As the recession bites and cracks start appearing in past deals we can expect to see an array of claims against professionals coming out of the woodwork. Mis-selling claims brought by borrowers against their mortgage advisers will form a significant part of this new flood of claims.
In 2008, house prices declined by around 18% and about 45,000 homes were repossessed. Prices are expected to continue declining this year, despite a slight upturn in January, and the Council of Mortgage Lenders has predicted a further 75,000 repossessions – these will inevitably trigger claims. It is likely that the vast majority of claims of this type will be brought before FOS, given the consumerfriendly nature of the service and the absence of the costs risks involved with court proceedings. This forum did not exist at the time of the last property crash and we expect disgruntled borrowers to make full use of it this time around.
The new pre-action protocol for mortgage possession claims, introduced in November of last year with the principal aim of limiting repossessions by lenders, will only have the effect of adding to mortgage advisers’ woes. The Protocol requires lenders to give extra consideration before bringing possession proceedings where the borrower has brought a related complaint before FOS and give five business days’ notice to the borrower where they intend to bring such proceedings in any event. Lenders bringing possession proceedings will have to be prepared to demonstrate before the courts the steps they have taken to comply with the Protocol. It will not take worried borrowers long to realise that a complaint to FOS is worthwhile if only to delay repossession.
The crucial issue which any forum must address when resolving complaints in present economic circumstances is who should bear the exacerbated losses caused by declining property prices: the negligent professional or their client? The courts developed a reasonably settled approach to this question arising from the last property crash and, principally, in SAAMCo3 and the cases which followed on from it. The general theme of this case law was that the courts refused to make professionals liable for clients’ losses which resulted from declining property prices rather than their negligence. For instance, in a claim brought be a lender against a negligent valuer, the lender’s recoverable loss is limited to the extent to which the property was overvalued and the greater part of the loss resulting from declining property prices is excluded.
Unfortunately, the FOS is not bound to follow this or any other common law. The Ombudsman is required to determine complaints by reference to what is, “in his opinion, fair and reasonable in all the circumstances of the case”. Moreover, the Ombudsman is required only to “take into account” relevant law in making such determinations. Consequently, we are left in a position where we can only speculate as to what approach FOS will take to losses arising from declining property prices. Given that an Ombudsman’s decision is binding on the business respondent - but not, incidentally, on the complainant - this is a cause for considerable concern.
Consider, by way of example, the situation where a borrower in negative equity alleges misselling against their mortgage adviser before FOS. As a matter of law, negative equity is not actionable in itself because there is no crystallised loss. Moreover, there is no express duty placed on mortgage advisers to advise on ‘house price risk’. However, it seems unlikely that the absence of a crystallised loss would act as a bar to recovery before FOS and the potential for broad interpretations of the general duty to advise on mortgage suitability (MCOB4.7.4) means that this door is not completely closed. After all, the financial services sector has already experienced awards based on prospective losses in the context of the Pensions Review.
Take a different scenario, where the borrower in possession cannot afford to service their mortgage. Affordability of a mortgage falls squarely within the ambit of the adviser’s duties under MCOB. It is entirely conceivable that FOS could conclude it would be fair and reasonable for the adviser to pay redress to the borrower to make up any shortfall in mortgage repayments and allow the borrower to stay in his or her home. This would, presumably, amount to the difference between what the borrower can afford and the repayments on the mortgage the adviser originally recommended. Before a court, any such award would be vulnerable to the argument that the mis-sold mortgage has given the borrower the opportunity to live in a better home. However, such an argument would be likely to be given short shrift before the FOS when faced with distressed borrowers.
Finally, there is the situation where the borrower’s home has already been repossessed and they have suffered a shortfall in the recovery from the proceeds of sale. In these circumstances, it is likely that the borrower would seek to recover any lost equity put in when the house was purchased. Again, it is easy to see FOS taking a sympathetic stance towards borrowers suffering these types of losses where there has been a failure to advise properly on affordability.
It is also important to be aware of FOS’s powers in respect of interest awards on redress payments and additional payments for distress and inconvenience. The FOS has complete discretion as to the rate of interest to be applied to any award and the dates between which it should run. In the past, interest has typically been awarded at 8% simple, mirroring the court rate. However, it is clearly open to argue that a much lower rate should be applied given that the Bank of England base rate has been slashed to 1%.
The Ombudsman has an express power to make awards for distress and inconvenience and is encouraged to consider such an award for every complaint brought, whether or not the complaint itself is upheld. For complaints brought by a borrower who has had to undergo the undoubted trauma of being removed from their home, it seems likely that the Ombudsman will exercise this power liberally. Indeed, this could be a reason in itself for complaints in the absence of any other losses.
On the plus side, the quantum of these awards is usually under £300 and payments of greater than £1,000 are described by the FOS as “exceptional”. Whilst it may be easy to downplay the significance of these awards, it should be noted that if an award of £500 had been made last year for every complaint received which made it beyond the initial vetting stage - of which there were 123,000 - it would have constituted an additional liability of £61m.
Given the FOS’s broad discretion and unpredictability, the first trickle of complaints by borrowers against their mortgage advisers should be carefully monitored and FOS’s response gauged. It is likely that a settled approach to these complaints will be established fairly quickly, though it is unlikely to be an approach which favours mortgage advisers. It is hoped that the FOS will retain at least some sense of perspective and acknowledge that mortgage advisers cannot underwrite losses their clients subsequently incur irrespective of whether these losses are attributable to the adviser’s negligence.