"It could well be the case that miss-selling finance may now become the next PPI."
If something goes wrong with a client’s bridging loan, it’s the lender that is on the hook, because lenders are the ones with all the money. Right?
There has been a very interesting Ombudsman ruling recently (Charterhall Associates Ltd) and it’s of interest to the short term lending community because:
• The facts will be common to many lending transactions,
• The compensation award reflects the serious duties of care owed by advisers to their customers,
• A clear distinction is drawn between the legal (which the lending was) and the advisable (which the regulator says the lending wasn’t),
• It’s a clear indication that there will be circumstances where the adviser has to pay out even on cases where the lender recovers relatively high interest and fees – which is newsworthy!
The customers owned a property that was worth around £350,000 and had outstanding secured debt of approximately £39,000. They were interested in downsizing and moving to another property valued at approximately £189,000. They first approached a high street lender to discuss financing the purchase but had indicated they may be interested in bridging finance, so were referred to the adviser.
The adviser recommended that they take out a 12-month interest only bridging loan secured jointly against both properties, enabling a move to a dream home, while they arranged a sale of their existing property. The first bridging loan recommended was declined at application stage, so the adviser recommended another similar, but more expensive, loan with a different lender. The loan was on a retained interest basis – so additional funds were borrowed at the start to make the monthly interest payments as they became due.
In total it was recommended that the couple borrow £305,000, which would allow them to buy the new property, pay off the existing borrowing and carry out work on the two properties, cover fees and pay the retained interest, as well as additional fees to be paid at the end of the term.
The couple took the loan and moved into the new property. However, their original property did not sell within 12 months, even at a reduced asking price. The clients agreed a six-month extension to the bridging loan but were again unable to sell the property. As they had been unable to sell, the property was surrendered to the lender and eventually sold, sometime later, for £216,000, significantly less than their sale price expectation and valuation.
The couple were left with an outstanding balance of almost £150,000 secured against their home, and this figure continued to accrue contractual interest. They complained to the broker that the advice they were given was unsuitable, saying that the risks, specifically that their home was put at risk, were too great and the full potential cost of the agreement was not made clear. The broker rejected the complaint as it felt the advice was suitable and the clients had proceeded in a fully informed position. The couple also complained to the lender at the same time about its actions – in particular it agreeing to extend the facility after the initial 12 months and how their original property was sold.
The Ombudsman ruled that the adviser should recompense the clients more than £120,000, a very significant and remarkably sized award. The reasons given included:
• The advice was unclear,
• The recommended product did not meet the majority the couple’s aims,
• The risks were not in line with what they were likely willing to accept and overall it was unsuitable for them,
• Costs were too high.
The adviser was widely criticised for its decision making, but also its lack of properly documented records which hampered, if not scuppered, its chances of defending its position against the complainants.
Regulators differ from courts of law in some significant respects. First, they must have regard to the law, but do not necessarily have to follow it. Second, their decisions are to be made on a fair and reasonable basis. Third, they have no restrictions on the ambit of a complaint, and once a complaint is actioned, they can, and often do, investigate issues which may even be outside the official complaint.
The result, in this case, was a heavy and painful blow for the adviser.
This should be a stark warning shot for any adviser business that is dismissive about documents and record keeping. From a customer perspective it is easier and certainly cheaper to pursue a miss-selling angle against an adviser than pursue a lender through the courts (where, of course, there is a ground to do so). With the pandemic, the court system is creaking and dysfunctional at present, but the ombudsman decides complaints on paper with no need for hearings and may now be quicker route to compensation as well.
It could well be the case that miss-selling finance may now become the next PPI.