Legal & General Partnership Services have defeated accusations that their appointed representative Kinleigh Financial Services was negligent in recommending an interest only mortgage.
The judgement is significant not only for considering the scope of a broker’s duty of care under the Mortgage Conduct of Business (MCOB) rules, but also as the wider context involves a large number of miss-selling claims being conducted against mortgage brokers by claims management companies. The narrative of some claims had included a perspective that interest-only mortgages are a toxic product, bringing with it suggestions that brokers would be negligent for suggesting such products at all.
Kinleigh Financial Services were approached by the borrowers, who wanted to mortgage their home in order to invest in an offshore property development scheme run by Harlequin Hotels and Resorts (Harlequin). A loan of £101,000 over a twenty year period was recommended, on an interest only basis.
The borrowers subsequently lost their investment when the Harlequin scheme was revealed to be a Ponzi-like scam.
The borrowers then claimed that the mortgage broker was negligent in recommending a mortgage without ensuring that the borrowers had taken independent financial advice regarding their proposed investment. The claimants alleged that had Kinleigh recommended that they take advice on the investment, they would not have invested in the scheme.
The court declined these claims. The broker had recorded that he was unable to advise on the suitability of the investment, and the judge ruled the broker did not owe a duty of care to borrowers to require them to take independent advice before recommending a mortgage. The court considered that the MCOB rules were not intended to consider whether the borrower’s intended use of the loan was a financially prudent one.
James Burgoyne, Divisional Director – Claims & Technical, Brunel Professions said: “This decision is a further instance of the courts following the Manchester Building Society v Grant Thornton case, and looking closely at the original purpose of the professional’s advice. Professional indemnity insurers will be pleased that this case did not accept a wider interpretation of a brokers’ duty of care under the Mortgage Conduct of Business rules.
The case also provided yet another example of the critical role played by a professional’s file in defeating professional negligence accusations, and therefore the importance of creating and keeping notes and records at the time.”
The court considered issues of causation and limitation as well as scope of duty, and the judge ruled in favour of the broker across all these aspects. 4 New Square and TLT have issued reports and comment on the case.