The current law has been criticised by the Law Commissioner Stephen Lewis as “archaic” Victorian legislation which is "outdated, inflexible, costly and unduly complex".
Experts suggest new regulation and the creation of a register of assets would lead to more transparency in the market which would eventually attract larger banks to get involved.
Currently loans against assets such as art or cars are regulated by the 1878 Bills of Sale Act and a subsequent amendment. Now the Law Commission plans to repeal the Bills of Sale Act and instead proposes the Goods Mortgages Act.
This act could eventually lead to the formation of a searchable electronic art register of assets that are borrowed against.
The Law Commission this month published a report into the act and has made a series of recommendations with plans to introduce the legislation next year. It could come into force by 2019. According to Lewis and other experts the costly and long-winded regulation under the Bills of Sale Act has put off many lenders from entering the art lending market.
Vibrant American Art Lending Market
Currently only small specialist lenders operate in the sector in the UK. Under the US law of UCC (Uniform Commercial Code) there is a vibrant art lending sector in the States.
But experts now predict the changes proposed in the UK will lead to the growth in activity here and it could even pave the way for interest from the major banks into the UK market.
At a seminar hosted by art-focused law firm Boodle Hatfield in London on September 19, experts argued for the need for reform.
Harco van den Oever, founder and chief executive of fine art finance firm Overstone, said: "There is a dramatic need for people to access liquidity. It is not a luxury to be able to borrow against your assets, it is a need."
Register of Assets is “crucial”
However, the expert panel also warned that the key to the opening up of the lending market is the creation of a register of assets that have been lent against.
Oever added: "The register needs to start happening now. It is crucial."
Luke Dugdale, partner at art advisory firm Cadell & Co, said: "The big banks are not willing to lend in this market. If we were able to have a register then it would encourage new lenders and transparency."
The Law Commission acknowledged in its report: "We see benefits in an electronic register of security interests. We recommend that there should be a regulation-making power to allow for this."
Tim Maxwell and Rudy Capildeo of lawyer Boodle Hatfield said in the US the art lending market is estimated to be £6bn, with the potential to grow to £20bn.
Capildeo said that as well as a proposed register in the UK, the creation of "a self-imposed code of practice" would also enable the lending sector to grow here.
The regulations relate to individual owners of assets or those held in trust. But it does not include assets owned by companies or incorporated vehicles.
The report focused on problems with the rise in the number of so-called logbook loans, which allow owners to borrow money using their car as collateral, which has soared over the past decade. However, the act also covers other loans secured on goods such as paintings or objects.