“The court concluded that the scope of a mortgage broker’s duty of care, which is informed by MCOB, is far narrower than that argued by the claimants.”
At what point does a mortgage broker’s responsibility to their client end? If, for example, a client is recommended an interest only remortgage on their home to help finance an offshore property investment, does the broker have a duty of care to ensure that investment is a prudent one?
This was the subject of a particularly interesting recent case – Taylor v Legal & General Partnership.
The claimants, Taylor, had sought the advice of the broker for a remortgage on their residential home, to raise capital for investment in an offshore off-plan property development and to redeem a small existing interest-only endowment mortgage. Their stated repayment strategy was via the sale or refinance of the investment properties or alternative savings if the investment went wrong. With this in mind the broker, Legal & General Partnership, recommended an interest-only mortgage.
The offshore property investment failed, and the claimants sought to recover their loss from the mortgage broker.
The claimants claimed that a reasonably competent mortgage broker should comply with the requirements of Mortgages and Home Finance: Conduct of Business sourcebook (MCOB) when advising, arguing that, the broker should not have recommended any mortgage products unless and until the claimants had obtained independent financial advice as to the risks of the underlying investment for which they were raising money. Their argument was that, if such advice had been taken, they would not have proceeded with the mortgage.
However, the court concluded that the scope of a mortgage broker’s duty of care, which is informed by MCOB, is far narrower than that argued by the claimants. The broker’s scope did not extend to consideration of whether the borrower intended to apply the monies in a financially prudent way.
There were a number of reasons why the court ruled against the claimants in this way, but a notable takeaway for brokers is that, in the case of Taylor v Legal & General Partnership, the broker had told the claimants that if they were unsure about the investment they should take independent financial advice on it. And crucially, the documentation – relying on the broker’s file from 2007, clearly recorded that the broker had advised the claimants to take financial advice on the investment if they were uncertain as to the level of guarantee it offered.
Interest only has become a popular area for claims from borrowers who claim to have been mis-sold the product. Interest only is also a feature of short term lending, as is the raising of finance on domestic residential property to fund alternative purposes.
The taking of independent legal advice, and obtaining a certificate to such effect, is highly regarded as an effective tool against lender-debtor dispute, but is typically restricted to the mortgage product itself, not the underlying investment.
When the broker advised on this case in 2007, they probably didn’t anticipate that they would need to defend their advice in court nearly 15 years later. Limitation was an issue in this case, but the borrower pursued a claim on the basis that time ran from the date they became aware of damages, which was some time after the mortgage had been arranged.
It’s very hard to predict what products or parts of the market might attract claims in the next decade, so all that brokers and lenders can do at this stage is to ensure they take a belt and braces approach to everything they do with customers today, to help protect against potential future claims in the future. They should give particular consideration to:
• Investigating thoroughly the purpose of finance
• Recommending independent advice where the circumstances of the lend, and the purpose for which the lending is required merit this recommendation
• Documenting meticulously the broker role, and the extent of the retainer.
Whilst the claim failed, taking the above precautions, may well have avoided the human cost and pain of proceedings and trial.
Recent figures from the Ministry of Justice (MoJ) have shown significant increases in possession claims, orders, warrants and repossessions by county court bailiffs. And, while the time taken to reach each stage has reduced since last year, the MoJ says long-term increases in the mean average time from claim to warrant and claim to repossession are due to an increasing proportion of historic claims reaching the warrant and repossession stages respectively in recent quarters. It says this is possibly due to defendants recently breaking the terms of the mortgage agreements put in place at the start of the process.
In the current economic environment, unscrupulous borrowers are going to take desperate measures to fight actions and claim compensation wherever they identify the opportunity, so increasingly mortgage brokers are being considered as targets. Cutting corners, in process and due diligence, will only open up more opportunities for them to expose. So now is the time to invest in high-quality legal advice, with the expertise and experience to protect businesses for the long-term.