.34 and final
payment of £693.34, The security for the loan was the van that the man
needed for work as he was self employed. He couldn’t keep up with the
payments as per the agreement and accrued interest. As a result he had
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paid in excess of £2,000 with a balance still outstanding of approximately
£1,700 with interest accruing monthly on the balance. The man was
finding it hard to comply with the payments as his earnings had reduced
considerably due to the financial climate. However to keep working he
had to keep the van. He was married with two dependant children in a
mortgaged property, with mortgage payments of £1,000 per month.”
A total ban on the use of the bill of sale as a security was also
supported by The Money Advice Trust in their response to the
Labour Government’s Consultative Document:
“We feel that bills of sale are an archaic lending product with obscure
and complex rules that has no place in a modern society. The lending
products offered using bills of sale are both oppressive and enforced
unfairly. Consumer protection is inherently untenable given the nature of
the legislation. We fully support a ban on bills of sale.”xxxi
Government Response to Consultation
It is perhaps not surprising given the Coalition Government’s
stated desire to de-regulate and to reduce burdens on business
that the current Government decided to opt for industry selfregulation as the main component of a reform regime –
supplemented by the use of general enforcement powers under
the CCA 1974 (as amended):
“Following careful consideration of all the responses to the
consultation, Government has come to the conclusion that a
package of measures based on Option 2 (introduce an
industry wide code of practice) is the most appropriate and
proportionate way forward.
These measures are:
“• a code of practice that contains increased protections for
consumers, especially for those who are having difficulty
repaying the loan;
• a consumer information sheet explaining in plain English
how bills of sale work and what the customer can expect from
the lender;
• new Consumer Credit Act requirements from 1 February
2011;
• OFT monitoring under Irresponsible Lending Guidancexxxii;
and
• a commitment to look again at reforming bills of sale for
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consumer lending if problems continue……. “(Response para
37)
“…….the evidence received in response to the consultation
did not indicate that the problems identified were sufficient to
justify a ban on using bills of sale for consumer lending. There
are certainly examples of bad practice by lenders and of
consumers experiencing problems with bills of sale loans. But
the size of the problem is comparatively small. The value of
bills of sale lending is estimated at £38-£40m, compared to
£7.5bn for high cost credit generally. It is estimated that a
secured vehicle is repossessed as a result of default in only
2%-3% of cases (800-1200 loans out of about 38,000).
(Response @ para 39)………………….
“Reforming Bills of Sale legislation to make it more
appropriate for consumer lending (Option 3) could deliver
additional consumer protection and some benefits for lenders
with potentially less of an adverse impact on lending.
However, the size of this task compared to the size of the
problem and the long time lag before consumers would see
any benefits made this an unattractive option.’ (Response @
para 41)
‘
It is disappointing that the what might be considered relatively
minor legislative changes to adjust the regime to modern
conditions is regarded as a major task, particularly given that the
Government is envisaging another major restructuring of the
regime to bring into line with the regulation of other financial
services and give rule making power to the proposed new
Consumer Protection and Markets Authority – the repeal of the
outdated legislation the tweaking of the new legislation could
surely resolve things quite easily?
New Code of Practice & Customer Information Sheet
The centre piece of the proposals is the new CCTA Code set
out in Annex C of the Response. It only applies to agreements
covered by the CCA 1974 regime. It commits the CCTA to
monitoring and compliance action including unscheduled
compliance audits (Annex C para 2.4) and proper recording of
complaints which will be made available to the OFT (Annex C
para 2.3). General obligations to trade honestly responsibly,
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ethically and lawfully are found in Section 3 of the Code and
also to ensure staff are properly trained. Member’s interests
in assigned vehicles are to be registered within 24 hours with
a recognized asset finance register such as HPI Ltd
(para3.13). Advertising is to be fair and reasonable and not
contain misleading information with an avoidance of high
pressure or aggressive selling practices. Prospective
borrowers are to be given an adequate opportunity to consider
pre-contract information and ask questions (para 4.1.4). In
particular:
4.2.1 Members shall not engage in any behaviour that the
OFT considers may constitute ‘irresponsible lending’.
Members must have regard to: ‘Irresponsible Lending-OFT
guidance for creditors’ – August 2010 as amended from time
to time.’
Loans structured to have large balloon payments at the end of the
agreement will only be used for wholly or predominantly for
business purposes (para 4.2.2). Proper explanations and
assessment of affordability must be carried out:
4.4.1 Members shall, before granting credit or increasing the
amount of credit to be provided to the customer, undertake an
assessment of the creditworthiness of the customer to assess
the borrower’s ability to undertake any proposed credit
commitment, or specific additional credit commitment, in a
sustainable manner, without the customer incurring (further)
financial difficulties and/or experiencing adverse
consequences.’
