Regulatory Spotlight - FCA permissions as an unregulated lender

I am an unregulated Lender – Do I need FCA permissions?

The understandable assumption to many market participants is no, given they are an unregulated lender, no FCA permissions or regulatory approval is required. However, things are not always as they seem, as Matt Pentecost and Lorraine Johnston explain.

Many specialist lending sectors are subject to regulatory oversight in one form or another, but sometimes those that ostensibly fall outside of the regulations can be inadvertently tripped up. Care needs to be taken to ensure products or activities do not stray into the regulated arena, or if they do, the relevant entity holds the right permissions. The FCA has also recently reminded firms to regularly review their regulatory permissions.

Ashurst's Speciality Finance team has worked on several transactions over the course of the last twelve months or more where counterparties have been unaware they are currently not in compliance with their regulatory obligations. Specifically this is relatively commonplace where the lending and servicing obligations in relation to a loan are split between two group companies, a common feature of the speciality finance market. Whilst the knowledge that a company is not complying with its regulatory obligations often comes as a surprise to the board, there are a number of solutions available.

The particular confusion under discussion in this note arises from the gap between unregulated loans secured by way of mortgages over a property, and the Consumer Credit Act requirements. In some instances, even if the product is unregulated a servicer may be required to obtain authorisations under the current FCA guidance. In this note we set out some of the questions and considerations specialist lending market participants should look at in order to ensure compliance at all times with their regulatory obligations.

How do I categorise my loans?

Hopefully this will be one of the first questions you have asked when considering the product from the outset. As a reminder, a regulated mortgage contract is defined as a contract which at the time it is entered into satisfies the following conditions:

1. the contract is one where a lender provides credit to an individual or trustees (the "borrower");
2. the contract provides for the obligation of the borrower to repay to be secured by a mortgage on land in the UK (meaning over immoveable property and excluding security over (for example) shares, guarantees and other liquid assets); and
3. at least 40% of that land is used or is intended to be used as or in connection with a dwelling.

What permissions do I need in relation to regulated mortgage contracts?

There are six regulated mortgage activities set out in the Regulated Activities Order ("RAO"), requiring authorisation or exemption if they are carried on in the UK, the most common being:

1. entering into a regulated mortgage contract as lender;
2. administering a regulated mortgage contract (i.e. notifying a borrower of interest rate changes and / or collecting monies owed under a facility); and
3. agreeing to carry on any of the above.

These activities only require authorisation if they relate to a regulated mortgage contract and there may be a relevant exemption (for example, the corporate borrower exemption). Again, it is expected that this analysis will have been done already for any loans.

So if my assets do not consist of regulated mortgage contracts I don't need authorisation, right?

Herein lies the incorrect assumption. The answer is not quite. Some loans which do not fall into the regulated mortgage contract definition, will however fall into the consumer credit regime, and further analysis is required where a specialist lender makes loans which are not regulated mortgage contracts, but which are made to individuals. The definition of “credit agreement” as set out in RAO is wide and encompasses any agreement whereby any person provides credit of any amount to an individual.

Like the regulated mortgage regime, there are carve outs under the consumer credit regime, including setting out where a credit agreement is an exempt agreement.

Again, it would be easy to assume that if a loan were an exempt consumer credit agreement, you would be acting outside the regulatory perimeter, but that is not the case. The consequence of a credit agreement being an exempt agreement is that the agreement is not a “regulated credit agreement”, but is still a “credit agreement". Consequently there are ramifications around which permissions a specialist lending group may need. The regulated activities of debt administration and debt collection are still applicable to credit agreements and the group company servicing this type of agreement may well need certain FCA permissions, depending on the corporate structure involved.

Are there any carve outs?

Yes, if you are the lender of record (i.e. the servicing obligation is not performed by a separate group company) under such an agreement you do not need to seek this permission. There is an exclusion that means that debt collection and debt administration permissions are not required by the entity lending the loans.

However, in many corporate structures, lending and servicing is bifurcated. It is this splitting of roles within a corporate group which may well mean that the group is not in compliance with regulation, notwithstanding their asset class being unregulated.

What should I do?

Specialist lenders, and those funding specialist lenders, should consider the points raised in this note early in the process of structuring a transaction, and in the meantime may like to review their operations to ensure they are not inadvertently the wrong side of the regulatory line – if they are, there may be wider ramifications for the business and is an area which the regulator is now clearly focused on. For example, they may well have compliance with law and regulation representations and undertakings in their corporate and financing documentation.

If you have any concerns we would recommend speaking to your friendly lawyer, who should be able to walk you through the technical legalities, the risk to the business and the solutions available. Before embarking on a new transaction, be it equity or funding (of whatever form), ask for a regulatory analysis or summary that can give you comfort around your current and proposed structure. There are several possible ways of rectifying this structural requirement and Ashurst has worked on several different solutions, each tailored to the needs of the parties involved. These have included engaging regulated third parties to take on the certain roles which require authorisation, helping the specialist lender seeking authorisation itself, as well as formalising organisational solutions. We would recommend considering these as early on as possible to ensure they do not become a gating item on an otherwise exciting growth journey.