The unintended regulated mortgage contract
By AdminWhat happens if an unregulated lender offers a regulated mortgage contract to its client? Clive Whitfield-Jones, Solicitor Director Jeffrey Green Russell Limited Solicitors explains more…
An unauthorised lender lends Mr Brown £500,000 for a 6 month term, upon the security of a first charge over a house he owns. Mr Brown has assured the lender that the house is let to unrelated tenants; it is a condition of the loan agreement, as stipulated by the FSA, that the house is not to be occupied by the borrower or any related person. In fact, Mr Brown’s sister, recently estranged from her husband, is living in the property temporarily. Mr Brown defaults on the loan.
Can the Lender enforce the loan and security for it?
If at least 40 per cent of the property was occupied by Mr Brown’s sister at the date of the loan agreement, the lender has entered into a regulated mortgage contract (“RMC”) (see Article 61 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001). Entering into an RMC is a regulated activity under FSMA if it is done by way of a business (section 22).
There are arguments available to the lender that unintentionally entering into a one-off RMC is not done by way of a business even if the lender is in the business of lending (see article 3A(1) of the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001; the FSA’s guidance at PERG 1.6.5(2), 2.3.2 and 4.3.3; and Helden v Strathmore Ltd [2011] 1 BCLC 45 and [2011] 2 BCLC 665).
However, if on the facts and the law, the true analysis is that the lender entered the RMC in the course of a regulated activity, the RMC is only enforceable to the extent that a court may be persuaded that enforcement is just and equitable (sections 19, 26(1) and 28(3) of FSMA).
Mr Brown is obliged to repay the capital in any event (FSMA section 28(7)) but enforcement of the security and recovery of interest and other charges are in the discretion of the court.
What should the lender do?
If the lender is authorised under FSMA for other activities, its authorisation may be jeopardised by its conduct in relation to an unintended RMC. The FSA requires authorised entities to take all reasonable steps to establish whether a mortgage will be an RMC before it is granted (MCOB 1.6.3R).
Where an authorised entity only realises during the course of an RMC that it is an RMC, the FSA’s requirements for an RMC are still to be met (at least going forwards, by for example treating customers in arrears in accordance with MCOB 13). The borrower must be informed, as soon as practicable, that it is an RMC and what his rights are in relation to the RMC, including the application or otherwise of the Consumer Credit Act 1974 (MCOB 1.6.4R).
Similar transparency is advisable even where the lender’s business does not depend upon any authorisation under FSMA in order to reduce the risk of prosecution under section 23 of FSMA or under the Consumer Protection from Unfair Trading Regulations 2008 - particularly if the lender’s practices may have resulted in a number of unintended RMCs.
What if the lender has/has not turned a blind eye?
When considering whether to enforce the RMC on the just and equitable ground, the court must have regard to whether or not the lender reasonably believed that it was not entering into an RMC (FSMA section 28(4)(a) and (5)).
The better the lender’s due diligence in seeking to confirm that the actual use and intended use of the property does not fall into the remit of a RMC, the better the prospects of enforcement of the charge and the lower the risks of regulatory action against the lender.