David Huggins, Principal of Huggins Legal, writes that the recent downturn in property markets across Australia will inevitably lead to an increase in the complaints to the Australian Financial Complaints Authority about maladministration in lending by banks and misconduct by mortgage brokers. He also discusses how he successfully acted for a complainant before the AFCA.
Financial planners and property developers
Before I get into this topic it is worth looking at a specific part of this problem which is the activities of financial planning firms that act as a front for property developers. There are a number of examples of these types of businesses. They give the appearance of being financial planning firms to attract clients but the only advice they actually give is to make a property investment that is being sold by a related entity. A related type of conduct is the legitimate financial planning business that steers clients towards property developers in return for a very substantial commission.
Claims about advice concerning property investment fell outside of the jurisdiction of the Financial Ombudsman Service and the Credit and Investments Ombudsman. Their replacement, the AFCA, is able to deal with this type of claim. This is a very important development because any holder of an AFSL which has provided poor advice about property investment faces the very real risk that a complaint will be made to AFCA. The Government is proposing to allow AFCA to consider claims going back to 1 July 2008 so poor advice given over many years could potentially be the subject of a complaint.
Banks and mortgage brokers
The other actors in poor property investment are banks and mortgage brokers. Under the National Consumer Credit Protection Act, banks are required to make an assessment as to whether a proposed loan is not unsuitable for the borrower. The NCCPA imposes obligations upon mortgage brokers to not assist a client to obtain an unsuitable loan and to act efficiently honestly and fairly.
In my experience, bad property investments involve one or more of bad advice, a failure by a bank to properly assess information that has been provided about a borrower’s capacity to repay the loan, mortgage brokers submitting false information on behalf of clients and mortgage brokers concealing information from clients about the actual value of a property and/or the rental income that it is likely to produce.
Until AFCA commenced operations nothing could be done about bad advice unless a client wanted to commence Court proceedings. This was rarely a realistic option. Now, when looking at these claims, the first step will be to consider whether a claim can be made against the entity that provided the advice. The next step is too look at the position of the bank and the mortgage broker.
Claims against banks are difficult. Banks have limited obligations under the NCCPA and it can be difficult to establish that these obligations have been beached. Moreover, upon a successful claim, the bank is only liable to repay the after tax interest and holding costs paid by the borrower plus the costs incurred by the borrower in selling the property. When the property is sold there will be a shortfall between the amount borrowed and the amount realised. The bank is not liable to write off this shortfall and it will therefore have to be repaid by the borrower. This shortfall can be recovered by making a claim against the mortgage broker.
Success before the AFCA
An example of how these types of claims can be made are the recent AFCA Cases numbered 490011 and 509461. These Cases concern the same residential property investment. I acted for the complainant. The bank failed to properly assess the borrower’s suitability for the loan in terms of their ability to make repayments. The bank was required by AFCA to deduct from the value of the loan the net interest and holding costs and the sale costs incurred by the borrower, but a substantial shortfall was left that was required to be repaid to the bank.
The mortgage broker was aware that the property had been valued at significantly less than what the borrower was going to pay, but the mortgage broker assisted the borrower to obtain the loan. AFCA found that, in contravention of the NCCPA, the mortgage broker assisted the borrower to obtain an unsuitable loan and failed to act efficiently, honestly and fairly. The mortgage broker was required to pay the value of the shortfall to the bank, thereby extinguishing the borrower’s remaining liability to the bank.
David Huggins is Principal of Huggins Legal. David has more than two decades of experience in all aspects of financial services-related disputes, including regulatory disputes. David has worked at ASIC, ASX and a national law firm and has operated Huggins Legal since 2005. David has a deep commitment to legal practice and to obtaining compensation for his clients. Where possible David looks to achieve settled outcomes but if necessary he will take matters to trial. David has written extensively for the West Australian Newspaper and other publications and has appeared on television as an expert commentator. In addition, David has been a Director of the Australian Compliance Institute and the Independent Market Operator. David is an Adjunct Lecturer for the College of Law and is a member of the Compliance Committee for two managed investment schemes. Contact David at davidhuggins@hugginslegal.com.au. You can also connect with David Huggins via LinkedIn and Twitter