The unintended regulated consumer credit agreement

The unintended regulated consumer credit agreement


What happens if an unregulated lender offers a regulated consumer credit agreement to its client? Clive Whitfield-Jones, Solicitor Director Jeffrey Green Russell Limited Solicitors explains more…

A lender with a Consumer Credit Act 1974 licence provides a £50,000, six month loan to Mr Green for non-business purposes. The loan is secured by a second charge over a property owned by Mr Green. The property is let to unconnected residential tenants. The current tenancies are due to expire in three months. Mr Brown has assured the broker and the lender that the house is a buy-to-let investment and that neither he nor any person connected with him will reside in the property, as stipulated by a clause in the loan agreement. Accordingly, the lender does not document the loan as a regulated agreement under the CCA. In fact, Mr Green has promised his son, who is returning from abroad in three months’ time, that he can live in the property rent free until he buys his own flat. Mr Green defaults on the loan.

Let’s look at some of the issues and a few arguments that might be deployed…

Can the lender enforce the loan and security for it?

The lender may argue that the intention for the property to be used as a dwelling by a connected person would have to be the shared intention of the lender and the borrower for it to prevent the loan agreement from falling within the section 16C exemption for loans secured on investment properties.

Another argument available to the lender is that they have inadvertently entered into a regulated credit agreement in the honest belief that it is exempt as a result of the borrower’s tenancy intended assurances. It can further be argued that it is not something that the lender has done in the course of a consumer credit business, with the result that the agreement, though regulated, was a ‘non-commercial agreement’ and so was not required to meet the requirements which generally apply in respect of the making of regulated consumer credit agreements. 

If those and any other arguments failed, the lender could only enforce the loan and the security on an order of the court under section 65(1) of the CCA.

What should the lender do?

As an order of the court is required to enforce the security, even if the agreement falls within the investment property exemption (see sections 16C (5) and 126), the sensible course is to explain, in the Particulars of Claim, that, if the arguments mentioned above are incorrect, the agreement is a regulated consumer credit agreement which was improperly executed with the result that an enforcement order is required under section 65(1) of the CCA (see para.7.4 of CPR PD 7B).

What if the broker told the lender that Mr Green might wish to let his son live at the property temporarily?

Arguments would still be available to the lender and it would have to be proved that there was an intention for the property to be used as a dwelling by a person connected with the borrower more than just temporarily. The intention would have to be settled for it to prevent the loan agreement from falling within the section 16C exemption.

However, in this situation there would be a higher risk that the loan agreement was regulated and also a risk that the lender’s culpability, in not meeting the requirements of the CCA when making the agreement, would have an impact on the court’s decision whether not to make an enforcement order (see sections 127, 135 and 136 of the CCA).

What if the lender has no CCA licence at all, intending only to make CCA exempt loans?

If all the lender’s arguments, including those pertaining intent and the fact that the loan was not made in the course of a consumer credit business (which would be strengthened by the fact that the lender’s usual business did not include lending under regulated agreements) were rejected, the lender would have to obtain a validation order from the Office of Fair Trading under section 40(2) of the CCA and then an enforcement order from the court.


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    jean paul

    Is Mr Brown in fact Mr Green? If not, I see no connection.

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    Ray Cohen

    'Related person' is defined in article 61(4)(c) of the Regulated Activities Order as meaning the borrower's spouse, parents, grandparents, siblings, children and grandchildren. An unmarried partner of the borrower whose relationship with the borrower has the characteristics of the relationship between a husband and wife is also included; this can include a person of the same sex as the borrower. Stepchildren, however, would seem to be excluded.

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    gordon bailey

    Would the contract be regulated if the property was let to a step son.

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