Shared appreciation mortgages, briefly available in the mid-1990s, are hitting the headlines again.
Capable of raising finance for the cash-poor and asset- rich, particularly those in or near retirement, Sams have been criticised for being expensive and inflex-ible. A recent change in the law raises the possibility that borrowers can go to court to get out of these con-tracts and recover their losses.
The primary sponsors of these plans were Barclays and Bank of Scotland (now HBOS). The bank typically advanced 25 per cent of the property value, interest-free, in return for 75 per cent of the property’s appreciation on sale or death.
For example, say you borrowed £30,000 in 1998 on a house worth £120,000. If your house then rose in value to £300,000 by 2008, the appreciation would be £180,000 or 150 per cent. You would therefore owe the bank £30,000 plus 75 per cent of the increase in value, totalling £165,000.
You would have borrowed £30,000 and 10 years later you would owe £165,000. This represents 450 per cent growth in the debt. You previously owned 100 per cent of your home but now own 45 per cent.
This has caused problems for elderly people looking to downsize or move into more suitable housing, as the net proceeds of a sale are not enough to buy alternative housing in today’s market.
Around 8,500 people have shared appreciation mortgages and a campaign group, Struggle Against Financial Exploitation, is asking its 1,500 members to pay £5,000 towards a fighting fund to mount a legal challenge. This will be some battle, with millions or even billions of pounds at stake.
What grounds will the claimants be able to use for a legal action? For those affected, Sams seem highly unfair and appear to allow banks to make an excessive amount of profit for the risk undertaken. There has been political debate, TV programmes, complaints to the Financial Ombudsman Service and action groups set up to help those who feel trapped in their own homes. In response, Barclays set up a Sam hardship scheme in summer 2007. According to Safe, customers who are in substantial hardship can get help to move or adapt their property.
Substantial hardship means poor mobility or quality of life caused by illness, disability, age or other factors. HBOS is in discussions with Safe but has yet to set up a hardship scheme.
One argument that could be used is that Sams are a defective product. Was the packaging and marketing of Sams to consumers so bad that the courts will find some basis on which they could decide the product should be thrown on the financial services scrapheap?
Is it relevant that no borrower intended to lose the majority stake in their home? The courts will review the documentation on Sams objectively and consider what a third-party bystander would understand from the deal. Unless there is ambiguity in the pre-sale documents or mortgage deeds about the extent of the borrower’s liability, the apparently harsh effect will stand.
Another avenue that could be pursued is the rules set out in the Unfair Terms in Consumer Contracts Regulations 1999. These offer potential remedies for unfairness in all standard consumer contracts for goods and services, including mortgages.
The bank’s remuneration for lending the money will be subject to the fairness test if the relevant provisions are not in plain and intelligible language. It is easy to envisage explanations about financial products that lack clarity, particularly formulae for commission, enhancements, returns and interest rates. Will the courts decide that Sams are a relatively straightforward product? If not, an inter- pretation more favourable to the borrower applies.
However, it is also arguable that Sams fall outside the scope of the regulations as the price for the product is based on fluctuations in the property market, which banks do not control.
Or are Sams a negligent product? Arguing that banks or advisers negligently marketed a dangerous financial product is hard to win. You would have to prove that the banks carried out a negligent analysis of the likely performance of Sams against historical interest rates and property fluctuations.
There is no precedent for a financial product being inherently dangerous and an attempt to stigmatise Sams as a defective product would be an uphill battle.
Finally, and of most concern to brokers involved, is defective advice. Any breach of financial services regulatory rules which results in a loss to an investor gives rise to a right of action for breach of statutory duty under section 150 of the Financial Services and Markets Act 2000 (previously s62 of the Financial Services Act 1986). For Sams, PIA and SIB rules are likely to apply (post-Fimbra and Lautro but pre-FSA regulation of mortgages).
It is likely that the banks’ obligations were restricted to giving correct information and maintaining independence but IFAs’ obliga-tions will be far wider rang-ing. The core obligations of IFAs making recommendations are know your client, suitability and risk assessment.
These kind of issues must be assessed on a case-by-case basis although similar cases could be tried together.
One last issue that complicates matters is limitation. As a general rule, claimants have six years to bring a claim against banks and advisers. This is likely to rule out most claims as I doubt any Sams have been entered into in the last six years. However, there are ways around this.
If Sams were entered into under deed, for example, by mortgage deed, a 12-year time period for bringing a claim could apply. This depends on what kind of document was used to execute the Sam and whether the law will extend the 12-year rule to Sams.
The six-year period for bringing a claim for breach of PIA rules probably does not start to run until a loss has been suffered (I say probably because the law is not free from doubt on what the relevant period is for this type of claim).
In the case of Sams, the date when loss is suffered is difficult to assess. It could be argued that loss is not suffered until rises in the property market caused an increased rate of return for banks to the detriment of customers. It could also be argued that loss is not suffered until deterioration in mobility forces a customer to move or undertake modifications to their home.
In claims for negligence, a secondary three-year period applies starting from the date at which the claimant had, or ought to have had, knowledge of the claim against the banks.
Banks are sure to argue that people’s problems with Sams have been in the public domain since 2002 and, therefore, all negligence claims are time-barred. Claimants will take a much more personal approach based on what their specific recollections and views are.
All I can say is, limitation revolves around very complex areas of law and is bound to be an issue for litigants, bearing in mind that we are 10 or so years on from most points of sale.
Sams appear to be bubbling under the surface of important issues in the financial services world. The amounts at stake for banks could run to billions of pounds and the media and politicians are alive to the issues. Banks have a lot on their plate at the moment and it now looks like Safe is turning up the heat on Sams too.