In two separate cases, Intrinsic representatives advised borrowers who took out interest-only deals that relied on Harlequin properties for repayment and were unsuitable for their circumstances, the Financial Ombudsman Services (FOS) ruled.
The clients each remortgaged and used cash from the loans to pay deposits on Harlequin overseas properties that were never built, with the investments now considered worthless, the ombudsman said.
In both cases, Intrinsic had argued advisers weren’t qualified to advise whether the Harlequin property was a realistic means of repayment – and so, the network is not at fault after the loss.
But the FOS didn’t agree and in both cases said the borrowers would have been unlikely to take out the interest-only mortgages if they had been fully aware of the risks.
In one of the cases, Intrinsic has been told to pay more than £30,000 back to the client referred to as ‘Mr G’.
He was advised in 2009 by an appointed representative (AR) of Intrinsic at the time.
In this case, Intrinsic said documentation made clear the client would still have a lump sum left to repay at the end of his mortgage term, which he would need to account for.
But the ombudsman found the adviser was aware of the circumstances and nature of the Harlequin investment, which had been intended to repay £30,000 of the loan.
Risk not properly explained
It added that the complainant likely wouldn’t have taken out the additional borrowing for the property on an interest-only basis, if the risk had been properly laid out, as he had no other means to pay off the debt, the FOS said.
After an initial ruling and a review of the case, the ombudsman upheld the complaint, represented by High Street Solicitors (HSS), and told Intrinsic to pay cash from the loan used as the deposit for the Harlequin property.
In the written ruling of Mr G’s case, Jo Storey from the FOS, said: “This isn’t because the investment failed or to compensate for Mr G’s investment loss, but because I don’t believe Mr G was fully advised of the risks in repaying the mortgage, and the mortgage advice was unsuitable for his circumstances.”
She added: “Even though the adviser could only provide recommendations about Mr G’s mortgage, because of its reliance on Harlequin, I conclude that he ought to have highlighted the potential repayment risks more specifically.
“Alternatively, the adviser could have referred him for investment advice or investigated whether he had any other means of repaying the mortgage debt if needed.”
High Street Solicitors, who represented Mr G, warned more brokers could be in the firing line after advising customers to remortgage in cases that resulted in a risky investment.
Sean Rogers from the firm said: “We are delighted that the Financial Ombudsman Service has reached the correct conclusion in respect of Mr G’s complaint [and] the suitability of his mortgage and the advice provided.
“It is disappointing that many in the sector still consider such matters to be complaints regarding investments and not complaints regarding the suitability of the mortgage and advice provided.”
Interest-only complaints not spiked
The FOS estimates it currently upholds around one in five interest-only mortgage complaints, with the number received at a steady level over the past three years.
Many of the interest-only mortgages provided in the lead-up to the financial crisis are set to start maturing in the coming years.
Antony Lark, managing director of Just Mortgages, said: “Ultimately any future claims will stand or fall on the paperwork; where there is loose paperwork and loose justifications for the advice given then the broker may be at risk.
“Where the paperwork and justifications are robust and the broker has stayed within the parameters of their permissions, then the broker should be safe from any future claims.”
Mr G’s case is unlikely to make a marked difference in terms of future mis-selling claims according to Eddie Goldsmith, founding partner at GW Legal.
He said: “This particular case centres around the need for the broker to take account of all the circumstances of the case, in particular the method of repayment at the end of the term.
“As in all these cases, the circumstances of each borrower is unique and would need to be considered in detail before any decision on whether any mis-selling could be substantiated.”
A spokesman for Intrinsic said: “Mortgage advisers currently authorised by Intrinsic must ensure the method of repayment is accounted for and establish that the mortgage can be repaid at the end of the term.
“Advisers must supply clients with key facts documentation illustrating the relevant product information on both an interest only and repayment basis.”