It was always going to be a big ask.
The Law Commission’s proposal to use its fast track “special Parliamentary procedure” to replace the Dickensian Bills of Sale Acts of 1878 and 1882 (the Acts) with a whole new goods mortgages regime in the lifetime of a Parliament already struggling to cope with the highly complex, time consuming and controversial demands of delivering an exit from the European Union was an ambitious plan, largely aimed at providing greater protection to consumers and unwitting purchasers of cars subject to “logbook loans”.
At first, all seemed to be going smoothly with a draft bill and a recommendation from the Law Commission that such proposed legislation be expedited into law. But, creaking under the weight of Brexit and unconvinced by the extent of the consumer protections to be provided by the possible new regime (as well as the perceived reduction in current need for such selective reform), the government last month announced that it would not be introducing the anticipated changes at this time, but instead would be working with the FCA on a wider review of high cost credit. So where did it all go wrong, and what, if anything, does this have to do with the UK art finance market?
The problem with Victoriana
The Victorian roots of the Acts have long been evidenced in the inflexible, formal, costly and generally unsuitable system required to create, register and maintain a bill of sale (a means of allowing an individual to create security over an asset whilst retaining possession of that asset) (Bill of Sale). The archaic and unworkable nature of the Acts, particularly for consumers, was greatly highlighted by the ten-fold increase in the use of Bills of Sale in the first 15 years of this century. This increase was largely necessary to secure the growing number of “logbook loans” made to individuals who, in return, offered their cars to lenders as security. As a result of the Acts however, consumer borrowers were losing vehicles too easily following a default and innocent private purchasers who unknowingly bought cars subject to these Bills of Sale found themselves to be unprotected. Additionally, the increasing number of lenders wanting to lend against art “on the walls” struggled with the antiquated, inflexible system under the Acts combined with the insufficient coverage and inadequacy of the existing registration and search procedures.
Enter the Law Commission – law nouveau?
As a result of this spike in the use of Bills of Sale, HM Treasury were tasked in 2014 with reviewing existing legislation in this area. Following initial consultations the Law Commission then returned with a plan to create a new, more workable, more consumer friendly and modern legal framework, which would have allowed individuals and unincorporated bodies to grant security over tangible assets without having to conform to the 19th century peculiarities of the current law. Various further consultations followed, a draft Bill was produced and the ears of lenders and art collectors pricked up in the hope that the proposed new legislation, while of course improving the lot of consumers in the world of car finance, might also have offered a chink of light on an unsatisfactory English law position in respect of taking security from individuals over other assets, such as art, classic cars, fine wines and watches. In particular, the art lending market started to believe that perhaps, just perhaps, the age old English problem of allowing an individual to grant security over a piece of art whilst allowing it to remain on the walls of his or her home, might be on the brink of being in some way resolved. The great new hope was that, along with a repeal of the Acts, the new “Goods Mortgages Act” would provide a new mechanism and registration regime, (more akin to the US UCC filing system) by which individuals would be able to create and electronically register charges (with no time limit) over goods on a central electronic register. Re-registration would only be required every ten years and, crucially for the art and luxury goods finance market, high net worth individuals would be exempt from the consumer protections that would otherwise be afforded by the new legislation.
By the time the final report (which included a draft Bill) was published on 24 November 2017, it was clear however that much of the detail required to fully implement the new “Goods Mortgages Act” would be delegated to secondary legislation and regulations. The most opaque area appeared to be the approach to registration. Outstanding questions in respect of the draft Bill concerned the design and administration of the new register and the details that would be required to complete a registration. If this new system was not fulsome enough, would Lenders actually be convinced by its accuracy, security and coverage and would the consequential expected rise in art financing actually come to fruition?
The end of all hope or the start of a new movement?
…alas we will never know. The government, having taken further consultations in late 2017, announced on 14th May 2018 that the “Goods Mortgages Act” will not be progressed any further. Reasons cited included insufficient scope of consumer protections in the “Goods Mortgage Act” and disagreement as to whether or not the subject matter was suitable for the special Parliamentary procedure. The government also considered that, because the number of “logbook loans” has actually been falling since 2016 in favour of more accessible “payday loans,” its proportionate share of the wider high cost credit market was insufficient to justify a change in the law in itself. Instead, the executive stated that it would focus on the FCA’s high cost credit review. Reading between the lines and echoing the sentiments of the Law Commission’s Stephen Lewis, the proposals simply seem rather to have been put into the “too difficult, too time consuming, not now” box by the powers that be.
But all hope is seemingly not lost. The writing may well be on the wall for the Goods Mortgages Act but this may in time prove to have been a blessing in disguise, heralding the start of a new movement towards the creation of more flexible and certain security regime and registration regime in respect of not only chattels but all asset categories.
The reason for such optimism comes from the government itself and one of the additional reasons cited for the shelving of the proposed new law, being the need for a broader reform of securities law generally. In our previous article we discussed how the proposed legislation could potentially have paved the way towards the creation of a universal electronic register of security interests. Peculiarly, the abandonment of the “Goods Mortgages Act” proposals, which largely left the question of registration unanswered could now actually mean that a wider review of the registration of all security interests is initiated, covering all types of security assets. Whilst of course this delays the expected surge in growth of art lending for the foreseeable future, a full scale review of the registration of security would undoubtedly be welcomed by many practitioners, consumer groups and certainly by those in (or trying to find a means of entry into) the UK art finance market who, constrained by stifling warehousing or sale and leaseback structures to support their credit, crave a more flexible and satisfactory way to provide credit secured against art, wherever it is located.
If you require further information please contact Bethan Waters or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. The law and rates of tax referred to are correct at June 2018. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, June 2018