And so it was in a recent court of appeal case. Mr and Mrs Ayles undertook property development but were unable to obtain finance from a conventional lender. So they went to a private source, and this is where IFAs might take prick their ears and put down their garden forks.
In 2008, the developers borrowed money from Mr Pumphrey to fund the construction and development of a property and agreed to pay him monthly compound interest, with repayment being secured against the property. When the property was sold, Mr Pumphrey received the return of his capital and £41,273.24 in interest and there was a shortfall of £6,563.16.
In 2010, Mr and Mrs Ayles borrowed money from Mr Pumphrey to fund the construction and development of a second property. Again, they agreed to pay monthly compound interest and repayment was secured against the property. When the property was sold, Mr Pumphrey received the return of his capital and £105,103.23 in interest; Mr and Mrs Ayles received £7,305.53.
In 2013, Mr and Mrs Ayles again borrowed money from Mr Pumphrey to purchase a house in Weymouth which was intended to be their family home (the Weymouth Loan). Once again, they agreed to pay monthly compound interest and repayment was secured against the property by way of a first legal charge. It was common ground that the loan agreement and charge was a ‘regulated mortgage contract’ for the purposes of FSMA 2000.
But in 2016, Mr Ayles was made bankrupt. Subsequently, his trustee in bankruptcy applied for a declaration that Mr Pumphrey’s charge over the Weymouth Property was unenforceable because it was entered into by him as lender and he wasn’t authorised as a lender by the FCA.
Mr Pumphrey argued that this act did not apply because he did not lend money to Mr and Mrs Ayles ‘by way of business”.
What did the court decide?
Although lending money was not Mr Pumphrey’s only business and formed a small part of his overall enterprise, the making of the loan was nevertheless an activity carried on by Mr Pumphrey by way of business. On his own evidence, Mr Pumphrey had sought advice from a law lecturer about ‘private lending’ and had obtained a charge template for the purpose of securing his lending to ensure that he got his money back. Since 2005, he had lent more than £3.5m to 14 different individuals and companies and charged interest in excess of market rates. The relationship between him and Mr and Mrs Ayles arose out of commercial dealings (and not a prior friendship), he had made several loans to them over many years and the lending was not built on trust.
Unsurprisingly, he didn’t get his money back, and, if there was any justice in financial services for all the pain we who are authorised suffer, he would be prosecuted for the criminal offence of trading without a licence. Some chance of that!
Lesson to learn?
Don’t lend money privately – you may find that recovery, is no longer enforceable.