Jackson v Ayles & Ors

Mortgage lending may be carried on by way of business even where it forms only a small part of a lender’s wider enterprise. Relevant indicators include repeated lending, commercial security, investigation and negotiation of transactions, and lending for profit.

Where unauthorised lending is a regulated activity, the agreement is unenforceable under Financial Services and Markets Act 2000, section 26(1). Relief under section 28 requires the court to consider whether the lender reasonably believed that the general prohibition did not apply. Ignorance of the legislation cannot establish the necessary belief, and an experienced businessman’s failure to obtain available legal advice may make any such belief unreasonable. The failure to satisfy section 28(5) is a weighty factor against enforcement.

The applicant, Melissa Jackson, trustee in bankruptcy of Stephen Anthony Ayles, sought possession and sale of the respondents’ matrimonial home. She challenged the enforceability of a secured loan made by Trevor Pumphrey, alleging that the lending breached the general prohibition in the Financial Services and Markets Act 2000.

A separate challenge to a later second charge, based on its having been granted between presentation of the bankruptcy petition and the bankruptcy order, was conceded shortly before trial. The central issues were whether the Weymouth Loan was a regulated activity carried on by way of business and, if so, whether it was just and equitable to permit enforcement.

1. The court held that Mr Pumphrey’s lending was carried on by way of business. The relevant activity could form part of a wider business without being the lender’s only or principal business. The court focused on the lender’s activities and considered the commercial origin of the relationship, advice sought about private lending, use of security documentation, repeated lending over several years, lending to 14 individuals and companies, the desire for profit, and interest rates above market rates.

2. Mr Pumphrey was unauthorised and had carried on a regulated activity in the course of his wider business. The Weymouth Loan was therefore unenforceable under section 26(1) of the Financial Services and Markets Act 2000.

3. Section 28(5) required consideration of both a subjective question, whether the lender believed that he was not contravening the general prohibition, and an objective question, whether that belief was reasonable. Ignorance of the existence of the prohibition could not amount to the necessary belief. In any event, it was unreasonable for an experienced and financially sophisticated businessman, who could obtain legal advice and chose not to do so, to believe that the legislation did not apply.

4. The court weighed the parties’ sophistication and experience, the borrower’s lack of financial expertise, the lender’s calculated risk and high returns, the absence of profit to the borrower, the likely effect of compound interest, and the lender’s other possible remedies. The failure to satisfy section 28(5) was a weighty factor against relief. The circumstances relied on in favour of enforcement did not outweigh it.

5. The court concluded that enforcement was not just and equitable. The discretion under section 28 was therefore not engaged. If it had been engaged, the court would not have exercised it in favour of Mr Pumphrey. The Weymouth Loan was declared unenforceable, and the parties were invited to draw an order.