FSMA – A route to free the estate from the unregulated?


Adam Edwards and Miles Hacking recently acted for a Trustee in Bankruptcy where they successfully obtained a declaration that a charge secured on a bankrupt’s matrimonial home was unenforceable under the Financial Services and Markets Act 2000.

Factual background

  • In 2013, Mr and Mrs Ayles borrowed £180,000 from Mr Pumphrey (“the Loan”) to purchase a property which they intended to be their family home (“the Property”).
  • Pursuant to the Loan Mr and Mrs Ayles were to pay monthly compound interest and Mr Pumphrey received security by way of a first legal charge (“the First Charge”).
  • Approximately 3 years later in 2016, Mr Ayles was adjudged bankrupt
  • By virtue of the bankruptcy order, Mr Ayles’ former beneficial interest in the Property vested in his bankruptcy estate (“the Vested Interest”) pursuant to section 306 of the Insolvency Act 1986 (“the IA86”)
  • On investigation it was noted that the Property was subject to the First Charge (as set out above) but also a second charge (“Second Charge”) entered into following the presentation of the petition upon which Mr Ayles was adjudged bankrupt.
  • It was the Trustees position inter alia that:-
    • The First Charge was unenforceable by operation of section 26(1) of the Financial Services and Markets Act 2000 (“FSMA”) because it was entered into by Mr Pumphrey as a lender in breach of the general prohibition under section 19 of FSMA; and
    • The Second Charge was void against the bankruptcy estate by operation of section 284 of the IA.
  • Mr Pumphrey accepted that the Second Charge was void against the bankruptcy estate by operation of section 284 of the IA but denied that the First Charge was unenforceable
  • Accordingly, as part of possession and sale proceedings in respect of the Property, Mr Ayles’ Trustee in Bankruptcy applied for declarations that the First Charge was unenforceable

Key Issue before the Court

  • Given that the cumulative effect of the compound interest claimed on the Loan meant that redeeming the First Charge (if enforceable) would have utilised all available equity in the Property, the enforceablility of the First Charge was the initial key issue before the Court
  • In this regard Mr Pumphrey argued, inter alia, that:
    • The general prohibition pursuant to section 19 of FSMA did not apply here because he did not lend money to Mr and Mrs Ayles ‘by way of business’; and
    • In any event, even if the general prohibition did apply, it would be “just and equitable” to allow enforcement of the Loan and the First Charge pursuant to section 28(3) of FSMA.


  • On these two issues the Court found as follows:-
    • “By way of business”
      • The Court found that Mr Pumphrey had made the Loan by way of business
        • Mr Pumphrey had a history of loaning money to individuals and businesses which was secured, and charged interest in excess of market rates
        • Mr Pumphrey’s lending as a whole had equated to more than £3.5m to 14 different individuals and companies
        • Whilst lending monies was not Mr Pumphrey’s only business, the creation of the Loan was an activity carried on by Mr Pumphrey as a business
    • Accordingly, Mr Pumphrey was found not to be an “authorised person” or an “exempt person”, that he had breached the general prohibition pursuant to section 19 of FSMA and thus the Loan was unenforceable pursuant to section 26(1) of FSMA
  • Just and Equitable
    • Insofar as Mr Pumphrey’s alternative argument, the Court also found that it would not be just and equitable in the circumstances of the case to allow the Loan to be enforced
    • To reach this conclusion the Court was required under section 28(4)(a) and 28(5) of FSMA to consider (a) whether Mr Pumphrey believed (subjectively) that he was not contravening the general prohibition and (b) if that was the case, whether his belief was (objectively) reasonable
    • In considering these two tests it was found that
      • As Mr Pumphrey did not know of the general prohibition, he cannot have believed he was contravening the general prohibition; but
      • Mr Pumphrey could not have reasonably believed that he was contravening the general prohibition in circumstances where he had sufficient resources to engage legal representation to advise him and chose not to.

Lessons for Trustees

  • The key components in this case included the fact that the lender had entered into a “regulated mortgage contract” for the purposes of FSMA but was unregulated. That the lender had done so “as a business” rather than on a personal basis and had been unable to satisfy the Court that it would nevertheless be “just and equitable” to allow enforcement.
  • Therefore, whilst each case will be determined on its own facts, this case is a useful reminder to Trustees of their ability in certain circumstances to challenge and set aside charges using the provisions of FSMA

Freeths have dedicated Financial Services Regulation and Insolvency teams who are experienced in assisting Insolvency Practitioners with cases involving issues arising from FSMA. For further information or assistance, please do not hesitate to Miles Hacking or Adam Edwards.Jackson v Ayles & Pumphrey [2021] EWHC 995 (Ch)


The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.

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