Court considers “by way of business” test

The High Court has considered the scope of the “by way of business” test for the purposes of FSMA.  Mr and Mrs A were involved in property development. They took a loan from a Mr P when they were unable to get conventional finance, and the loan was secured on their matrimonial home.

When Mr A was adjudicated bankrupt his trustee in bankruptcy sought possession and sale of the house. Enforcement of the security would mean that no proceeds were available for the creditors of Mr A.

Mr P had made money from manufacturing plastic products and was an early investor in real estate, and received significant rental income from his real estate activities.

The Court had to consider whether the amount of lending Mr P did to individuals and businesses amounted to “a business”.  Mr P asserted it did not, because his main business was manufacturing and property rentals, although he admitted that the loans he made were made with the intention of making a fair profit.

The question was whether Mr P was entering into regulated mortgage contracts by way of business in breach of the FSMA regulated activities prohibition.  If he was, among other things, he would not have been able to enforce the agreement.

The Court considered the earlier case of Strathmore, in which it was concluded that there was unauthorised lending, but the Court considered it was reasonable for the defendant not to have realised it was breaching the general prohibition and therefore that it was not just and equitable to consider the contracts unenforceable.

While Mr P clearly did not view his lending activities as being done as “business” the court thought otherwise. Among other things, he had sought advice (albeit not from a lawyer), had obtained a template for the charge and had made several loans on several occasions.  Although the lending was not his only business, it was business, and therefore, insofar as it was a regulated activity was unauthorised and therefore the relevant loan was unenforceable.  In the circumstances, the court felt that there was insufficient basis to conclude that Mr P reasonably believed the lending was not in breach of FSMA and so there were no grounds for asserting it was just and equitable to allow the loan to be enforced.

Emma Radmore