Land's end: HMT clarifies position on the HNW exemption for article 3(1)(b) credit agreements

HM Treasury has published an Order clarifying the regulatory position for article 3(1)(b) credit agreements entered into by high net worth individuals. In short, the Order provides much-needed certainty (not least for private banks and those offering so-called Lombard lending), and clarifies that such loans may be treated as exempt agreements, subject to a residency test and usual formalities under the high net worth (HNW) exemption.

The changing scope of the HNW exemption

Article 3(1)(b) credit agreements are agreements, the purpose of which is to acquire or retain property rights in land or in existing or projected buildings (but which are not otherwise regulated mortgage contracts).

Following the introduction of the Mortgage Credit Directive, such credit agreements were removed from the HNW exemption to the regulated activity of entering into a credit agreement (in Article 60H of the Regulated Activities Order (the RAO)). The decision was taken to restore the pre-MCD position – in other words, for article 3(1)(b) agreements entered into by HNW individuals to once again be exempt from regulation – after the UK’s withdrawal from the EU. However, the position under the RAO was not clear cut, and some uncertainty remained as to whether the exemption had been purposely reintroduced.

Undoing uncertainty 

The Order (and its accompanying explanatory memorandum) removes this uncertainty, and confirms that such loans are to be treated as exempt agreements under the RAO, subject to a residency test – individuals must have spent at least 183 days in the UK during the year prior to the agreement being entered into – and the other requirements of the exemption.

The extension of the HNW exemption is likely to be of particular benefit to private banks and those lending to HNW individuals. The Order comes into force on 21 July 2022.