Article / 10 Apr 2024

A guide to lending and secured finance in the UK

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Gateley Legal

Our expert team recently contributed a country-specific Q&A chapter to the 6th edition of The Legal 500: Lending & Secured Finance Comparative Guide providing an overview of lending and secured finance laws and regulations applicable in United Kingdom.

The United Kingdom (UK) is comprised of three separate legal jurisdictions comprising (1) England and Wales, (2) Scotland and (3) Northern Ireland (NI). This guide has been prepared based on the laws of England and Wales, as it is the largest of the three jurisdictions. However, most of the responses apply equally to Scotland and NI with minimal material modification although there can be significant differences in respect of laws relating to real estate and security. We recommend that local advice is taken if a transaction involves an entity that is incorporated, established, resident and/ or domiciled in Scotland or NI or if the lender is taking security over assets located in either jurisdiction.

1. Do foreign lenders or non-bank lenders require a licence/ regulatory approval to lend into your jurisdiction or take the benefit of security over assets located in your jurisdiction?

Generally, no banking licence or regulatory approval is required for commercial lending to businesses that are incorporated or tax-resident in the UK, nor are they required for a lender to benefit from guarantees from a UK business or security over assets situated in the UK.

There are authorisations required under the Financial Services and Markets Act 2000 (FSMA) for certain specified regulated activities (including accepting deposits and managing investments). Most notably, authorisation is required from the Financial Conduct Authority under FSMA for making regulated mortgage loans and for consumer credit lending. For these purposes, a “consumer” extends to sole traders and small partnerships.

2. Are there any laws or regulations limiting the amount of interest that can be charged by lenders?

Generally, economic terms are freely agreeable between a lender and a borrower.

However, if any provision for the payment of default interest or similar amounts triggered by breach of contract is out of all proportion to any legitimate interest the lender may have in performance, then it might be held to be unenforceable as a penalty.

Further, where any fee or interest could be considered as an unconscionable bargain in equity, or as extortionate within the meaning of section 244(3) of the Insolvency Act 1986, it may not be enforceable or recoverable and the Court has the power to set extortionate credit transactions aside

Interest and default interest are common in UK transactions and the above does not generally prevent them being charged.

3. Are there any laws or regulations relating to the disbursement of foreign currency loan proceeds into, or the repayment of principal, interest or fees in foreign currency from, your jurisdiction?

No, although there may be tax implications for corporate borrowers or lenders as a result of accounting profits and losses derived from forex fluctuations.

Click here to view the full guide, consisting of answers to the following questions:

  • Do foreign lenders or non-bank lenders require a licence/regulatory approval to lend into your jurisdiction or take the benefit of security over assets located in your jurisdiction?
  • Are there any laws or regulations limiting the amount of interest that can be charged by lenders?
  • Are there any laws or regulations relating to the disbursement of foreign currency loan proceeds into, or the repayment of principal, interest or fees in foreign currency from, your jurisdiction?
  • Can security be taken over the following types of asset: i. real property (land), plant and machinery; ii. equipment; iii. inventory; iv. receivables; and v. shares in companies incorporated in your jurisdiction. If so, what is the procedure – and can such security be created under a foreign law governed document?
  • Can a company that is incorporated in your jurisdiction grant security over its future assets or for future obligations?
  • Can a single security agreement be used to take security over all of a company’s assets or are separate agreements required in relation to each type of asset?
  • Are there any notarisation or legalisation requirements in your jurisdiction? If so, what is the process for execution?
  • Are there any security registration requirements in your jurisdiction?
  • Are there any material costs that lenders should be aware of when structuring deals (for example, stamp duty on security, notarial fees, registration costs or any other charges or duties), either at the outset or upon enforcement? If so, what are the costs and what are the approaches lenders typically take in respect of such costs (e.g. upstamping)?
  • Can a company guarantee or secure the obligations of another group company; are there limitations in this regard, including for example corporate benefit concerns?
  • Are there any restrictions against providing guarantees and/or security to support borrowings incurred for the purposes of acquiring directly or indirectly: (i) shares of the company; (ii) shares of any company which directly or indirectly owns shares in the company; or (iii) shares in a related company?
  • Can lenders in a syndicate appoint a trustee or agent to (i) hold security on the syndicate’s behalf, (ii) enforce the syndicate’s rights under the loan documentation and (iii) apply any enforcement proceeds to the claims of all lenders in the syndicate?
  • If your jurisdiction does not recognise the role of an agent or trustee, are there any other ways to achieve the same effect and avoid individual lenders having to enforce their security separately?
  • Do the courts in your jurisdiction generally give effect to the choice of other laws (in particular, English law) to govern the terms of any agreement entered into by a company incorporated in your jurisdiction?
  • Do the courts in your jurisdiction generally enforce the judgments of courts in other jurisdictions (in particular, English and US courts) and is your country a member of The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (i.e. the New York Arbitration Convention)?
  • What (briefly) is the insolvency process in your jurisdiction?
  • What impact does the insolvency process have on the ability of a lender to enforce its rights as a secured party over the security?
  • Please comment on transactions voidable upon insolvency.
  • Is set off recognised on insolvency?
  • Are there any statutory or third party interests (such as retention of title) that may take priority over a secured lender’s security in the event of an insolvency?
  • Are there any impending reforms in your jurisdiction which will make lending into your jurisdiction easier or harder for foreign lenders?
  • What proportion of the lending provided to companies consists of traditional bank debt versus alternative credit providers (including credit funds) and/or capital markets, and do you see any trends emerging in your jurisdiction?
  • Please comment on external factors causing changes to the drafting of secured lending documentation and the structuring of such deals such as new law, regulation or other political factors.

Republished from the 6th Edition of The Legal 500: Lending & Secured Finance Comparative Guide with the permission of Legal 500.