Section 4.7 sets out how members should deal with customers
experiencing financial difficulties. Procedures are to be ‘fair, clear
and not misleading’ and ‘consider cases of financial difficulty
sympathetically and positively..with understanding and
forbearance’. Members are advised to suspend for a minimum
period of 30 days active pursuit of the debt where a bona fide debt
advisor is assisting the consumer in agreeing a repayment plan
(para 4.7.5). Debt collection procedures must comply with the
statute and with the OFT Debt Collection Guidancexxxiii.
For innocent third parties who buy a car subject to a Bill of Sale
the protection afforded by Part III HPA 1964 to good faith private
purchasers where the lender has failed to register their interest
with an Asset Finance Register Company within 24 hours of the
execution of the mortgage over the car (para 5).xxxiv
16
The CCTA commits itself to providing a conciliation service to try
and resolve complaints between a borrower and its members and
if this fails the customer can of course take the matter to the
Financial Ombudsman Service which of course is free to use for
consumer debtors.xxxv
The new CCTA Customer Information Sheet is set out in Annex C
of the Response sets out in plain English the balance of
obligations.
Persistent breaches of the Code should lead to the imposition of a
‘requirements notice’ under s33A CCA 1974 with the possibility,
subject to an appeal to the First Tier Tribunal, of the imposition of
civil penalties of up to £50,000 per breach of the notice and
ultimately to the revocation of the licence for not being a ‘fit and
proper person’ under s25 CCA 1974.xxxvi
Enhanced CCA enforcement powers:
Enhanced powers under the CCA 1974 regime which came into
force on 1 February 2011 will add some regulatory backbone to
the self-regulatory code:
* lenders will have to make a reasonable assessment of
whether a borrower can afford to meet repayments in a
sustainable mannerxxxvii;
* lenders will have to explain key features of the credit
agreement to enable the borrower to make an informed choicexxxviii;
* prospective borrowers will be given an information sheet
setting out all the relevant information about the credit agreement
in a standard format to assist easy comparison and this will be
supplemented by the CCTA information sheet on the key features
of a bill of salexxxix; and
* consumers will have an absolute right to withdraw from a
credit agreement within 14 days, paying back only the money lent
and the interest accrued over that time.xl
In addition civil enforcement orders can be obtained for breach of
consumer credit legislation under Pt 8 of the Enterprise Act 2002 –
breach of which can lead to imposition of penalties for contempt of
court.xli In addition plans are being made to introduce direct
powers to impose penalties by bodies such as the OFT with the
defendant having a right to appeal to the First Tier Tribunal which
should again cut down the time before an effective penalty can be
17
imposed.xlii
A different future
While the new Code of Practice is no be welcomed it is suggested
that more radical reforms are necessary in addition to the backing
up of the code with strong enforcement of the consumer credit
regulatory regime. It is suggested consistent with the
Government’s de-regulatory agenda both the BSA 1878 and BSA
1882 be repealed. Chattel mortgages falling outside the
Consumer Credit Act 1974 (as amended) be left to be regulated by
the common law and industry self-regulation. Those falling within
the consumer regulatory regime should be more effectively
absorbed into the regime by consideration of a combination of
some reforms of the CCA 1974 and effective use of already
existing powers.xliii Key points of such a regime might be:
 a possible extension of the provisions in ss58 and 61
covering pre-contract reflection periods for regulated real
property mortgages at least for loans say in excess of a
minimum level (possibly £5,000);
 rigorous enforcement of extended licensing powers – in
particular power to enforce ‘requirements’ where OFT
dissatisfied with conduct of mortgage provider;
 strict enforcement of the irresponsible lending guidelines
to require creditors to more seriously consider whether
the borrower can afford the financial commitment and not
lazily to rely simply on the security of the chattel offered
as security;
 an extension of the protected goods provisions (ss90-92
CCA 1974), currently applicable only to hire purchase and
conditional sale agreements to cover regulated chattel
mortgage agreements – this would mean that after onethird of total cost of the loan had been repaid a court order
would be needed to repossess the chattel – this would
also permit the borrower to suggest to the creditor a
repayment plan based on the time order provisions in
s129 CCA 1974xliv
 a modernized consumer chattel mortgage agreement
forms issued under s60 CCA 1974 and implementing
regulations;
 a full extension of debtor protection provisions – including
possibly extending court order provisions in s126 CCA
1974 to cover consumer chattel mortgage provisions at
least where the value of the loan justified it;
18
 repeated non-compliance with the CCTA Code of Practice
to be ground for revoking of lender’s licence.
