Revolutionary changes to the business of pawnbrokers

The Ministry of Finance and the President of the Office of Competition and Consumer Protection, who are the authors of the draft law of 13 October 2022 on consumer pawn loans, with the number UD 362 referring to information obtained through the monitoring of the financial market conducted by the Office of Competition and Consumer Protection, mention that the services rendered by pawnshops have seen a material gain in popularity recently. The increased interest in so-called pawn loans – loans against collateral – is a result of such things as legislative changes restricting the granting of short-term loans – with a repayment period of less than 30 days. In effects, consumers find it more difficult to get a small sum of money for a short period. The Covid-19 pandemic has also contributed to a deterioration in the financial situation of a section of the population, thus forcing them to look for other ways to raise the funds they need. In 2020, approx. 1.5 million Poles used pawn services, according to the Union of Entrepreneurs and Employers – ZPP.

The current Consumer Credit Act of 12 May 2011 (Dz. U. – Journal of Laws 2022, item 246, as amended) also applies to pawnbroking business. However, economic operators in pawnbroking sector avoid complying with its provisions by not registering their business in the register kept by the Polish Financial Supervision Authority, as a result of which they do not officially act as lending institutions. In view of the need to safeguard the interests of people who use pawn loans against the exploitation of their disadvantage, the government has proposed a draft law on consumer pawn loans. The aim of the bill is to facilitate access to finance for people who are not creditworthy or do not have enough collateral to be granted a bank loan. A pawnbroker loan is a type of loan that is obtained against valuable items such as jewellery, white goods, artwork or cars. If the loan is not repaid, the pawned item becomes the property of the pawnbroker and is sold.

The provisions contained in the bill are intended to comprehensively regulate the business of pawnshops, protecting consumers’ interests against inflated costs of loans and guaranteeing correct settlement of the amount obtained from sales. The aforementioned draft act is to ensure that entrepreneurs comply with its provisions by such measures as introducing the requirement to be entered in the register of entrepreneurs pursuing pawnbroking business, kept by the Polish Financial Supervision Authority, if such activity coincides with the statutory definition. The bill defines pawnbroking as a business consisting in concluding pawn loan agreements and selling the object of the pledge. The proposed construction focuses on material premises and not on formal ones as before. An entrepreneur who actually performs pawnbroking business will be recognised as such, even though not officially registered.

In addition to the concept of a pawn loan, the proposed law introduces a number of other definitions, including:

• Pawnbroker Loan Agreement – an agreement whereby the sole trader undertakes to transfer an amount of money to the consumer and the consumer undertakes to repay the total amount of the loan within a specified period and to provide security by submitting a pawn.
• Pawn pledge – security for the performance of a pawn loan agreement by transferring ownership of the pledged object from the conclusion of the loan agreement until the claim is repaid to the pawnbroker, transferring back to the consumer the ownership of the pledged object in the event of repayment of the claim, authorising the disposal of the pledged object in the event of failure to repay the claim on time.
• Object of pledge – a movable item that is used as security for a loan to a consumer.

The provisions of the proposed act commit entrepreneurs to provide information on the contract being concluded, on a durable medium, at the pre-contractual stage, that is before the pawn loan agreement being concluded. This is to ensure that the consumer has a full understanding of the terms of the contract and to prevent pawnbrokers from impacting the way in which the collateral object is assessed and raising the cost of the contract.

Under the proposed provision, a pawn loan agreement is to be made in writing, understandable and unambiguous to the consumer, and the period for which it is to be concluded is to be no shorter than 7 days. The Pawn Loan Act is also to regulate the determination of the costs of the agreement, specifying the maximum non-interest costs, costs in the event of extension of the repayment period and the rules for the sale of the pledged item. In order to ensure that a fair valuation of the pledged item is carried out, it is considered advisable to commit entrepreneurs to sell such an item by way of an auction available to the public – available to an unlimited number of people on online auction services such as OLX or Allegro. Such an obligation would apply to loans greater than PLN 300. The proposed law provides for the return of the surplus amount from the sale of the object to the consumer, less 20%. The sale of a pledged item in violation of the Act is to be punishable by a fine of up to PLN 100,000, and the same fine will be imposed if the entrepreneur settles with the consumer the surplus obtained for the sold item in violation of the Act.

The Polish Financial Supervision Authority, as the competent authority to supervise the financial market, is to be empowered to impose fines on rogue traders who fail to comply with the provisions of the proposed law.

• Conducting pawnbroking business without being entered in the register of pawnbrokers – Fine of PLN 500,000
• Breach of advertising rules requiring the trader to label advertisements with the wording ‘pawn shop’ or ‘pawnbroking business’ – Fine of PLN 500,000
• Conducting a sale of an object of pledge without conducting an auction addressed to an unlimited group of entities, unless the value of the monetary benefit provided to the consumer does not exceed PLN 300, organised via an ICT system – Fine of PLN 100,000
• Determination of the starting price of the object of pawn offered for sale, higher than the value established in the pawn loan agreement – Fine of PLN 100,000
• Making wrong settlements with the consumer by way of illustration: not returning to the consumer the surplus obtained from the sale of the pawned item – Fine of PLN 100,000

The Pawn Loan Bill 2023 is a proposal that is expected to facilitate access to credit for people who, for various reasons, are unable to obtain a traditional bank loan. The new provisions will contribute to the development of the pawn lending sector and increase competition in the financial market, which may reduce the cost of borrowing for consumers. Due to the continuous increase in the public’s demand for the services provided by pawnbrokers and the availability and widespread presence of this type of service on the market, it seems appropriate to regulate key issues for consumers related to the pawn loan agreement.

In the main, this is intended to protect the interests of clients and to ensure state supervision of this type of activity and the elimination of the so-called ‘grey market’.

Authors:

Jarosław Basiura, legal assistant

Jarosław Rudy, Attorney at Law