Claims arising out of Equity Release Mortgages – the next trend in claims against solicitors?
Guest article written by Robert Holme and Nathan Penny-Larter of DWF
Professional Indemnity Insurers wish to draw attention to a potential issue relating to Equity Release Mortgages which may affect firms carrying out conveyancing work.
As has been well publicised there has been a huge increase in the numbers of homeowners over 55 entering into Equity Release Products ("ERPs"). This has been fuelled by an increasing older population who are often borrowing in older age to supplement inadequate pensions, fund lifestyles or assist younger generations. The mis-selling of these products has given rise to a large number of complaints to the Financial Ombudsman Service. In this briefing we draw attention to the risks of claims being made against solicitors for allegedly negligent advice given to clients about ERPs, or for failing properly to assess the capacity of a client entering into ERPs
One of the principal issues with regard to ERPs is that they are only available to homeowners over the age of 55 and are often taken out by individuals who are significantly older than this. Solicitors dealing with transactions of this nature face a number of challenges as they are advising potentially vulnerable members of society.
What is an ERP?
Put simply ERPs are a way for homeowners to unlock the value of their properties and to turn it into cash either in one lump sum or in series of lower amounts (or a combination of the two). Interest (typically at high rates) is applied whichever form of release is chosen. ERPs are available to homeowners over the age of 55 and are not generally paid off until the borrower dies. It is also not necessary for the borrower to have a fully redeemed mortgage to qualify for ERPs.
There are two main types of ERP:
- Lifetime Mortgage - these are available to those aged over 55 and are the most popular product. This involves borrowing against the value of the home at a fixed or capped rate of interest. There are no repayments and the interest compounds meaning that the amount owed on repayment increases with each day that passes; and
- Home Reversion Plan - these are available generally to those who are aged 65 and over. The provider pays a lump sum, tax free for an interest in the home, but at below market value. The homeowner then lives in the house rent free until death and the proceeds of sale split between the percentage owned by the homeowner and that owned by the lender.
Why might claims be made against Solicitors?
Solicitors are typically asked to execute these mortgages and therefore, whilst the vast majority of Solicitors are not qualified to, and should not, provide financial advice, there are duties which a Solicitor owes to his or her client.
The context to all of this is that a house is invariably the most valuable asset of testators and testatrices and in circumstances where their Estates are reduced in value due to the presence of an ERP, it raises the possibility of claims brought by Personal Representatives and/or beneficiaries if Estates are significantly reduced in size either because of high rates of interest payable on a Lifetime Mortgage; or because the value of the property has increased and the provider of the Home Reversion Plan is entitled to a significant payment upon the sale of the property.
The Solicitor is the last point of contact for the client before finalising the ERP and therefore, ultimately, the advice given by the Solicitor might be seen as the last link in the chain of causation.
We set out some points to consider for those asked to execute ERPs in the future, below.
Has the client obtained independent financial advice as to the financial implications of entering into an ERP?
- This should be the first question asked by the Solicitor instructed to execute the ERP. If the answer is no then advice should be given immediately (preferably in writing but certainly recorded in an attendance note of the meeting with the client).
- It is important to recognise, however, that even in circumstances where the client has obtained advice from an IFA a Solicitor still has to take appropriate steps and provide adequate advice.
Does the client have the requisite mental capacity to enter into the ERP and does the client fully understand the details of the mortgage arrangement?
- This is a key consideration. The Solicitors dealing with ERPs are typically conveyancing Solicitors who do not deal on a day-to-day with issues of mental capacity.
- It is therefore a good idea in case of any doubt to enlist the assistance of a Solicitor in your firm (or an independent Solicitor if your firm does not have a Wills, Trusts and Probate practitioner or department) who is experienced at dealing with matters of this nature and assessing whether clients have capacity. If necessary the client can be assessed by a doctor for a view that he or she has the requisite mental capacity and understands the nature of the ERP and what this will mean before proceeding. ERPs are complex products and therefore a Solicitor should satisfy him or herself that the client fully understands the details of the mortgage arrangement.
Is the client coming under duress or undue influence to release equity in order to support family members?
- Any client should be interviewed alone, away from family members or other individuals. The full implications of the ERP (including loss of home ownership, very high interest rates or erosion of equity if appropriate) should be covered in detail and a note taken of the interview. The Solicitor should establish the reasons behind the ERP and look out for any changes in the behaviour of the client. This is, of course, easier when acting for an existing client and so extra care should be taken when instructed by a new client. If there are any potential language barriers then an independent translator should be used rather than a family member if at all possible.
- It is important that the correct questions are asked and this is something with which Wills, Trusts and Probate colleagues or fellow professionals will be able to assist.
Is the client aware of the impact that the ERP might have on his or her Estate upon death?
- It is therefore important that the Solicitor at least tells the client that he or she might want to seek advice from a suitably qualified Solicitor as to the likely implications for the ERP on their estate; and this is something with which Wills, Trust and Probate colleagues might be able to assist.
- It is of course the client's property and money and therefore it is his or her choice as to how to deal with that money but if the file can demonstrate that advice of this nature was offered then that affords the Solicitor with more cogent lines of potential defence if a claim arises in the future.
As with all claims of this nature, the key is record-keeping. The Solicitor's file should demonstrate that advice has been provided at least orally (and recorded in a suitable, contemporaneous attendance note) and, ideally, also in writing.
You’ve seen the adverts - retired couple in a suburban home in middle England show off their new extension or kitchen to their ‘green eyed’ neighbours who want to know how they afforded it. The explanation – a simple Equity Release Plan (ERP) to free up some equity in their home to pay for renovations, a luxury holiday and even enough to help them get their children onto the property ladder. It sounds so great you’re led to believe that even Carol Vorderman thinks it is a good idea!
However, the reality is likely to be far less appealing and rather more complex. The finance companies that offer and sell ERPs have found a gap in the market - people are living longer and their finances are often not stretching as far as they envisaged. It would be my guess that an increasing number of homeowners may decide to take out one of these products to top up their rapidly reducing pension rather than for home renovation. Depending on the product they decide to take, they may assume the remaining percentage share or accrued interest will not be all that bad and that there will still be a substantial lump sum to leave to their loved ones. However, as the article states, interest rates can be punitive and when it comes to dividing out the proceeds of the house sale to those they want to benefit, it will likely be rather less than they were expecting.
I am writing this in the middle of a global pandemic which has seen a massive strain on the economy, for businesses and people’s own individual finances. This could of course result in even more people turning to an equity release arrangement.
ERP’s have been around for a little while now and Insurers have seen enough claim notifications to know the pitfalls arising from them. If you are currently renewing your PII and have been involved in undertaking any ERP’s, it is important to be able to demonstrate to Insurers that the fee earners involved understand the risks and have adopted a high level of due diligence to the work to ensure your conduct of these matters cannot be called into question.
Ross Hickey, Associate Director, Legal team