It is argued that regularizing in a modern form lending secured by
a chattel mortgage will remove such lending from the fringes of
sub-prime credit to play a more significant part in securing lines of
credit and at more moderate rates of interest in these more
austere times.
i
Thomas v Kelly (1888) L.R. 13 H.L. 506, per Lord MacNaghten @ p 517.
Carl Richard Chapman (trading as Chapman & Co Solicitors) v Wilson & Others
[2010] EWHC 1746 (Ch) Vos J @ para. 129
iii
In this article the focus in on the law of England and Wales, chattel mortgages are
found in Northern Ireland but not the Scottish legal system.
iv
http://www.bis.gov.uk/assets/biscore/corporate/docs/migratedconsultations/a%20better%20deal%20for%20consumers%20consultation%20on%20
proposals%20to%20ban%20the%20use%20of%20bills%20of%20sale%20for%20con
sumer%20lending.pdf
v
http://www.ccta.co.uk/index.aspx
vi
http://www.bis.gov.uk/assets/biscore/consumer-issues/docs/g/11-516-governmentresponse-proposal-ban-bills-of-sale.pdf
vii
Response, Introduction para 3 – the typical cost of a £750 loand for 6 months being
between £1300 and £1500 (Response para 12).
viii
We are concerned here only with use of chattel mortgages by individuals not
lending to corporate borrowers using fixed or floating charges.
ix
(1888) L.R. 13 App Cases 554 @ p560-561 – in the case the House of Lords had to
decide whether the transaction was a sale accompanied by a hire-purchase transaction
or a loan financed by a security – a wagon hire company purchased the wagons from
the original owners and then leased them back to the company who had been hiring
them from the original owners at a rental for 3 years with an option to purchase at the
end of the lease – the rental payments equalled the purchase price plus interest at 7%
so it was argued it was a loan but looking at the ‘substance of the transaction’ the
view was taken that it was a sale not a security transaction.
x
The concept of registration is not defined and even today there is some doubt as to
precisely when the process is complete – see where the issue was whether bills were
routinely registered outside the 7 day period – the licenses claimed that bills which
were received within the 7 day period but stamped with a date outside the 7 day
period should be treated as validly registered – the First Tier Tribunal of the
Regulatory Grand Chamber took the view that registration must be the entering of the
bill on the register – and that the date of the court’s stamp on the bill is not
conclusive of the date on which the bill was registered.
ii
19
xi
Moorgate Mercantile Co v Twitchings [1977] AC 890 and Industrial Corporation
Finance Ltd v Wyder Group Ltd (2008) 152 (37) S.J.L.B. 31.
xii
Not all loans raised on the security of chattels are covered s4 BSA 1878 – and see
In Re Reis [1904] 2 KB 769 (covenant by husband to transfer all his after-acquired
property (except business assets) to the trustees of the settlement upon trusts for te
benefit of his wife and children not required to be registered as a bill of sale
xiii
Helby v Matthews [1895] AC 471 & Lee v Butler [1893] 2 QB 318 – holders of
Bills of Sale may be vulnerable where they lend money to on the security of a chattel
which the debtor has previously acquired on hire purchase and the finance company
has failed to register its security interest with one of industry asset registers such as
Hire Purchase Information Ltd (HPI) – see Welcome Financial Services Ltd v Nine
Regions Ltd (t/a) Log Book Loans (2010) 2 Ll Rep 426 – W, a finance company had
let a car on hire-purchase to a debtor – the debtor then entered into a ‘no credit check’
chattel mortgage with N on the car before title had passed from the finance company when the debtor defaulted on the loan N seized the car and sold it – when sued for
wrongful interference with goods by W, N claimed to be a good faith private
purchaser within s27 Pt III Hire Purchase Act 1964 – and therefore to have acquired
a statutory title – the judge ruled that they were not private purchasers within the
definition in s29 HPA 1964 – it was irrelevant that the finance given was not for the
acquisition of the car – the Act covered not only the provision of finance to purchase
the car but also where the car was used as security for a loan. Thus W was entitled to
the proceeds of the sale of the car by N.
xiv
See Eastern Distributors v Goldring [1957] 2 QB 600, Stoneleigh Finance v
Phillips [1965] 2 QB 537, Snook v London & West Riding Investments Ltd [1967] 2
QB 786 and Kingsley v Sterling Industrial Securities [1967] 2 QB 747.
