When it comes to the issue of regulation, most people automatically think of FSA regulation, but what about Consumer Credit Act (CCA) regulation? Clive Whitfield-Jones, Partner at Jeffrey Green Russell Solicitors, offers us an overview of the business purpose exemption…

The business purpose exemption

The Consumer Credit Act 1974 (CCA) does not regulate a consumer credit agreement by which the creditor provides credit exceeding £25,000, provided that 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.

Section 189 (1) of the CCA provides that “business” includes “trade or profession”.

The business must be one which is carried on, or intended to be carried on, by the borrower.

Mr. Smith is a director and shareholder of a company which carries on a property development business. Mr. Smith wishes to borrow £500,000 secured by a second charge on his dwelling. Mr. Smith will on-lend the £500,000 to the company to help fund a new property transaction. The business purpose exemption will not apply. The business is being carried on by the company, not by the borrower. The lender should consider whether the high net worth exemption is available.

In exceptional cases, a borrower may make certain types of investment in corporate entities with such regularity that those activities amount to the carrying on of a business by the borrower.

If Mr. Smith were a partner in a traditional unincorporated partnership (such as a firm of accountants or solicitors) and borrowed for the purposes of the business carried on by the partnership, then, in my view, the business purpose exemption should apply. This is because the business of the partnership is carried on by the borrower, in common with the other partners. The exemption would not apply if the business was carried on by an LLP, because the LLP is a separate legal entity.

What is a business?

Section 189(2) of the CCA provides that “A person is not to be treated as carrying on a particular type of business merely because occasionally he enters into transactions belonging to a business of that type”. Case law establishes that a person must carry on an activity, or intend to carry it on, with a degree of regularity or continuity in order for that person to be carrying on a business. One-off or occasional transactions, for example property deals, may not constitute a business. It may well be that an activity must also be carried on with a view to profit in order for it to amount to a business.

There are particular difficulties in identifying when buy-to-let activities constitute a business. This resulted in the introduction of the investment properties exemption under section 16C of the CCA, by the Legislative Reform (Consumer Credit) Order 2008, to exempt buy-to-let mortgages from CCA regulation.

Is there a business?

Where the borrower is already carrying on a business, the borrower should be able to demonstrate the existence of a business infrastructure and documentation, such as financial accounts and bank statements. Where the borrower claims that he or she intends to carry on a business the borrower should normally be able to produce tangible evidence such as a business plan, a business bank account and business notepaper.

If the loan agreement includes a declaration by the borrower, in the prescribed form, that 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 him, the agreement is presumed to have been entered into by him wholly or predominantly for such purposes. This is of evidential assistance to the lender. Failure to include such a declaration or to comply with the requirements of the 2007 Exempt Agreements Order in relation to its form and content is not fatal to the application of the exemption.

The presumption does not arise if the lender, or anyone who has acted on behalf of the lender in connection with entering into the agreement, knows, or has reasonable cause to suspect, when the agreement is made, that the borrower is not entering into the agreement wholly or predominantly for the purposes of a business carried on or intended on by the borrower.

In the next article, we’ll look in more detail at sham transactions in corporate lending.

Clive is the Partner in charge of lender services at Jeffrey Green Russell and has many years of experience in property and secured lending. He has knowledge of property finance including short term lending, buy-to-let finance, mortgage recoveries and receivership. If you'd like to get in touch with Clive you can contact him on 0207 339 3999.