A regulated credit agreement is an agreement between a lender and an individual (or a relevant recipient) where the lender provides credit that does not fall under an exemption. To determine whether entering into a credit agreement qualifies as a regulated activity, the following factors must be assessed:

• The borrower must be an individual or a "relevant recipient of credit," which can include certain partnerships and unincorporated entities.
• The activity must be conducted “by way of business”. The FCA assesses this by a "business test" that considers factors such as the frequency, scale and nature of the activity. Lenders need to be particularly mindful of whether their lending activity is regular or carried out with a commercial element, as this will often bring them within the scope of regulation.
• The agreement must provide “credit”, broadly defined to include loans and various financial arrangements, including but not limited to conditional sale agreements, overdrafts and hire purchases.
• The activity must take place within the UK or be deemed carried out in the UK under section 418 of FSMA. 

Credit agreements exempt from regulation if they meet specific exemption criteria, such as:

• Nature of the agreement (Article 60C, RAO). This exemption may apply if the credit agreement exceeds £25,000 if it is entered into for the purposes of business carried on or intended to be carried on.
• Purchase of land for non-residential purposes (Article 60D, RAO). This exemption may apply where the borrower or a related person to the borrower does not intend to use more than 40% of the property as a dwelling for themselves. This covers many buy-to-let scenarios.
• Nature of the lender (Article 60E, RAO). Credit agreements entered into by investment firms or credit institutions may be exempt from regulation.
• Number of repayments (Article 60F, RAO). If the credit agreement is for a fixed sum repayable within 12 months with no more than 12 repayments, it can be exempt. This exemption is designed to cover short-term lending arrangements.
• Total charge for credit (Article 60G, RAO). This exemption may apply for low-interest rate agreements.
• Nature of the borrower (Article 60H, RAO). If the borrower is a “high net worth individual” with a net income of no less than £150,000 and/or net assets of no less than £500,000 in the previous financial year they may qualify for this exemption. Lenders must obtain a signed declaration from the borrower to rely on this exemption.

Some exclusions under the RAO remove the need for  FCA authorisation when entering into regulated credit agreements as lender. Key examples of these include:

• Arranging administration of the lender’s rights and duties to be carried out by an authorised person.
• Exercising, or having the right to exercise, the lender’s rights and duties for any activity carried on by a local authority (in so far as the credit agreement to which the Consumer Credit Directive does not apply).

These exclusions help avoid unnecessary regulation when credit activities are already supervised or occur under specific conditions.

Two primary exemptions apply under FSMA, allowing entities to enter into regulated credit agreements without FCA authorisation:

• Entities acting as appointed representatives of authorised lenders, provided that they meet specific conditions such as offering interest free loans.

• Special purpose vehicles involved in structured finance transactions may be exempt if they have an agreement with an authorised person to service the loans.

Given the complexity of regulated credit agreements, lenders must carefully assess whether their activities fall within the scope of regulation. They must consider factors such as exclusions, exemptions, and the nature of the borrower. If you're unsure whether your lending activities fall under regulation, get in touch with our team.