Who the borrower is decides most of it
Entering into a regulated credit agreement as lender is a regulated activity under article 60B of the Regulated Activities Order. A credit agreement is only regulated if the borrower is an individual or what the Order calls a relevant recipient of credit. Between them those terms cover:
- individuals, including sole traders
- partnerships of two or three partners, where not all of the partners are bodies corporate
- unincorporated bodies such as clubs and associations, unless they consist entirely of bodies corporate or are a partnership
A limited company or LLP is neither an individual nor a relevant recipient of credit. That is why lending to companies is usually outside the consumer credit regime, and why a lender with a mixed book of company and sole trader borrowers needs to look carefully at the smaller borrowers.
The business purpose exemption
Article 60C of the Order exempts some agreements that would otherwise be regulated. One of the most used is for credit of more than £25,000 that the borrower enters into wholly or predominantly for the purposes of their business. A declaration by the borrower that meets FCA requirements creates a presumption that the agreement is for business purposes, but the presumption does not apply if the lender, or anyone acting for the lender in connection with the agreement, knows or has reasonable cause to suspect that it is not.
The exemption has conditions and it does not cover everything. Loans of £25,000 or less to a sole trader are not covered by it, and other exemptions in article 60C have their own tests. A lender relying on it needs a process that captures the declaration properly and keeps it on file.
Lending secured on property
If a loan to an individual or to trustees is secured on land in the UK and at least 40 per cent of that land is used, or intended to be used, as or in connection with a dwelling, it may be a regulated mortgage contract even when the money is used for a business. Regulated mortgage lending has its own definitions, exemptions and permissions, separate from consumer credit, and some business loans and investment property loans are carved out on conditions. Bridging loans and second charge lending to individuals are common examples where this comes up.
If any of your lending is secured on residential property, that is one of the first questions to settle.
How you fund the lending
Lending your own money is one thing. Raising money from other people to lend on is another, and it can bring in different parts of the perimeter:
- pooling investors’ money so they share in the returns of a loan book may create a collective investment scheme
- running a platform that matches lenders with borrowers can be operating an electronic system in relation to lending, which is itself a regulated activity
- taking money that is repayable on demand or on notice can raise questions about accepting deposits
- the documents you use to raise the money are likely to be financial promotions
See property and investment schemes and fundraising and investor materials for more on these.
Activities around the loan
A lender that sits outside the perimeter for the lending itself can still pick up regulated activities around it. Collecting or administering debts under regulated credit agreements, for example, are regulated activities in their own right. If you buy or service loans made by others, the same borrower questions apply to those books.
Your marketing is a separate test
Advertising credit can be a financial promotion. If your adverts reach sole traders or small partnerships, they may be promoting regulated credit even if most of your customers are companies. There are exemptions aimed at communications about credit for businesses, but they come with conditions about who the communication is directed at and what it says. How the financial promotion rules work
Common misunderstandings
We only lend B2B, so we are unregulated
Not if some of your business borrowers are sole traders or small partnerships. The legal form of the borrower matters more than whether the loan is for business.
All our loans are over £25,000
The business purpose exemption needs more than a loan size. It depends on purpose and on the way you record it, and lending secured on a home has its own separate rules.
We are fine, so our adverts are fine
The financial promotion test is separate. An unregulated lender can still have promotions that need approval or an exemption.
Our funders are friends and family
How the money is raised, documented and returned can still matter. Informal arrangements are where scheme and promotion questions are most often missed.
When a written opinion helps
A written legal opinion is worth considering when a bank, investor or funding partner asks you to show that your lending is outside the perimeter, when your borrower base includes individuals or small partnerships, when any lending is secured on residential property, or when you raise money from others to lend. The opinion applies the rules above to your actual documents and process, which this page cannot do. How written opinions work
Primary sources
- Financial Services and Markets Act 2000, section 19
- Regulated Activities Order, article 60B: regulated credit agreements
- Regulated Activities Order, article 60C: exempt agreements
- Regulated Activities Order, article 60L: interpretation, including relevant recipient of credit
- FCA Handbook, PERG 2: authorisation and regulated activities
- FCA Handbook, PERG 4: regulated mortgage activities