How mortgage lenders will be expected to change how they handle financial abuse

This ruling significantly increases the liability on lenders to undertake checks in respect of those it is lending to. However, the decision also raises a lot of questions about how this will be applied in the case of mortgage brokers, for example.

In this case, Ms Waller-Edwards, the borrower and appellant, had owned her home mortgage free, with substantial six-figure savings. However, having met Mr Bishop in 2011, when she was in an “emotionally vulnerable” state, he persuaded her to remortgage the property for £384,000.

“Lenders must ensure that sureties are received through independent legal advice regarding risks associated with entering any transaction”

The bank understood that this would be used to pay off existing mortgage debt and purchase another property as a buy-to-let investment. However, the money was used to pay off Mr Bishop’s credit card, card finance, a divorce payment to his ex-wife, and clearing the first mortgage on the property. 

When the relationship broke down, Ms Waller-Edwards was left in the heavily mortgaged property with only her pension income, which meant that she was unable to keep up the repayments. OneSavings Bank then began repossession proceedings.

While appealing the repossession, Ms Waller-Edwards argued successfully that the Etridge protocol (legal guidelines for banks and solicitors to protect individuals from undue influence) should have applied, as she was under undue influence from Mr Bishop when entering the remortgage.

Unfortunately, after winning the initial case, the County Court, High Court and the Court of Appeal disagreed. They ruled that the bank was not required to follow the Etridge protocol and carry out checks to ensure that she was not, in fact, under undue influence, as it was considered a “joint borrowing” rather than a “surety transaction” where she was acting as a type of guarantor.

The Supreme Court decision reverses these findings.

“Banks and building societies are ultimately liable for what checks they carry out on mortgage applications, but they often rely on information received from a broker”

The Etridge protocol stems from the House of Lords decision in 2001 in the case of Royal Bank of Scotland v Etridge, which established guidelines for lenders when taking security from a third party.

It aims to protect individuals, particularly in cases of undue influence, by ensuring they are fully aware of their obligations and the implications of any transaction they enter into. Lenders must ensure that sureties are received through independent legal advice regarding risks associated with entering any transaction.

Solicitors are also required to ensure that they carefully consider procedures when security for a borrowing is provided by a third party.

Banks and building societies are ultimately liable for what checks they carry out on mortgage applications, but they often rely on information received from a broker.

Will this liability extend to them as well? Should this lead to a more stringent regulatory regime? Solicitors, for example, are often expected to identify similar situations when dealing with clients and face regulatory investigations by the Solicitors Regulation Authority if they fail to do so.

It may be that we see a similar tightening of regulation among lenders as a result of this case. 

Jennifer Richardson, financial crime partner, Blackfords