Key repossession ruling opens door to mortgage mis-selling complaints Ombudsman's verdict offers hope for homeowners who are battling to keep a roof over their heads.
A remarkable ombudsman victory for a householder who had his home repossessed after being mis-sold a hefty mortgage could set a precedent, preventing others from losing their properties as the recession bites, lawyers say.
This year an estimated 75,000 families - against 40,000 last year - will lose their homes, according to the Council of Mortgage Lenders (CML).
But many who face handing back the keys could be helped by rules covering "suitable advice" for borrowers, buried in the handbook of the Financial Services Authority (FSA), the City regulator.
Andrew Brown (not his real name) struggled to repay his mortgage but subsequently took his mis-selling case to the Financial Ombudsman Service, and has now won. Despite turning to the FOS late on and being repossessed, he will receive compensation - while other borrowers who begin cases at an earlier stage than he did might well be able to save their homes too.
A housing association tenant, Brown had the valuable promise of a rent fixed for life. However, a mortgage adviser persuaded him to buy the property and failed to consider "what would happen when the attractive discounted rate [set up on that mortgage] ended", according to an FOS spokeswoman.
Brown was repossessed and had to move; he then lodged a complaint with his mortgage adviser and ultimately brought the case to the FOS.
Industry specialists believe more claims of this kind are now likely to emerge. The main source of optimism for those in a similar position lies deep within the FSA's rulebook for mortgage advisers, Mortgage and Home Finance: Conduct of Business (MCOB).
This states mortgage advice must be "suitable for that customer" and that advisers "must make and retain a record" of it being suitable; this is known, crucially (and rather technically), as complying with section 4.7. Breaches of the MCOB rules are "actionable at the suit of a private person who suffers loss as a result", under section 150 of the Financial Services and Markets Act 2000.
"Undoubtedly, such cases would succeed," says professional negligence barrister John Virgo of Guildhall Chambers in
Philip Ryley, head of financial services and markets at solicitor Michelmores, is more cautious. He says: "It really depends on each individual case as to whether they have received a service which would breach MCOB rules. It is an issue that may be raised before district judges [deciding repossession cases].
"If it develops wholesale, it devalues the meritous cases that exist. The courts will soon become familiar with these arguments and will then require the borrowers to produce evidence at an early stage. to root out frivolous or unsubstantiated allegations."
Though there may be concern some borrowers might try to exploit the MCOB rule without good cause, there appear to be many cases of people being mis-sold mortgages they could not afford.
A Citizens Advice report entitled Set Up to Fail, on the sub-prime lending market in 2007, found the charity's repossession clients had often found themselves with "inappropriate and unaffordable" mortgages and secured loans, and that people buying council houses received "particularly poor advice".
One case it highlighted concerned a couple with a disabled child in south-east
The CML accepts the rulebook can be invoked by consumers. "The MCOB rules are there for a reason: to protect consumers," says spokeswoman Sue Anderson. "Consumers have 'the ability and right' to rely on these regulations if they believe they have not been dealt with correctly," she says.
In 2007, Cash highlighted how cold-callers were using dodgy selling tactics to convince social housing tenants to exercise their "right to buy" and saddle these low-income homes with inappropriate mortgages.
Although the ombudsman found in Brown's favour, the issue remains complicated. The FOS is charged with restoring people, as far as possible, to the situation they would otherwise have been in - and that is not straightforward in circumstances such as these.
"Historically, you may not have been worse off," says the FOS spokeswoman, referring to the fact that when house prices were rising - until 2007 - people who had been mis-sold an unsuitable mortgage might not have lost out if the price of their house was rising. They would not have won compensation.
Now, the ombudsman is having to work out how to compensate someone who has not been protected by the rise in property values.
Have you got a claim for mis-selling?
• If you are in financial difficulty, first try all other steps to resolve your crisis: talk to the lender as early as possible about arrears; seek advice from a debt charity; curb spending and draw up a tight budget; and try to boost your income.
• Be brutally honest: if you've been in any way economical with the truth in your mortgage application, such as overstating your income (whether unwittingly or not), your case will be much weaker.
• You could have a case if your mortgage adviser never explored affordability with you, or dealt with you in a superficial way. Advisers should rely on past figures for income and outgoings, says Philip Ryley of Michelmores. If they don't have them, then you're off to a strong start.
• You might have extra grounds for a case of mis-selling if your mortgage stretched beyond your retirement date and your adviser did not explore that as an affordability issue.
• A case based on what's known as mortgage "misrepresentation" might also be feasible. According to Ryley, this might be arguable if you were "given a very hard sell, or told everything good about the product and given no information about what would happen when interest rates went up". If misrepresentation is argued successfully, the contract can be rescinded - as a case in 1991 proved.
• To avoid the expense of lawyers' fees, a homeowner can make a claim with the individual who advised on the mortgage, and if the response is unsatisfactory take the case to the Financial Ombudsman Service. The FOS would probably request that your repossession proceedings are put on hold during any investigation.
• Even if your mortgage began before the MCOB was ushered in on 31 October 2004, the rules could still apply, says one lawyer who wishes not to be named. "It makes no difference as to when the loan was entered in to, for the purposes of the arrears rules," he says.
• Publicity about such cases will take time to filter out, as they are likely to be settled informally. But if people do start making claims in significant numbers, it could snowball, says one unnamed financial services lawyer. "What would be interesting would be a group action," he said.
Courtesy of The Observer, Sunday 22 March 2009.
