Loan Agreements – Do I need Financial Conduct Authority Approval to Make a Loan to a Friend or Family Member?

Published on 1 Sep 2023

It is very common for informal loans to be made between family members and friends but whilst the arrangement might be an amicable one, it is still common for the lender to want to protect themselves to ensure they get their money back. This is usually provided by way of a legal charge over a property – known as a mortgage. In line with this, we get a large number of enquiries to put together short-form loan agreements between family and friends. What is not very well-known is that in certain circumstances, informal loans are still regulated by the Financial Conduct Authority (FCA) which means that a lender would need to be approved in order to provide the loan.

If someone lends money and takes a legal charge as security, if that arrangement is regulated but the lender does not have the necessary approvals, the lender will not be able to enforce the terms of the loan (including the charge), and will also commit a criminal offence.

There are certain exemptions to the legislation that mean family and friends can lend money to one another, and take a mortgage, without falling foul of the legislation. The most common one in this scenario is that the loan in question is not made “by way of business”.

We advise that all individuals wishing to put a loan agreement in place consider the implications of the proposed loan. In order to assess whether a loan is made “by way of business” we recommend that the following matters should be considered:

  • Is the loan to a family member?
  • Has the lender made similar loans to the borrower, or to any other individual, in the past?
  • Does the lender work in a similar financial industry which would give them an unfair advantage over the borrower?
  • Will the lender be taking a charge/security over the borrower’s property?
  • Will interest be charged on the loan?

Although the above is not an exhaustive list, it sets out some of the points which are relevant as to whether the lender must obtain FCA approval in order to provide the loan.

What if I do not draw up a loan agreement?

The usual position on lending money is that a lender can request repayment in full at any time. However, if you do not have an agreement in place, and this is contested, it can take some time to prove this and retrieve the loaned money. Proving that the money was intended to be a loan can be easier in some circumstances than in others. For example, if you sent £5,000 to a friend six years ago and they have been paying you back in monthly instalments since that time, there is a pattern of repayments which would most likely amount to evidence of a loan. Whereas, if you loaned £5,000 to a friend two years ago and you had orally agreed for this to be repaid on the two year anniversary of the loan but they are now refusing, there is no evidence of other repayments to back this up. If a loan is to be paid back in one lump sum payment, especially over an extended period of time, it is advisable to have a loan agreement drawn up to protect your interests.

Every situation is different and must be determined on a case by case basis. We advise anyone intending to lend money to a third party, even if it is to a family member, to obtain legal advice to ensure that they are adequately protected and to ensure that the loan does not breach FCA regulations.

Please contact the Corporate and Commercial Team at Lanyon Bowdler if you would like to discuss a loan which you are considering making.

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