To achieve its policy goal for the statutory pledge, the Scottish government faces the challenge of coming up with a legal test that distinguishes between sole traders and consumers in the context of a security arrangement - perhaps a tall order.

There are a few models that the Bill could adopt for that legal test. Importantly, the test needs to be unambiguous. If there is uncertainty as to when individuals are eligible to grant a statutory pledge, the resultant legal risk might reduce lenders’ willingness to accept the new security from sole traders or cause increased costs and delays in verifying eligibility.

Potential models that the legislation might adopt to determine whether an individual is eligible to grant a statutory pledge include the following:

• Business purposes test:

Eligibility to grant a statutory pledge could be limited to individuals who are acting wholly or predominantly for business purposes. The test found in the consumer credit regime could be used as a basis. Under that regime, credit agreements that are entered into for business purposes are exempt from regulation (if the credit exceeds a monetary threshold of £25,000). As with the consumer credit regime, individuals granting a statutory pledge could be asked to sign a business purposes declaration giving rise to a presumption that the security is entered into for business purposes.  (The government in Westminster is, of course, currently consulting on reform of the Consumer Credit Act, including on its scope for business lending.)

• Specified categories of asset only:

The scope of a statutory pledge could be limited so that it could only be granted over certain types of property. The permitted or proscribed categories could be defined by: (1) a generic description (for example. . “any property used wholly or predominantly for business purposes”); (2) a list of specific assets (i.e. a ‘white’ or ‘black’ list); or (3) a minimum monetary value of property below which an asset may not be pledged. The Bill currently contains relevant provisions, although they have been criticised.

• No security for consumer lending:

Alternatively, the Bill could provide that liabilities for consumer lending must not be secured by a statutory pledge. The concept of consumer lending could be defined by reference to existing regulatory classifications under financial services legislation, such as regulated credit agreements, regulated mortgage contracts and so on. Banning the use of a statutory pledge as security for consumer lending should help address concerns raised by consumer organisations that the Bill might have the unintended consequence of creating an undesirable form of high-cost credit in Scotland.

A further alternative is to combine elements from one or more of the three models described above.

Each of the potential models has its own advantages and disadvantages. Whatever legal test is adopted to distinguish between sole traders and consumers, it should strike an appropriate balance between good consumer protection, on the one hand, and good access to finance for sole traders, on the other.

Finally, the test adopted by the Bill will need to take into account that some individuals are neither “consumers” nor “sole traders” in the ordinary sense of those terms, such as high net worth individuals, clubs, trusts, and partnerships established in parts of the UK other than Scotland.

A more detailed commentary on the potential models for distinguishing between sole traders and consumers is available here. For further information on the Moveable Transactions (Scotland) Bill, please visit Shepherd and Wedderburn’s webpage here.