What is an individual to do when they want a new car? If they do not have cash readily available, the prescriptive and inflexible nature of the Victorian bills of sale legislation means hire purchase and contract hire dominate the vehicle finance market. However, new legislation could change this, write Stephenson Harwood associate Camilla Neil Martin.
Following the credit crunch, moneylenders began proactively deploying bills of sale – in the form of logbook loans – as a form of non-possessory vehicle security in relation to sub-prime borrowers.
Unfortunately, the register of bills of sale at the High Court largely went unnoticed by private purchasers. The result of a failure to check the register was that a buyer could acquire a shiny new car but shortly thereafter lose said car in settlement of the outstanding logbook loan.
In addition, there were instances of logbook lenders repossessing vehicles from those in temporary financial difficulties, even if the loan was substantially paid off and the borrower was making efforts to meet the outstanding amount.
Amid growing concerns that logbook lenders were operating in a regulatory vacuum, the government consulted on new forms of moveable property security. The result was the Law Commission-drafted Goods Mortgages Bill.
In summary, the Goods Mortgages Bill will enable individuals to borrow money against security over moveable assets. This will create a readily accessible form of vehicle finance that has the potential to squeeze the leasing and hire-purchase market.
Goods mortgages will carry various borrower protections such as mandatory warnings on security documentation, statutory rights to terminate and a last-gasp court procedure when the mortgageholder is looking to sell. In recognition that individuals of all backgrounds are likely to utilise the new goods mortgage, there is flexibility within the security documentation for borrowers less in need of protection – high net worth individuals and businesses borrowing more than £25,000 – to opt out of some borrower protections.
To discourage the dishonesty that could lead third parties into trouble, the borrower will be under a duty to disclose to a prospective purchaser or lender the existence of a goods mortgage, with criminal implications for failure to do so.
Finally – and perhaps most importantly – goods mortgages will only bind a new owner if registered before sale. Where a good-faith private purchaser, for example a consumer, has no “actual notice” of the goods mortgage, they will receive good title. This will apply even though the purchaser may be considered to have had “constructive notice” in the form of an entry in the goods mortgages register.
In an era where UK GDP is bolstered by consumer spending, and with the UK government keen to present the UK as “open for business”, creating a more straightforward and fair form of secured vehicle finance looks like a good proposition.
Aside from the consumer and SME vehicle market, an added benefit is that goods mortgages will enable asset-rich individuals to access finance for cash-flow or investment purposes.
Finance houses and banks will be whetting their appetite at the prospect of so-called ‘HNWIs’ mortgaging high-value lower-risk assets such as artworks, jewellery and wine, and perhaps even taking a punt with higher-risk assets such as bloodstock.
With innovation comes increased competition. Traditional leasing businesses may find their vehicle finance offering becomes overly complicated and outmoded, particularly in the fast-moving consumer market. There is a risk that traditional finance providers – such as banks – get hold of goods mortgages and run with them. The resultant economies of scale may ultimately push vehicle leasing businesses into obscurity, unless they can adapt by emphasising one of their unique selling points, which is that they enable consumers to refresh their vehicle on a periodic basis.
In a world where car manufacturers regularly have new models on the production line and fashions ebb and flow at an ever-increasing rate, perhaps this will be enough to keep the vehicle leasing industry going in the medium term.