The High Net Worth Individuals Exemption
The Mortgage Credit Directive, which was introduced as of March 2016, has limited the availability of the "HNWI exemption" for consumer credit agreements. The effect is that loans which previously fell within the exemption may no longer do so, and the lender must now be authorised before it can enter into such loans. We detail below the changes and those loans which will no longer be exempt.
1. What is the HNWI exemption?
Article 60H(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 as amended ("RAO") sets out the exemption for consumer credit agreements entered into with high net worth individuals (the "HNWI exemption").
The effect of this exemption is that those consumer credit agreements to which it applies shall not be a regulated agreement and as a result the lender (or owner under a consumer high agreement) does not need to comply with the Consumer Credit Act 1974 requirements.
In order for the exemption to apply the borrower must declare that they relinquish the protection and remedies available if the agreement were to be regulated as a consumer credit agreement, and obtain a statement of high net worth signed by the lender (or owner) or an accountant confirming that the borrower (or hirer) is a natural person who:
- earnt, net of national insurance contributions and income tax, no less than £150,000 during the previous financial year; and/or
- throughout that year held net assets of not less than £500,000, excluding items such as a primary residence and pension contributions.
The above requirements have not changed.
2. Changes to the HNWI Exemption for certain loans
The HNWI exemption was amended when the Mortgage Credit Directive 2014/17/EU ("MCD") was implemented as of 21 March 2016.
Prior to the implementation of the MCD, the HNWI exemption applied to credit agreements with individuals, where it was either secured on land or was for a loan exceeding £60,260. However the MCD introduced two restrictions to the HNWI exemption, which means that the HNWI exemption is not available if either:
2.1 the loan exceeds £60,260, the credit agreement is entered into on or after 21 March 2016, and the purpose of the loan is either the renovation of residential property or to acquire or retain property rights in land or an existing or projected building; and/or
2.2 the credit agreement is entered into on or after 21 March 2016, the credit agreement is either secured on land or to acquire or retain property rights in land or an existing or projected building (i.e. it is of a type described in Article 3(1) MCD), and the credit agreement is:
(a) not excluded from the scope of the MCD by Article 3(2) MCD,
(b) not a bridging loan as defined by Article 4(23) MCD, or
(c) not a 'restricted public loan' (as defined in Article 60HA(3) RAO) for which timely pre-contractual information on its main features, risks and costs has been provided, and where any advertising is fair, clear and not misleading.
In broad terms, as of March 2016 the HNWI exemption may no longer be available in respect of loans for which the purpose is either the renovation of residential property or to acquire or retain property rights in land or an existing or projected building. This is true whether or not the loan is secured by land.
In addition to new loans, lenders should take note of this change of law in the context of reviewing their portfolio of existing loans. Any variations or renewals of an existing loan would require the new criteria for the HNWI exemption to be satisfied, so lenders should not automatically assume that a previously unregulated credit agreement can continue to be afforded such status.
4. How Fieldfisher can help
Our team can advise on whether an application for FCA authorisation is needed and how this can be done. We can also consider your existing arrangements and suggest alternative approaches to ensure the new regime is optimally complied with.
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