Does an occasional consumer credit transaction require FCA authorisation?
A difficult point of consumer credit law has for some years been the extent to which a one-off or occasional series of transactions may be subject to the need for licensing or authorisation. The issue arose in the recent High Court case of Newmafruit Farms Ltd v Pither  EWHC 2205.
Before consumer credit regulation was taken over by the FCA on 1 April 2014 the position was relatively straightforward, in that section 189(2) of the Consumer Credit Act (“CCA”) provided as follows:
“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.”
Goode’s Consumer Credit Law and Practice says at paragraph 27.15:
“…regularity of activity is necessary before that activity can be regarded as a business activity so as to attract the licensing provisions. Thus a person making occasional bridging loans for his clients or customers would not on that account alone be carrying on a consumer credit business”.
However, since 1 April 2014 the position has been governed by the rather more complex provisions of the Financial Services and Markets Act 2000 (“FSMA”) and raft of accompanying Regulations, which essentially provides that a funder requires FCA authorisation before entering into regulated agreements “by way of business”.
The FCA’s Perimeter Guidance Manual, while not binding on the courts, provides as follows at PERG 2.3.3G:
“Whether or not an activity is carried on by way of business is ultimately a question of judgment that takes account of several factors (none of which is likely to be conclusive). These include the degree of continuity, the existence of a commercial element, the scale of the activity and the proportion which the activity bears to other activities carried on by the same person but which are not regulated. The nature of the particular regulated activity that is carried on will also be relevant to the factual analysis.”
In the Newmafruit case the creditor was not involved in financial services at all but was a a farm business which had made some loans, and the issue before the court was whether there could be summary judgement of part of the claim relating to loans to an individual which may well have been regulated. The High Court decided that a broad test was to be applied:
“This means that it is not necessary for Mr Pither to show that the exercising of lender’s rights under regulated agreements represented for Newmafruit the carrying on a business in its own right. The test is the looser one of whether the activity of exercising lender’s rights under regulated agreements was carried on by Newmafruit “by way of business” . The latter test could be (though would not necessarily be) satisfied even if the activity were undertaken “on an isolated occasion” only”.
This case has been widely reported and commented on because it highlights the fact that a business which may not be involved in financial services at all may require FCA authorisation when making loans which fall within the consumer credit regime.
The main interest for funders lies in the fact that it confirms that the test for authorisation by the FCA under the FSMA is broader than that under the previous licensing provisions of the OFT governed solely by the CCA.
An example is whether a funder which operates primarily in the consumer hire market is entitled to carry out an occasional hire purchase transaction. Under the old law, an occasional hire purchase transaction would not require a consumer credit licence because of the definition in section 189 (2) of the CCA set out above.
However, under the stricter terms of the FSMA it would appear that this case confirms that even a “one-off” regulated hire purchase transaction requires FCA authorisation with full permission as a consumer credit firm. The absence of such authorisation involves the commission of a criminal offence and renders the Agreement unenforceable.
The other point worthy of note is that the judge set out in some detail the changes in the relevant legislation between licensing under the old CCA regime and authorisation under the FSMA regime, and in describing this “labyrinth of provisions” he highlighted the difficulties which have arisen as a result of importing what were stand-alone provisions into the much broader financial services regulatory regime which already existed in the FSMA; see paragraphs 83–90 here.