Loans Made “by way of business”: A Broad Test

When does a lender lend “by way of business”?   Useful guidance has been given in a recent ruling¹ on when occasional lending by lenders must be authorised by the Financial Conduct Authority “FCA” (and therefore enforceable under the Financial Services & Markets Act 2000 “FSMA”) – even though their primary business may not be financial services.

What’s the issue?

At issue was whether a small number of loans, given on an occasional basis by a lender, were enforceable. This meant determining whether the lender concerned needed the FCA’s authorisation to exercise its rights under regulated consumer credit agreements.  The lender would have to show its lending was not “by way of business” in order to be exempt from the FCA’s authorisation.

In this case, the lender (a fruit farming business) made £1.75m worth of loans to a builder/property developer to enable him to fund various building projects.  In the event, he used most of the funds for other business ventures and to pay off some personal debts – but failed to repay the lender.  The lender therefore took action to recover the loans.

Whilst the High Court gave the lender summary judgment for the majority of the amount owed, the remaining sum (£25,000) was the subject of legal argument surrounding the obligations that apply where an entity lends money on an occasional basis. 

What did the court say?

The High Court had to decide whether the outstanding amount claimed by the lender was due under a “regulated agreement” and, if so, whether the lender was exercising its lender’s rights and duties “by way of business under” under the FSMA. If it was, in the absence of FCA authorisation – the loans would be unenforceable.

“By way of business”

The Court said the test for deciding whether the lender had acted “by way of business” was broad: it simply had to be shown whether the lender was “exercising lender’s rights by way of business”. Even an isolated loan would satisfy this test.

The lender was therefore unsuccessful in obtaining summary judgment for the remaining amount.

What does this mean?

A one off, isolated loan (or a series of occasional loans) by a business is most likely to fall within the provisions of the FSMA, in which case, they will be unenforceable should they remain unpaid. If you are considering making loans to others – even if it is outside of your usual course of business, it is vital to take expert legal advice to protect your interests.

How can we help?

We provide business organisations with expert commercial advice on all their commercial issues.  If you have any concerns about the implications of a loan to a third party, or any other commercial law issues, contact the experienced company solicitors at Herrington Carmichael for specialist advice. 

Please contact Mark Chapman on 01276 686222 or Matthew Lea on 01189 898 155.

¹ Newmafruit Farms Ltd v Alan Pither [2016] EWHC 2205