xv
Online Catering v Frank Acton & Others [2010] 3 All ER 869 – the defendant
carried on a business repairing and servicing motor vehicles and did this for the
claimant catering company – the defendants claimed to be entitled to seize and retain
possession of two of the claimant’s vans for nonpayment of service charges – the
judge held that the right in the contract allowing them to do this as a licence to take
possession of personal chattels as security for a debt and should have been registered
under s8 BSA 1878, the agreement being with the managing director of the company
– the Court of Appeal ruled that while this right could constitute a bill of sale the Act
did not apply as the agreement was with the company, a corporate body, not the
managing director personally.
xvi
Any good seized must not be sold until a minimum period of five days have
expired – s13 BSA 1882 – see O’Neil v City & County Finance Co Ltd (1886) L.R.
17 Q.B.D. 234 & Hetherington v Groome (1883-84) L.R. 17 Q.B.D. 789
xvii
It shows some of the complexity of the area that the writer of the document
includes the wrong section s129 refers to the making of time orders to give a debtor
more time to pay the correct section iss127 in relation to the making of enforcement
orders which since April 2007 has permitted the enforcement of all ‘improperly
executed’ agreements where the debtor has suffered no significant prejudice and with
powers to neutralize that prejudice by varying the agreement or adding conditions to
the enforcement order under ss135-136 CCA 1974 – see Wilson v First County Trust
Ltd (No 2) [2004] 1 AC 816 – the practical effect of which was reversed from 6April
2007 by Consumer Credit Act 2006 Sched 4 para 1 – removing all mandatory grounds
for refusing to enforce an agreement – now all agreements subject to judicial
discretion.
20
xviii
Applying the views of Fry LJ in RE Burdett (1888) 20 QBD 310 @ 315-6 and In
Re North Wales Produce and Supply Society Ltd [1922] 2 Ch 340.
xix
After acquired property clauses are only valid against the grantor unless
specifically permitted in relation to third party creditors see s5 & 6 BSA 1882.
xx
Thomas v Kelly & Baker (1888) 13 HL 506 @ pp518-19 – the majority in the case
decided that the clause was not in the appropriate form as required by s9 BSA 1882
and therefore void – in that there had been a failure to comply with the statutory
requirements of a bill of sale by including an assignment to after acquired property in
the body rather than the schedule of the deed.
xxi
See Response (2011) para 16.
xxii
See Part III CCA 1974 – in particular s25& 25A requirement that the licensee be
‘a fit and proper’ person, the power of the OFT to impose ‘requirements’ if
dissatisfied with the licensee’s conduct backed up by civil penalties of up to £50,000
for breach of those requirements (ss33A & s39 CCA 1974).
xxiii
S140A CCA 1974 and illustrations of unfairness cases on OFT Unfair
Transactions Page:
xxiv
See digest of case on OFT page on Unfair relationships http://www.oft.gov.uk/about-the-oft/legal-powers/legal/cca/CCA2006/unfair/unfairrel-full/
xxv
Borrowers are not always honest – see Mannion v Nine Regions Ltd, Oxford
County Court, 7DVL19259, 18/5/10 – were a case failed in part due a
misrepresentation made by the borrower that he was employed when in fact
unemployed (see Case 21 OFT Unfair Relationships Page http://www.oft.gov.uk/about-the-oft/legal-powers/legal/cca/CCA2006/unfair/unfairrel-full/
xxvi
[2010] UKFTT (GRAC) 643
xxvii
Being therefore in breach of s48(1) & (2) CCA 1974:
(1) An individual (the “canvasser”) canvasses a regulated agreement off trade
premises if he solicits the entry (as debtor or hirer) of another individual (the
“consumer”) into the agreement by making oral representations to the consumer, or
any other individual, during a visit by the canvasser to any place (not excluded by
subsection (2)) where the consumer, or that other individual, as the case may be, is,
being a visit—
(a) carried out for the purpose of making such oral representations to individuals who
are at that place, but
(b) not carried out in response to a request made on a previous occasion.
