Just under a fortnight ago the Supreme Court handed down its landmark judgment in the case of Waller-Edwards v One Savings Bank, in which solicitors Howard Kennedy acted for the successful appellant.
Much has been said about the impact of the decision upon lenders, but what about other intermediaries operating within the mortgage lending ecosystem?
It is clear that the outcome has increased the scope of a mortgagee's duty of care in circumstances where a joint borrower also stands as surety for their co-borrower's debts. From now on, lenders will need to be wary of proceeding with such transactions without taking reasonable steps to ensure that the surety borrower has entered into the arrangement freely and with full understanding, particularly where the loan is partly or wholly for the benefit of the other party. The judgment builds on the line of authority established in O’Brien, Etridge, and Pitt v Holt, extending those principles into the previously untested territory of hybrid lending arrangements.
While the principal impact will undoubtedly be felt by lenders, who now face a broader duty to guard against undue influence, the decision has also prompted questions about its wider implications for other professionals.
Specifically, what does this mean for the brokers and advisers who play a central role in facilitating these transactions? These are the parties through whom lenders generally deal with borrowers at arm's length. Their role does not displace the duty on lenders, undoubtedly the key focus of the judgment and upon whom the extended duties have the greatest direct impact. However these intermediaries also play a pivotal role in such transactions, and owe unique duties to the borrower of their own. The judgment's ripple effect will impact on how these intermediaries operate and their own responsibilities to borrowers.
In particular, the Court’s “bright line” test, whereby lenders are put on inquiry where a loan includes more than a minimal element of detriment to one party, not only clarifies the bar for lenders identifying and mitigating risk in joint borrowing scenarios, but also reinforces the pivotal role brokers play as the first line of defence in spotting potentially problematic transactions.
It is likely that intermediaries will come under increasing regulatory scrutiny as to how robust their due diligence procedures are. What is clear is that those procedures need to go beyond the basic fact-finding and affordability checks that have been accepted practice over the years. Indeed, the FCA's Consumer Duty – in force since 31 July 2023 for open products – has already raised regulatory standards when it comes to firms' engagements with retail customers. These include delivering outcomes that are in the best interest of customers, ensuring mortgage products are suitable for customer needs and circumstances as well as considering customer vulnerabilities and avoiding foreseeable harm (such as the harm the Supreme Court found Ms Waller-Edwards had suffered). Products must also offer fair value, with brokers required to provide clear, timely, and comprehensible information to support informed decision-making. The importance of managing these risks is heightened in the case of hybrid lending, where the loan structure could disproportionately benefit one borrower at the expense of another.
In practical terms, the Supreme Court judgment brings the obligations under Consumer Duty into sharp focus, requiring brokers to enhance their documentation, training, and internal processes. Clear records as to the loan's purpose, the dynamic of the borrowers' relationship with each other, how the benefit and burden of the loan is spread between the borrowers, and each borrower's understanding of the loan, its features, and suitability for their circumstances will be crucial. Brokers should also revisit their compliance frameworks to ensure they are placing customer outcomes at the heart of every recommendation; asking the right questions, probing responses, identifying red flags, and not being afraid to cease brokerage service if red flags cannot be resolved satisfactorily.
In the longer term, we may see a shift in the culture of mortgage advice toward a more safe-guarding orientated approach, in particular when it comes to joint borrowing. The Supreme Court may have spoken to lenders first and foremost, but its message to intermediaries is equally clear: vigilance, transparency, and proactive safeguarding are non-negotiable.
