The judgment in the recent high court case of Jackson v Ayles and another  EWHC 995 (Ch) (23 April 2021) is a stark reminder how easy it can be to fall foul of the FCA’s regime and the serious consequences of doing so.
Under section 19 Financial Services and Markets Act 2000 (FSMA) a person is not permitted to carry on a regulated activity unless they are authorised by the FCA or they are an exempt person (e.g. by way of an appointed representative arrangement with an authorised person). This is often referred to as the general prohibition. The activities which are regulated by the FCA are set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO). It should be noted that a breach of the general prohibition is a criminal offence under FSMA and arrangements entered into can be unenforceable, as such, the consequences of getting it wrong can be significant.
However, an activity will only be caught by the regime if it is done “by way of business” (s.22 FSMA). This is so that certain arrangements where it is clear that they are not done by way of business e.g. a parent making a loan to a child to help them buy a house, are not caught. The fact that the parent takes a charge over the property to secure the loan and may or may or not charge interest should not alter the position. Unhelpfully, the position is not always so clear cut. By way of example a friend makes a loan to another friend and takes a charge over their property to protect their interest; subsequently a friend of a friend then makes an approach for a loan. At which point is the activity considered to be undertaken by way of business?
The FCA provides some guidance on the sorts of things that firms and individuals should be considering when determining whether their activities are done “by way of business”. The guidance is intended to assist individuals and firms in making a determination and each instance needs to be considered on a case by case basis. The guidance identifies a number of factors which should be considered. Ultimately it is a question of judgement that takes account of several factors (none of which is likely to be conclusive). These include the degree of continuity; the existence of a commercial element; the scale of the activity and the proportion which the activity bears to other activities carried on by the same person but which are not regulated. The nature of the particular regulated activity that is carried on will also be relevant to the factual analysis. Of particular note is that the FCA guidance also states that an activity which is undertaken on a single occasion can (in the right circumstances) constitute a regulated activity. Quite often the assumption is made that if something is done on a one off basis, it cannot be considered to be done by way of business.
The recent judgment in Jackson v Ayles and another  EWHC 995 (Ch) (23 April 2021) sends a very clear message that the FCA’s general prohibition should always be considered.
In this case, an application was made by a trustee in bankruptcy for possession and sale of the bankrupt’s matrimonial home. However, there was a charge registered on the property in favour of an individual (Mr Pumphrey). As part of the application, the trustee sought a declaration that security held over the property by Mr Pumphrey was unenforceable as the loan that was entered into was in breach of the FCA’s general prohibition. The argument advanced was that the loan and charge taken over the matrimonial property fell within the definition of a regulated mortgage contract and entering into regulated mortgage contracts as a lender is a regulated activity under the RAO.
The point that was considered by the court was whether or not the arrangement between the bankrupt individual and Mr Pumphrey was entered into by way of business. Mr Pumphrey argued that he made the loan as a friend and accordingly, did not meet the by way of business test. The judge considered all the facts of the case and noted:
- Mr Pumphrey on his own evidence said that he had sought advice from a lecturer of Law at Kingston University about “private lending”
- Mr Pumphrey had advanced several loans to the bankrupt and his wife over the years
- whilst the individuals knew each other, any relationship arose out of commercial dealings and not a prior friendship
- The loans were made with a view to profit
- Mr Pumphrey had made a number of loans over the years with some regularity (Mr Pumphrey had loaned in excess of £3.5m to 14 individuals and companies since 2005)
- All the loans made had entitled Mr Pumphrey to the receipt of interest in excess of market rates
Taking all of the above factors into consideration, the Judge found that Mr Pumphrey had carried on the regulated activity of entering into a regulated mortgage contract as lender by way of business. The Judge conceded that whilst Mr Pumphrey was not aware of the requirements under FSMA, he had not taken reasonable steps to inform himself of the legislation and ignorance is an insufficient basis for a person to contend that they have not contravened the law. The Judge cited Lord Neuberger obiter remarks on appeal against the judgment of Newey J ( EWCA Civ 542):
People who carry on regulated activity and are ignorant of the law, even if reasonably so, should be more at risk because they are more of a danger to the public.
This case is a salutary reminder of the need to consider the scope of FSMA and not to push the envelope too far why claiming that an activity is not done by way of business. Whilst clients are understandably costs conscious, investing time up front can save a lot of pain further down the line.
The outcome of the judgment was the loan provided by Mr Pumphrey was unenforceable.
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