What exactly is a missold mortgage?
By Robert Thickett
There are many breaches that constitute a missold mortgage but the fundamental question is whether people were treated fairly by their adviser or lender.
I am looking at complaints that a recommendation was inappropriate for debt consolidation, capital raising, extending the term, affordability, arrears and right-to-buy mortgages.
There are many breaches that constitute a missold mortgage but the fundamental question that a claimant needs to consider, is whether they were treated fairly by their adviser or lender.
Please also remember that advisors are not only liable for complaints from Mortgage Conduct of Business day onwards.
The jurisdiction of the Financial Ombudsman Service for many advisors began in December 2001 if they were regulated for investment business.
Despite no mandatory FSA mortgage regulation, FOS jurisdiction means that missold mortgage claims can still be escalated to the FOS who will apply their own “fair and reasonable test”.
First and foremost it is probably helpful to repeat the underlying principle that mortgage advice given to consumers must comply with the statutory principles of treating customers fairly as set out by the Financial Conduct Authority.
This aims to help customers fully understand the features, benefits, risks and costs of the financial products they buy. It also aims to minimise the sale of unsuitable products by encouraging best practice before, during and after the sale.
Inappropriate debt consolidation
If a client had debts at the time that the mortgage was applied for and were advised to consolidate these debts into the mortgage, they should have been advised of the additional costs that could be incurred as a result of extending the repayment period.
Where appropriate the implication of securing previously unsecured debt should have been clearly set out as this would put the client’s property at risk if there were to fall into financial difficulties.
There are certain occasions were consolidating debts could have been the right advice such as for credit card debt which was on a very high interest rate but generally for the majority of unsecured debt it would not be good advice to consolidate.
If the client was already in financial difficulties it could have been more appropriate for them to negotiate an arrangement with their creditors rather than increasing their mortgage and increasing the risk of losing their home.
If a client wished to raise capital it was the responsibility of the broker or lender to make it clear to the client that by borrowing this money using the equity in their home, they would be reducing the value of their home and that, as the debt would more than likely be paid back over a longer period of time than a personal loan, this would mean that the money raised would have cost more to borrow than a personal loan.
Substantial claims for tangible and consequential loss are possible in this area.
Compensation for clients who have raised capital by adding it to their mortgage would expect compensation to cover the extra interest liability paid and due to be paid over the term of the mortgage including statutory interest.
Extending or unsuitable term
Another area of potential claim is If the term of a mortgage had been extended or not set up correctly to start with and was not clearly explained to the client that by having a longer term (even though their monthly payments would be less) the interest liability would increase as the mortgage was being paid back over a longer period.
Affordability, a most important factor when considering best advice
It has always been the responsibility of brokers and lenders to assess whether a mortgage is affordable for a client and this would be done by making sure that all the proper checks were carried out relating to the clients income and financial situation.
There are many instances when clearly a client could not afford the mortgage they were provided with.
Examples of this are where clients were allowed by the lender to borrow high income multiples or where they already had a high amount of debt which, with their monthly payments meant they could not sustain the total they were paying each month from the income they received.
This could be considered to be irresponsible lending for the lender to approve a mortgage that was not affordable; also potential negligent advice from the broker.
Arrears or repossession
If as a result of a client being provided with a mortgage that they could not afford, they have fallen into difficulties including but not limited to arrears or repossession then it is likely they will be compensated by putting them back into the position they would have been in had the mortgage not been taken out.
This might include any bank charges they have incurred or in the case of repossession any loss that has been incurred due to losing their home for example continuing debt due to house being sold off below market value by lender.
The recent case of Emptage Emptage v Financial Services Compensation Scheme Ltd  EWCA Civ 729 (18 June 2013) has highlighted the responsibility of the FSCS to take all steps to ensure proper compensation is awarded.
Self-cert mortgages with evidence of income available
There are instances where borrowers were advised to self-certify their incomes even though they had proof of income readily available. Often they may have been employed.
This was sometimes encouraged by a broker to fast track their application to make the brokers’ job easier.
Generally self-cert products had a higher interest or reversion rate so the client would have been disadvantaged rather than having been placed on a mainstream product.
Also as a result of decrease in house prices, clients in some cases are trapped with self-cert products on high rates as mortgage prisoners.
Clients who could have provided their incomes and should have been placed on a mainstream product could be compensated by being put back into the position they would have been in if they had not been placed on a self-cert mortgage.
This would mean a refund of all fees associated with a self-cert product and additional interest paid including statutory interest on both of these amounts.
If there is any evidence that borrowers declared the correct income but were poorly advised by their broker, often due to negligence or greed then this would indeed be prima facie evidence of mis-selling
Right to Buy mortgages
There are likely to be these plus additional issues raised by claimants in respect of Right to Buy cases where mortgagors are considered to be vulnerable and worthy therefore of enhanced diligence in dealing with their individual circumstances.
So with any legal action there are likely to be common heads of claim which I have attempted to list and briefly set out above.
Of course any legal case will turn on the specifics of the case, what is said by the claimants, what records are kept and produced by the defendant and ultimately who the Court believes as the most credible witness if the case were to get to trial.
In the next article, we will examine what records and information will be needed to robustly defend any such actions and therefore what you may wish to consider before any claim hits your desk.