Perils of the home
Risk issues for solicitors when acting for clients at opposite ends of the house ownership spectrum – first time buyers, and mature houseowners releasing equity from their homes
Family funded purchases
At one end of the house buying spectrum are those first-time buyers who need help to buy their first home. On 6 February, the Telegraph reported (“First-time buyers: two-thirds get parental help”) on research conducted by HSBC. According to the report, HSBC’s findings “showed how much harder it is for 25 to 36-year-olds to afford a property now than it was for their parents, thanks to bigger deposits, higher house prices and stricter mortgage lending criteria than previous generations”; and that “Of the first-time buyers who bought in 2012, 64% received financial help from their parents.”
Depending on how the “financial help” of parents (or other relatives) is provided, these situations can raise potentially challenging issues for solicitors. The Master Policy claims experience includes claims against solicitors at the instance of parents, and other relatives, who have alleged that the financial assistance provided by them by way of gift or loan ought to have been protected in some way. What many of these allegations reveal is the scope for misunderstandings, assumptions and mismatched expectations.
A & Co acted for a young couple, Adam and Eve, in the purchase of their first home. Although the couple had some savings and were able to borrow a substantial amount, the purchase was only possible with help from Eve’s parents. The couple subsequently separated and a dispute arose regarding the house and the funding.
- Was the financial “help” provided by Eve’s parents as a gift or as a loan?
- In either case, was the gift/loan intended to benefit Eve alone, or both Adam and Eve?
- If this was a gift to Eve, how was that contribution to the purchase price to be recognised and protected?
- If the respective contributions of the young couple are unequal, how is that reflected and protected in how the property is purchased?
- If this was intended to be a loan, were Eve’s parents expecting A & Co to advise them on the risks and how to protect their interests?
- In representing the young couple’s lenders, does it make a difference whether the financial “help” was a gift or a loan? What has to be reported to the lender?
Risk management points
- Consider whether there is any conflict of interest.
- Make sure that parties are clear if you are not representing their interest.
- Make sure you have a record of advice and warnings given, and the client’s acknowledgment.
- When considering whether there are facts which might require to be notified to lenders, the prudent approach may be “If in doubt, report”. After reporting facts to lenders, await instructions before proceeding.
At the other end of the spectrum is the more mature established houseowner who has plenty of equity but a need for income (or perhaps a desire to release equity to assist a family member with a house purchase).
"Fall in living standards blamed as equity release figures soar 37%”: so reported a headline in the Sunday Herald of 16 February. The article went on to report on the findings of recent research by lender Key Retirement Solutions (KRS): “Scotland is witnessing rising numbers of older people borrowing against the value of their house to shore up shaky finances…
“Loans under equity release schemes rose 37% to £64 million in 2013 in Scotland, far outstripping the 10% growth in the UK market”.
Insurers in various jurisdictions have in the past flagged equity release loans with solicitors as a risk issue which should be treated with caution. Some insurers’ proposal forms ask specifically about the number of cases in which solicitors have advised on equity release plans. The potential exposures for solicitors representing those taking out equity release loans include the risk of:
- Clients holding their solicitors responsible for what proves to have been an unwise financial decision;
- Solicitors being deemed to have given, unintentionally, financial advice on suitability;
- Family members holding solicitors responsible for the depletion of the estates of their parents/elder relatives;
- Clients holding solicitors responsible for adverse impact on entitlement to social security benefits.
Risk management points
Ensure you understand the product and how it works.
Equity release arrangements tend to involve standard documentation, including guidelines on the requirements on the solicitor advising the borrower and a standard form certificate which the solicitor is required to complete. It is perhaps a statement of the obvious that, just because the certificate is in a standardised format, careful consideration should be given to each of the points to be confirmed/certified and whether you can give such confirmation/certificate.
Naturally, you need to be clear with your client about the scope of the engagement – what you are/are not advising on and doing for the client. Are you giving advice on taxation implications of entering into the arrangement? Are you or are you not giving advice on the suitability of the product? Does the certificate require you to give financial advice? That is advice that you should only be giving if you are authorised to do so.
Beware situations where you are being asked to assume a duty to the lender/provider for the advice of financial advisers – for instance, by endorsing the advice given by a financial adviser on the suitability of the product.
Whatever you decide and agree you are able to advise on, your advice needs to be clearly recorded in writing. If, for whatever reasons, you advise the client against signing the documentation but the client goes ahead anyway, then you will want the client to have acknowledged your advice in writing.
There is a strong argument for devising a detailed checklist of all the issues to be considered whenever advising a borrower client.
The checklist could usefully cover a wide range of issues, from client identification through conflict checking to scoping the engagement, and questions to be addressed and points to be addressed in giving advice/taking instructions from the client, including:
- Is there more than one borrower? if so, see them separately.
- Is there a “no negative equity” guarantee?
- Is the client clear about their various obligations, to ensure a default is not triggered?
- What protections are there entitling the borrower to remain in the home?
- In what circumstances can the property be sold?
- What constitutes a default? What are the consequences, including default provisions that nullify any “no negative equity” guarantee?
- Are there any indications of pressure from other parties or family members?
- Does the client have decision-making capacity?
- Is the client in an inexplicable rush to complete the transaction?
Make comprehensive file notes of the client’s instructions and your advice, including the reasoning process, your client’s response and duration of the meeting.
Confirm your advice to the client in writing. Keep your file.
Alistair Sim and Marsh
Alistair Sim is a former solicitor in private practice, who works in the FinPro (Financial and Professional Risks) National Practice at Marsh, global leader in insurance broking and risk management. To contact Alistair, email email@example.com The information contained in this article provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisers regarding specific coverage issues. Marsh Ltd is authorised and regulated by the Financial Conduct Authority.