Problems Ahead For Mortgage Advisers

It is predicted that upwards of 100,000 mis-selling complaints could be directed to Financial and Legal Ombudsmen over the next 5 years in respect of mortgage contracts which were not properly explained by professional advisers (mortgage advisers and solicitors).

Each complaint costs the borrower nothing to make but results in fees being payable to the Ombusdman by the professional adviser at the very least. On top of that, Ombudsmen can award up to £15,000 in compensation for each complaint. Multiple mortgage contracts (e.g. from buy-to-let borrowers with multiple mortgages) could result in multiple claims amounting to £ billions.

Solicitors firms, financial services networks and their Professional Indemnity insurers are likely to be hardest hit as many of the individuals who gave the advice are no longer working in the business.

The problems have come about as a result of the Financial Services Ombudsman ruling in favour of mortgage lenders unilaterally amending their mortgage contracts. For example, Skipton Building Society abandoned a contractual obligation to cap their standard variable mortgage rates at 3% over the Bank of England base rate. The FOS ruled they were allowed to do this. Over 130,000 mortgage borrowers were affected, some with buy-to-let mortgages, many were consumers whose only mortgage was secured on their home.

Another example is the Bank of Ireland whose tracker mortgage rate hike affected over 13,000 borrowers. Again the FOS ruled this was OK.

But were borrowers made aware that mortgage lenders could act in such a way by their professional advisers?

Property118 Action Group has reviewed hundreds of KFI’s and advice letters and there was nothing in any of them which made it clear to borrowers that mortgage interest rates could be varied in the way they have. This raises the question, were the FOS right to rule in favour of mortgage lenders? Perhaps more importantly, by doing so have they shifted liability to mortgage advisers and solicitors? In our opinion it is only a matter of time before test cases are submitted by professional advisers operating in this area of law. Once an Ombudsman rules in favour of a borrower the flood gates will open.

What can the professional advice industry do?

Perhaps the best way for Professional Indemnity insurers to mitigate their risks would be to fund a judicial challenge of the FOS decisions in the same way that Property118 Action Group did in response to the FOS decision when they ruled in favour of West Bromwich Mortgage Company unilaterally varying their mortgage terms? It is now a well known fact that Property118 Action Group won its case and persuaded the Court of Appeal to overrule the FOS and High Court decisions. The Building Society will now repay £27.5 million of over-charges plus significant legal charges and interest as well has having to return mortgage payments to what borrowers were led to believe they signed up to.

Property118 Action Group and its winning legal team at Cotswold Barristers hope to be able to work with Professional Indemnity insurers on these cases. As we have looked at hundreds of potential cases already and obtained Counsels opinion from barristers and QC’s we are well positioned to come to the rescue of the mortgage industry if it chooses to reach out to us.

On a personal level I very much hope the Professional Indemnity insurers will recognise that the logical commercial decision is for them to work alongside Property118 Action Group and Cotswold Barristers. The alternative is that we could witness a train wreck in slow motion for advice firms and PI insurers in the mortgage industry over the next five years. Having come from a financial services background myself, that’s the last thing I would want to see my former colleagues to be put through.

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