Mortgage Brokers’ Duties Come Under Analysis in Guideline Ruling

To what extent are mortgage brokers required to consider the security or otherwise of underlying investments that their clients hope will, in due course, repay a loan? The High Court considered that burning issue in the case of a couple whose foray into overseas property investment ended in disaster.

Following an appointment with a mortgage broker, the couple took out an interest-free mortgage on their home. The advance was used in part to fund the deposit payable on the ‘off plan’ purchase of an overseas property. The deposit was fraudulently misapplied and they lost their entire investment.

With a view to recovering at least part of their loss, they launched proceedings against a financial services company whose authorised representative arranged the mortgage. Their principal claim was that the broker should not have recommended the mortgage without first ensuring that they received independent financial advice as to whether their proposed property investment would be reasonably secure.

Ruling on the matter, the Court noted that the loss of their investment seriously impacted their retirement plans and expressed considerable sympathy for them as the victims of fraud. It acknowledged that the broker owed a duty of care to consider whether the mortgage was reasonably affordable by them and suitable to meet their needs. He was required to take into account their particular financial circumstances in discerning whether there was an unacceptable risk that they would not be able to meet their repayment obligations.

In dismissing the claim, however, the Court noted that the property investment was by no means exceptional. The broker could not reasonably have been expected to advise them as to whether it represented a good or bad investment. Documentary records indicated that he had informed them that he was unable to give such advice and that they should seek appropriate further advice if they were unsure about the level of guarantee the property investment offered.

They were enthusiastic about making the investment and it would have amounted to an unreasonable restriction on their autonomy as consumers were the broker to have insisted that they take independent financial advice that they did not consider to be necessary. They in any event had a fall-back position in that they had sufficient surplus income to pay off the mortgage if the worst came to the worst. In the event, that is what happened and they did not lose their home.