In a recent determination, the Financial Ombudsman Service (FOS) reduced the liability of a co-borrower who received no ‘real’ benefit from the loan.
FOS considered a loan transaction between a credit provider and a husband and wife as co-borrowers. The wife argued she should not have been signed up as a co-borrower because she received no real benefit under the loan.
The purpose of the loan was to refinance existing liabilities, most of which were between the credit provider and the husband.
Paragraph 11 of the Customer Owned Banking Code of Practice (COBCOP) states that a credit provider must not accept an applicant as a co-borrower where it is aware, or ought to be aware, that the applicant will not receive a benefit from the loan or other credit facility.
The credit provider argued that the wife had received a benefit from the loan sufficient to meet paragraph 11 of COBCOP because:
- the loan consolidated existing liabilities into one loan at a lower rate and that provided a benefit to the household;
- the wife benefited from the ability to redraw under the loan; and
- one of the refinanced loans was between the wife and the credit provider.
FOS considered the test for ‘benefit’ was whether the applicant received a ‘real benefit’. The benefit must be a ‘direct or immediate gain’. A benefit through an improved lifestyle obtained through the loan is insufficient.
FOS noted it was not enough for the applicant as co-borrower to have received ‘some’ benefit under the loan, and, in circumstances where the co-borrower receives a limited benefit from a loan, their liability will be restricted to those funds from which they received a direct benefit.
FOS said that the reduction in household liability and the ability to redraw funds was not a sufficient benefit. However, the wife was found to have received a real benefit from:
- the refinanced loan that she was jointly and severally liable for with her husband; and
- a very small portion of the loan that was paid to the wife’s savings account.
The wife’s liability as co-borrower under the loan was confined to these benefits where she received a direct benefit.
COBCOP is the code of practice for customer owned banking institutions – credit unions, mutual banks and mutual building societies.
The code of practice that applies to banks (where they have adopted it) is the 2013 Code of Banking Practice. Clause 29.1 provides ‘We will not accept you as a co-debtor under a credit facility where it is clear, on the facts known to us that you will not receive a benefit under the facility.’
The FOS decision is a red flag for credit providers and highlights a potential avenue for borrowers alleging a breach of a code of practice that applies to the lending transaction.