The reluctance of mainstream banks to lend in the credit crunch has created a positive knock-on effect for those involved in the ancient business of pawnbroking.
Albemarle and Bond, the UK’s biggest pawnbroker which bought rival Herbert Brown in July 2007, reported a gain of 43% in annual revenues, and lifted adjusted profits for the year to June 30 to £10.3 million.
Pawnbroking is a well established form of money lending. There is plenty of evidence to support its existence throughout history. Some sources say it started in 1462, when Franciscan monks established “Banks of Pity” to enable poor people to obtain small collateralized loans. References to pawnbroking however, can even be found in the Bible,
“…no man shall take the nether or the upper millstone to pledge, for he taketh a mans life to pledge.”
…and also in nursery rhymes. Many parents of this generation will be unaware that “Pop goes the weasel,” describes the pawning of a coat to pay for everyday items. To “pop” is the cockney verb, to pawn, and the “weasel” is the “weasel and stoat”, cockney rhyming slang for a coat.Traditionally, items of clothing such as coats were commonly placed on deposit in exchange for cash.
But what has become of the old-fashioned pawnbroking industry, and how is it regulated?
Pawnbroking is essentially a means of obtaining money on credit. The Pawnor (customer) will take an item to “pawn”. The Pawnee (pawnbroker) will assess its value, retain it as security, and lend cash of similar value to the customer. The money must be paid back with interest during or at the end of the agreed term in order to redeem the goods, failing which the pawnbroker can sell or “realise” them to recoup the value of the loan.
Pawnbroking activity is governed by the Consumer Credit Act 1974, and regulated by the Office of Fair Trading. The provisions of the CCA which are specific to pawnbroking largely mirror principles set down in the Pawnbrokers Act of 1872.
The pawnbroker must give the customer a receipt when he takes an item “in pawn”, and commits an offence if he does not do so. In practice, the pawn receipt and the loan agreement are often one and the same. It is also an offence to take an article in pawn from a minor.
Loan agreements must be for a minimum of six months, during which the customer can redeem his goods at any time and the pawnbroker is not at liberty to sell them. Many pawnbrokers opt for slightly longer agreements; this is because if an agreement is only for six months, and the value of the loan is less than £75, the pawnbroker will become the legal owner of the goods if they are not redeemed at the end of the six month period.
This can have VAT consequences for the pawnbroker if/when he then sells the goods. In all other cases, the pawnbroker can “realise” or sell the goods, but as he does not legally own them, he has no VAT liability on sale.
At the end of the loan period, the customer can redeem his goods at any time until they are sold by the pawnbroker. The pawnbroker commits an offence under the CCA if he refuses “without reasonable cause” to let the customer have his goods back.
If the customer does not redeem the goods, he must unless specified otherwise be given notice by the pawnbroker of his intention to sell them with details of the asking price. The pawnbroker must then provide written details of any sale, and following payment of the debt from the proceeds of sale, account for any surplus funds to the customer. If there is a shortfall, the amount of that shortfall becomes the debt from the date of the sale.
Whilst pawnbroking is now fully regulated, it appears that the principles have changed very little throughout history.
Current economic trends have however given rise to changes in the type of items pawned. The head of the National Pawnbrokers Association, Des Milligan, reported that one person had recently pawned his Aston Martin for £30,000. On the whole, transactions remain relatively low in value, with jewellery used most commonly as security and approximately 85% of goods being redeemed. The industry seems to have shed its negative image. Customers appreciate that pawnbroking can avoid a spiralling cycle of debt, and enable them to obtain cash quickly, albeit to pay the school fees, keep the bailiffs away, or just to fund a good night out.