Many advisers breached MCOB regulatory rules on affordability and suitability when selling the mortgages before the financial crisis, according to legal tech firm ME Group.
Some brokers failed to check adequate repayment vehicles were in place or wrongly accepted downsizing as a repayment strategy in a market where house price rises could not be relied upon, ME Group regulatory director Rob Cooper ME told Mortgage Solutions.
He said borrowers who could be entitled to claim were often vulnerable with high debts and, to their detriment, were moved from repayment to interest-only deals.
In many cases, clients should have been sent to an insolvency practitioner, rather than advised to take out interest-only mortgages, which has now left them at risk of losing their home altogether, Cooper added.
FOS rulings
Over the last three years, the Financial Ombudsman Service (FOS) has broadly upheld around one in five interest-only mortgage case complaints and the amount coming through has remained stable at around 300-400 a year.
In a handful of recent cases the ombudsman ruled that borrowers were due compensation after incorrectly being advised to take out interest-only deals by their adviser when there was no suitable, or an inappropriately risky repayment vehicle in place.
In these rulings, borrowers were typically relying on overseas property investments to pay off the mortgage.
For example, in a complaint the ombudsman refused to uphold at the end of last year, a borrower had taken the interest-only mortgage to buy an overseas property, but the FOS ruled the complainant could also have downsized had he needed to.
In another recent case where the interest-only mortgage was also used for an overseas investment, the FOS said the borrower had other means to repay the loan so did not uphold the complaint.
The ombudsman also failed to uphold a complaint where the borrower had been advised to take out borrowing on an interest-only basis for debt consolidation purposes.
In the case, even though the complainant ended up paying more interest overall, the ombudsman ruled the borrower had not been given unsuitable advice.
More claims to follow
The flow of claims is set to significantly increase from the few hundred a year the FOS is currently seeing because, as more mortgages mature, more borrowers are set to realise they could have a claim, according to Cooper.
He said: “You’ve got a large number of consumers now at the end of term and asking whether they were wrongly advised at the time – and many will be answering that yes they were.”
Mortgage mis-selling claims have previously been slowed by the size and complexities of files related to each case, Cooper added.
The group has launched a new technology which is designed to easily assess whether borrowers may have a claim and how much compensation they could be entitled to.
ME Group has carried out around 30,000 assessments since launching in September and estimates around 15% of enquiries currently received are eligible to claim.
The firm initially complains to the company in question, and then takes the case to the FOS, or Financial Services Compensation Scheme (FSCS) if the company is no longer in existence.
The average time to settle a claim is around 18 months, according to Cooper, meaning the group has not yet had a case run its course.
At the beginning of next year the first borrowers from the first tranche of assessments could start to see results.
The group estimates that in another six months it could be processing some 2,000 claims a month, based on the number of people with the mortgages.
Time to repay
A review of interest-only mortgages by the Financial Conduct Authority in 2013 found that around 2.6m of the loans will be due for repayment over the next 30 years.
At the time, the regulator also found that a vast majority of borrowers understood the terms of the loan at the point of sale.
But many borrowers are unaware they could have a claim against advisers, Cooper pointed out.
He said: “The FCA’s 2013 investigation of the mortgage market concluded that there was no evidence of mis-selling, but the growing number of people applying for our help suggests otherwise.
“While mortgage mis-selling is not on the scale of PPI, the individual sums involved are much greater, and we are talking about people’s homes, the biggest financial decision anyone makes in their life.”
Adequate advice
Broker L&C said it has only had a couple of interest-only complaints referred to the FOS and, so far, none have been upheld.
Peter Gettins, product manager at L&C said advisers and lenders changed their practices after the issues associated with the earlier endowment mortgages, which should help stem any issues now coming from interest-only deals.
He said: “Presumably any complaints would be based on the premise that the borrower was not made aware of the risks of interest-only borrowing and/ or their responsibility to ensure they had adequate repayment vehicles in place.
“Following the endowment shortfall issues and mis-selling claims in the early 2000s, both lenders and brokers became much more robust in making sure these issues were flagged prominently.
“It was standard practice for mortgage offers to state clearly something along the lines of ‘this is an interest only mortgage and it is your responsibility to ensure you have an adequate repayment method in place’.
“It’s impossible to to make sweeping statements on these things, but both in the absence of an incentive to promote interest-only it seems more likely that it would have been initiated by the borrower who articulated their planned a repayment strategy; and having been through the endowment process, lenders and advisers alike were more robust in their information.”
