Ruling in undue influence mortgage case could impact brokers too
A Supreme Court decision that a bank had a duty to investigate whether a woman was under the undue influence of her partner when she took out a mortgage that would be used partly to pay off his debts, has significant implications for the industry, experts suggest.
In 2011, the appellant, Catherine Waller-Edwards, commenced a relationship at a point in her life when she was ‘emotionally vulnerable’ but financially independent as the sole owner of her mortgage-free home with substantial savings. Her partner, Nicholas Bishop, persuaded her to exchange her home and savings for a property he was building, which was already subject to an existing charge.
In 2013, he re-mortgaged the property for £384,000 with the bank. The lender understood from him that the re-mortgage would be to purchase another property for the couple to use as a buy-to-let and to pay off an existing mortgage debt. The bank required him to use the loan to pay off his other existing debts so that £25,000 would be used to pay off the loan for his car, and £14,500 to pay off his credit card. In fact - but unknown to the bank - the loan was used by the woman’s partner to make a divorce payment to his ex-wife and pay off the first charge on the property. Following completion of the re-mortgage in October 2013, the relationship between the couple ended. The appellant remained living in the property, now heavily mortgaged. The former couple fell into arrears and ultimately the bank commenced possession proceedings in November 2021. At a contested trial, in which Waller-Edwards’ ex-partner played no part, the appellant alleged that she had acted under his undue influence when entering the remortgage transaction with the bank.
The Supreme Court held unanimously yesterday that One Savings Bank PLC should have carried out checks to discover whether undue influence was placed on Waller-Edwards by her ex-partner. It ruled that the lender knew that money it was lending to allow her to remortgage her home would be used in a way that did not benefit her financially.
Responding to the outcome of the appeal case, One Savings Bank said in a statement: “We note the judgement of the Supreme Court today. We are naturally disappointed by the decision, which was based on a very particular set of facts. This is a complex case arising from a loan in 2013 and we are assessing the implications of the ruling, although we note that cases involving undue influence are rare. At the same time, we will review our current procedures.”
Legal and mortgage experts have been assessing how this outcome could affect industry business, not only for lenders but brokers too. Jennifer Richardson, financial crime partner at law firm Blackfords LLP, commented: “This significantly increases the liability on lenders to undertake checks in respect of those it is lending to, however the decision also raises a lot of questions about how this will be applied in the case of mortgage brokers, for example. Will this liability extend to them as well? Should this lead to a more stringent regulatory regime? Solicitors, for example, are often expected to identify similar situations when dealing with clients, and face regulatory investigations by the SRA if they fail to do so. It may be that we see a similar tightening of regulation amongst lenders as a result of this case.”
David Hollingworth (pictured left), associate director of L&C Mortgages, acknowledges that any case precedent like this is bound to initially see lenders digesting the judgment to understand better how it could impact their approach. “They will no doubt then look closely at their current processes to understand whether they are doing enough to pick up any red flags where there could be undue influence,” Hollingworth said. “That could also follow as a sensible approach for brokers. Revisiting and monitoring processes and outcomes is central to Consumer Duty, and vulnerability should be at the heart of that.”
There’s been more awareness around coercive and controlling behaviour, Hollingworth notes, so the industry could see firms looking to train staff more specifically on signs to look out for when interacting with customers in this specific area, in addition to current wider vulnerability training. “As things progress, it would make sense for lenders and advisers to collaborate to help ensure all do better to avoid missing potential issues that could ultimately lead to customer detriment,” he said.
Kim Balasubramaniam (pictured centre), co-founder and director of brokerage, Versed, emphasises that brokers have long operated under the duty to act in their clients' best interests. “While we are not the final decision makers on lending, we are the first point of contact for borrowers, and this case highlights the importance of staying vigilant, especially when the purpose of a loan appears mixed or imbalanced,” Balasubramaniam said. “It’s vital that we have clear guidance from regulators on the extent of our responsibilities in these scenarios. Mortgage brokers are not trained to assess psychological or coercive dynamics in relationships, and while we can and do raise concerns where we see red flags, we mustn’t be expected to take on the role of solicitor or therapist.”
What brokers can and continue to do, notes Balasubramaniam, is to clearly document borrowers' understanding and intent, and encourage independent legal advice where appropriate. “This ruling may well lead to changes in how lenders, and potentially brokers, are expected to assess and flag these situations,” she said. “As always, we’ll be keeping a close eye on FCA guidance and any changes to industry practice that follow this decision.”
While acknowledging that brokers have a role to play in preventing harm to clients, mortgage broker Michelle Lawson (pictured right), director of Lawson Financial, believes there's got to be an element of consumer responsibility too. “For brokers, I think it's being mindful of vulnerable customers, asking questions and just following your gut feeling,” Lawson said. “But if people don't want you to know something, they're not going to tell you. It's working out how you would know whether there’s undue influence in a situation. How far do we, as brokers and lenders, go into someone's situation and their relationship? Consumers also need to start taking responsibility and understanding the implications of the debt that they're going into in the first place.
“From our perspective, we tend to know the origin of a lot of our applicants - we get very few what I call cold customers because we don't actively advertise. The majority of our customers are organic recommendations, and repeat business referrals. I guess the people that need to be concerned are the ones that who wholly just work off advertising because they've got no history, they've not got any background. Whereas for us, with our repeat customers for instance, we know them and we know what their situation is, we know what their history is. A large brokerage that might have 40 to 50 brokers hasn't got that consistency to know what's wrong.”
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‘A huge disappointment to lenders’
Meanwhile, Liam Bell, real estate disputes partner at Fladgate LLP, considers that the Supreme Court’s decision will come as a huge disappointment to lenders, who will have been keenly monitoring the progress of the claim and its potential impact on joint borrowing situations. “In allowing the appeal, the court has confirmed that there is an additional burden on lenders in so-called ‘hybrid’ borrowing cases,” Bell noted. “These cases arise where a mortgage is made available to joint borrowers for more than one purpose, one of which is to the financial advantage of one borrower only – such as the classic case of a wife guaranteeing repayment of her husband’s debts.
“Lenders will now always be treated as being ‘on notice’ of possible undue influence in such situations – even if that is only one small part of a wider, multi-purpose loan. To prevent the transaction from being set aside, a lender will need to ensure that the ‘surety’ borrower’s consent is being given without improper pressure from the other borrower. Until now, lenders were entitled to consider the transaction as a whole when assessing whether a loan was being made primarily for one borrower’s purposes. However, the Supreme Court’s decision now means that any element of surety lending, other than truly trivial ones, will require the lender to take a number of practical steps, known as the Etridge protocol, to ensure that its security remains enforceable.”
Bell believes this is likely to place a substantial administrative burden – and additional legal risk – on lenders, who are already facing challenging economic and competitive conditions.
