Lending Money: A Regulatory Minefield

Monday 20 May 2019

If you lend money to a friend, business contact, or relative, you could potentially be facing a criminal conviction, a hefty fine, and the prospect of being unable to recover any of your money if you are found to be carrying out a “Regulated Activity” in breach of the Financial Services and Marketing Act 2000 (FSMA).

The key here is to establish if you are lending to a consumer and doing so “by way of business”.

The legislation

The legislative framework is complex and derived from FSMA, the Consumer Credit Act 1974, and the Financial Services and Markets Act 2000 (Regulated Activities Order) 2001 (RAO).

The RAO contains a long list of financial services which are “Regulated Activities” and includes consumer credit agreements, and lending secured against a residential property (a regulated mortgage).

If you are carrying out a Regulated Activity “by way of business” you will need to be authorised by the FCA, which involves an onerous and expensive process unlikely to appeal to most people who don’t provide financial services professionally.

Am I lending to a business or a consumer?

The key to establishing this is to consider not only who the borrower is, but what the purpose of the lending is.

If you lent £5,000 to a friend from the pub so they could buy a new road bike, the friend would be defined as a consumer.

However if you decide to lend the money from your company to their company, so that they can buy the bike, it is likely that you will be providing the friend with consumer credit if you know that the purpose of the loan is to fund your friend’s purchase of the bike.

Am I lending “by way of business”?

In reality many one-off loans, despite technically being a loan to a consumer, will not be made by way of business, such as the bike loan above (probably).

The key here is to consider if there is a commercial element to the loan.

This is very much a grey area where the circumstances of each loan will be considered on a case by case basis, so potential lenders should be wary of claiming that the loan is not by way of business, if there is any form of commercial element to the lending.

Following the 2011 case of Helden v Strathmore, a Court will consider eight questions when considering if a loan has a commercial element involved (and is therefore made by way of business):

1. How many loans has the lender made?
2. How regular has the lending been and over what timespan?
3. How large are the sums of money involved?
4. Were the loans made with a view to profit?
5. Did any friendship between the lender and borrower pre-exist the lending?
6. Are there formal Loan Agreements? Have they been professionally drafted?
7. Is the loan part of a chain of similar transactions?
8. Was the loan made directly by an individual or via their company?

Therefore even when lending to family members, there may be sufficient commerciality to the loan for a Court to find that it is made by way of business.

What can I do?

Even if the loan is commercial there are still some quite specific exemptions within the RAO a lender could rely on (most notably relating to the total charge of the credit to the consumer).

However, whatever the circumstances, if you are considering lending to an individual in any way that could be considered commercial you should seek appropriate advice to ensure that you don’t break the law and that you don’t lend money that you might not be able to recover because the loan is found to be invalid.