(2) A place is excluded from subsection (1) if it is a place where a business is carried
on (whether on a permanent or temporary basis) by—
(a) the creditor or owner, or
(b) a supplier, or
21
(c) the canvasser, or the person whose employee or agent the canvasser is, or
(d) the consumer. – and therefore an offence under s49(1) CCA 1974.
xxviii
Consumer Credit (Advertisements) Regulations 2004/1484 reg 8(1)(d): - a credit
advertisement shall display a typical APR where it: ‘includes any incentive to apply
for credit or to enter into an agreement under which credit is provided.’
xxix
Regulation 9(1)(d) stipulates that no regulated credit advertisement shall include
‘the expression “loan guaranteed” or “pre-approved” or any similar expression, except
where the agreement is free of any conditions regarding the credit status of the debtor’
xxx
Citizens Advice Responses to the Department of Business, Innovation and Skills
consultation on proposal to ban the use of bills of sale for consumer lending:
Evidence (March 2010), Introduction p2 (hereinafter ‘CA Evidence’) http://www.citizensadvice.org.uk/proposal_to_ban_the_use_of_bills_of_sale_for_con
sumer_lending
xxxi
Money Advice Trust: Proposal to ban the use of Bills of Sale for Consumer
Lending Consultation Paper: Response by The Money Advice Trust (March 2010) @
p10.
www.moneyadvicetrust.org/MAT%20response%20to%20consultation%
20on%20proposal%20to%20ba...
xxxii
See’ Irresponsible Lending: OFT guidance for creditors’ (March 2010, Updated
February 2011) OFT 1107 - http://www.oft.gov.uk/about-the-oft/legalpowers/legal/cca/irresponsible#named1
xxxiii
see ‘Debt collection: draft OFT guidance for creditors, debt collectors, law firms
and other businesses engaged in the recovery of consumer debt (OFT 664 con) March
2011 - http://www.oft.gov.uk/about-the-oft/legalpowers/legal/cca/irresponsible#named1
xxxiv
Part III of the Hire Purchase Act 1964 is long overdue for reform and
modernization not covering chattel mortgages or the leasing of cars for instance.
xxxv
See Financial Ombudsman Service website - http://www.financialombudsman.org.uk/publications/technical_notes/consumer_credit_resource.html
xxxvi
See ‘Consumer credit licensing: General guidance for licensees and applicants
on fitness and requirements’ OFT 969 (Jan 2008):
http://www.oft.gov.uk/shared_oft/business_leaflets/credit_licences/oft969.pdf and see
examples of imposition of specific requirement notices – OFT Press Releases 22/11,
81/10 and 21/10 - http://www.oft.gov.uk/news-and-updates/press/
xxxvii
S55B CCA 1974
xxxviii
s55A CCA 1974 – in particular the following features:
(a) the features of the agreement which may make the credit to be provided under the
agreement unsuitable for particular types of use,
(b) how much the debtor will have to pay periodically and, where the amount can be
determined, in total under the agreement,
(c) the features of the agreement which may operate in a manner which would have a
significant adverse effect on the debtor in a way which the debtor is unlikely to
22
foresee,
(d) the principal consequences for the debtor arising from a failure to make payments
under the agreement at the times required by the agreement including legal
proceedings and, where this is a possibility, repossession of the debtor's home..
(e) the effect of the exercise of any right to withdraw from the agreement and how
and when this right may be exercised.
xxxix
See Consumer Credit (Disclosure of Information) Regulations 2010/1013.
xl
S66A CCA 1974.
xli
Such orders can be obtained by the OFT and other recognized enforcement bodies
such as local trading standards authorities see example of an interim order obtained by
Birmingham Trading Standards Authority – “Injunction secured against ‘debt sale’
firm, OFT Press Release 43/10, 26/4/10 - http://www.oft.gov.uk/news-andupdates/press/2010/43-10
xlii
see ‘OFT & LBRO outline plans for use of new civil sanctions’ OFT Press Release
147/10, 20/12/2010 – implementing on a pilot basis Pt 3 Regulatory, Enforcement and
Sanctions Act 2008 - http://www.oft.gov.uk/OFTwork/consultations/current/civilsanctions/
xliii
This reform may be made easier if the Government go ahead with a proposal to
bring the regulation of consumer credit legislation into line with the regulation of
other financial services on the model of the Financial Services and Markets Act 2000
with the rule making powers vested in a new Consumer Protection and Markets
Authority which would remove the need for time consuming and usually long delayed
reforms of primary legislation, see ‘A new approach to financial regulation:
Consultation on reforming the consumer credit regime’ (BIS December 2010) http://www.bis.gov.uk/Consultations/consultation-reforming-consumer-credit
xliv
Bearing in mind also the powers of the courts to vary the agreement and impose
conditions in connection with such orders in ss135 & 136 CCA 1974 – but the court
would have to take into account the interests of the creditor and that there was a
realistic chance that the loan and interest would be repaid over a reasonable period –
see First National Bank v Syed [1991] 2 All ER 250 & southern District Finance v
Barnes [1996] 1FCR 679.