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From 21 July 2022 lenders will be able to provide MCD article 3(1)(b) credit agreement on an exempt basis to a UK resident, high net worth individual borrower.

Changes to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), effective, from 21 July 2022, will allow a lender to provide a loan, the purpose of which is to acquire or retain property rights in land or in an existing building (MCD article 3(1)(b) credit agreement), to a high net worth individual (HNW) borrower on an unregulated basis where the borrower satisfies both the HNW borrower conditions specified in rules made by the Financial Conduct Authority (FCA) under Article 60H RAO (HNW Exemption) and a UK residency test.

On or after 21 July 2022, in order to enter into an MCD article 3(1)(b) credit agreement as an exempt credit agreement under the HNW Exemption, the lender will need to ensure that all the formalities specified under the HNW Exemption are satisfied. These include:

  1. that the amount of the loan is for more than £60,260,

  2. obtaining a financial statement, in the prescribed form, that the borrower’s assets or income meet the specified thresholds,

  3. the agreement itself including a prescribed declaration, made by the borrower, confirming that the borrower has seen the financial statement and agrees to waive the rights and protections that would otherwise be available to them, and  

  4. obtaining a declaration, made by the borrower before the loan is entered into, which either

    • provides that the borrower is UK resident; or

    • provides that the borrower is treated as present in the United Kingdom (UK).

A borrower is UK resident if:

  1. the borrower is present in the UK on at least 183 days during the continuous period of 365 days ending with the date the agreement is entered into, or

  2. the spouse or civil partner of the borrower, is living with the borrower on the date the agreement was entered into, and is present in the UK on at least 183 days during the continuous period of 365 days ending with the date the agreement is entered into.

A borrower is treated as present in the UK if, on the date the agreement was entered into, the borrower is:

  1. in Crown employment, and is present in a country or territory outside the UK for the purpose of performing activities in the course of that employment, or

  2. the spouse or civil partner of an individual who is in Crown employment, who is present in a country or territory outside the UK for the purpose of performing activities in the course of that employment, and is living with their spouse or civil partner.

References to a borrower being present in the UK on a day are to the borrower being present in the UK at the end of that day.

Following the UK withdrawal from the EU, a number of changes were made to the HNW Exemption for credit agreements however the MCD override remained. This resulted in differing views amongst the industry as to whether or not the amendments meant that the HNW Exemption could be applied to MCD article 3(1)(b) credit agreements. We raised this as a concern with both the FCA and UK Finance last year. We are delighted to see that the Treasury, in recognition of the issue, proposed these legislative changes to remove the MCD override that prohibited the HNW Exemption being applied to MCD article 3(1)(b) credit agreements, albeit with an additional UK residency test, and that they were swiftly approved by Parliament.

For credit agreements to acquire or retain UK property, not secured on property, entered into on or after 21 July 2022, lenders will have the ability to provide these loans to HNW borrowers on an unregulated basis where the borrower meets the HNW & UK residency test. We suspect that for many HNW lenders this will indeed be a welcome development.

If you require further information about anything covered in this briefing note, please contact Grania Baird, Katy Ruddell or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, July 2022

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