Loans to family members and friends – do I need FCA authorisation?

Wednesday, January 29th, 2020

A simple loan to a family member or friend may seem innocent enough, but these types of loans will almost certainly fall under the Consumer Credit Act 1974 (CCA), the consequences of which are:

  1. the lender may need authorisation to make the loan from the Financial Conduct Authority (FCA); and
  2. the loan agreement must comply with the regulations set out in the CCA.

FCA authorisation will be required, unless:

  1. the loan falls under one of the exemptions set out articles 60C to 60H of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO); or
  2. the loan is not made “by way of business”.

RAO Exemptions on loans

The most commonly used RAO exemptions are:

  1. the Business Purpose Exemption– which provides that the FCA does not regulate loans of over £25,000 if the agreement is entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower; and
  2. the High-Net Worth Exemption – which has three elements:
    1. the borrower is an individual;
    2. the loan agreement is either (1) secured on land or (2) provides credit of over £60,260 for purposes other than the “renovation of a residential property” or “to obtain or acquire property rights in land or in an existing or projected building”; and
    3. the borrower has signed a statement that confirms (1) they are happy to waive the protections offered by the CCA and (2) their net income for the previous financial year was not less than £150,000 or their net assets total not less than £500,000

“By way of Business”

If none of the RAO exemptions apply, the lender may still proceed without FCA authorisation if they are not lending “by way of a business” as defined in the Financial Services and Markets Act 2000. The FCA handbook offers some guidance as to the factors to consider when determining if the loan is made by way of a business – https://www.handbook.fca.org.uk/handbook/PERG/14/5.html

The Court of Appeal considered whether or not a lender had been lending by way of a business in the case of Helden v Strathmore Ltd [2011] Bus LR 1592. The Court found that, in this case, the lender had indeed lent by way of business. In making this decision, the Judge considered the following factors:

  1. the lender had made a number of substantial loans;
  2. the loans were made over a period of years with some regularity;
  3. substantial sums were lent;
  4. the loans were made with a view to profit;
  5. the friendship between the lender’s directors and the borrower grew from their business relationship;
  6. the loan arrangements were often formal and secured;
  7. the loans were part of a chain of similar transactions by the lender; and
  8. the lender was a limited company with commercial objects.

If you are considering lending to a family member or friend, we would suggest you take specialist legal advice. A member of our Corporate & Commercial Law Team can be contacted on 0207 228 0017 or info@hanne.co.uk

This article does not constitute legal or other professional advice or a professional opinion of any kind nor does it give rise to a solicitor/client relationship. If you require specific legal advice on the matters contemplated by this article, please contact a member of our Corporate & Commercial Law Team. 

Loans between friends - get legal advice from Alex O'Leary of Hanne & Co's London-based Corporate & Commercial Law Team

Alex O’Leary is a solicitor in Hanne & Co’s Corporate & Commercial Law team