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issue 72

September/October 2008

case studies involving equity release schemes

A small but significant number of the cases we see involve investment and banking products aimed at older homeowners, enabling them to raise money by releasing some of the value (or "equity") in their home without having to sell up and move out. In return, the homeowner agrees to the financial firm having a share in the value of the property.

"Equity release" schemes offering a means of raising money in this way include "home reversion" plans and "lifetime" mortgages, including "shared appreciation" mortgages.

A feature common to all these schemes is the effect they will have on the value of any estate the homeowner wishes to pass on when they die.

Firms offering such schemes generally advise homeowners to discuss their intentions with family members before committing themselves. It is, however, entirely a matter for the individual concerned whether or not they wish to do this.

As our case studies illustrate, some of the complaints we see are made after the death of someone who signed up to one of these schemes. It may only be at that stage that a family member discovers that a financial firm has a substantial interest in the property they had been expecting to inherit in its entirety. In some situations, such as that outlined in case study 72/08, the complications of an underlying family dispute about inheritance may mean the complaint is more suited to resolution by the courts than by the ombudsman service.

issue 72 index of case studies

  • 72/5 - whether firm acted correctly in recommending home reversion plan to elderly homeowner
  • 72/6 - whether elderly homeowner was appropriately advised to take a home reversion plan in order to pay for property repairs
  • 72/7 - whether elderly homeowner was appropriately advised to take a home reversion plan in order to pay for property repairs
  • 72/8 - next-of-kin complain about advice given to their late sister to take a home reversion plan
  • 72/9 - elderly homeowner complains about mis-sale of shared appreciation mortgage
  • 72/10 - whether the bank wrongly advised couple to take shared appreciation mortgage

whether firm acted correctly in recommending home reversion plan to elderly homeowner

At the age of 79, Mr V applied successfully for a home reversion plan, which provided him with a cash lump sum and a nominal annual annuity. In return, he transferred part of the freehold of his property to the firm providing the plan. He had already paid off his mortgage some years earlier and wanted to raise some cash to buy a new car and have a holiday in Barbados.

Mr V had not mentioned the home reversion plan to any of his family. It therefore came as quite a surprise to his daughter, Mrs K, when she found out about it several years later. By that time, Mr V had given his daughter power of attorney and it was in that capacity that she complained to the firm.

She said she had serious concerns about its sale of the plan to her father. She thought the firm's assessment of his assets had been inaccurate. And she said she doubted her father would have understood the agreement he was making, as his mental capacity had started to fail at around the time he applied for the plan.

In her view, the terms of the plan were onerous, so the firm should have discussed it with her and other members of the family before Mr V signed the agreement. When the firm rejected the complaint, Mrs K contacted us.

complaint not upheld
We noted from the firm's records that it was Mr V who had provided the firm with the information that his daughter considered inaccurate. The firm's adviser clearly recalled his meeting with Mr V and said that he had thought him perfectly capable of understanding the details of the plan and its implications.

The firm's records showed that, in response to a question about his health, Mr V had said that he was "generally in good health", given his age. He had chosen not to elaborate when asked if he was receiving treatment for any existing medical conditions. Mr V had, in fact, recently undergone medical investigations but he had not mentioned this to the adviser. Mrs K later suggested that this was probably because he had not been prepared to accept there was anything wrong with him.

We did not think the adviser could reasonably have been expected to doubt the overall picture given by Mr V, unless there had been some clear indication of ill-heath, or mental incapacity which would have been apparent to a lay observer.

We noted that, as part of the application process, the firm had required Mr V to appoint solicitors to act on his behalf in arranging the freehold transfer. Mr V also took independent legal advice from the solicitors, based on written details of the offer that the firm had provided. The solicitors had signed a certificate confirming the issues they discussed with Mr V. These issues included the fact that, by taking out the plan, he would reduce the value of the assets he might wish to leave to his beneficiaries.

We thought it unlikely that the solicitors would have signed the certificate if they had any doubts about Mr V's ability to understand the details of the plan and the consequences of entering into the contract.

We understood Mrs K's disappointment at not having been consulted about her late father's decision to release some of the equity in his home. However, the firm produced clear evidence that it had suggested to Mr V that he might want to involve family members, and that he had decided to proceed alone.

Overall, we were satisfied that the firm had acted responsibly and appropriately when advising Mr V. The plan was not unsuitable for him and the terms and conditions had been fully explained to him. We did not uphold the complaint.

whether elderly homeowner was appropriately advised to take a home reversion plan in order to pay for property repairs

Mrs B had been finding it increasingly difficult to afford essential repairs to her house, which she owned on a leasehold basis. The firm advised her to take a home reversion plan. This would provide her with a modest income for the rest of her life - and she would be able to use part of the money for property repairs.

The arrangement gave the firm a 90% interest in the value of Mrs B's house. She retained the remaining 10% and the firm lent her a certain amount of money against this. The loan attracted interest, but enabled Mrs B to buy the freehold of her house (since it was one of the conditions of the plan that the property was freehold).

After Mrs B died, the executor of her estate - her sister Mrs M - complained to the firm. She thought the plan had been inappropriate for her late sister's needs, as she considered its terms extremely onerous. She also thought the firm should have ensured that Mrs B obtained independent advice and consulted her family before agreeing to take the plan. When the firm rejected the complaint, she referred it to us.

complaint upheld
The firm had stressed that Mrs B's estate had benefited through her purchase of the freehold. It noted that Mrs B had signed all the relevant documentation and it said this indicated that she had been responsible for her own actions in taking the plan.

After investigating the complaint, our adjudicator upheld it. He accepted that Mrs B had signed the firm's documents, agreeing to take out the plan. However, he noted that she had consulted the firm for professional advice and had been heavily reliant on the firm's guidance. He considered that the firm should have investigated any alternative means of paying for home repairs - such as state benefits or local authority grants - rather than simply recommending the home income plan.

The adjudicator did not agree with the firm's view that Mrs B, or her estate, had received any material benefit as a result of obtaining the freehold. There was no reason to believe Mrs B would have wanted or needed to buy the freehold, if it had not been a condition of the home income plan. And Mrs B had funded the entire cost of buying the freehold, even though her estate would receive only a nominal benefit from it when the property was sold, after her death.

The firm refused to accept the adjudicator's view. It asked for the case to be referred to an ombudsman, for an independent review. After fully examining the case and considering all the evidence and arguments afresh, the ombudsman decided that the complaint should be upheld.

The firm was required to pay Mrs B's estate an amount comprising the proceeds of the sale of her house, together with the sum she had paid in legal fees when she entered into the agreement for the plan. However, the ombudsman agreed that the firm could deduct a certain amount in recognition of the fact that the plan had provided Mrs B with some financial benefit.

whether elderly couple were wrongly advised to take home reversion plan

Mrs J's complaint concerned the home reversion plan that she and her husband had been advised to take some years earlier. This provided the couple with a cash lump sum and an income for life, together with the right to continue living in the house. After both of them had died, the house would be sold and the firm would take a specified percentage of the property's value. The remaining value would pass to the deceased's estate.

Following her husband's death, Mrs J asked the executors of her late husband's estate - the family solicitors - to complain to the firm that provided the plan.

The solicitors told the firm that they considered its advice to have been inappropriate, in view of Mr and Mrs J's financial objectives at the time. They added that it was doubtful whether Mr J would have understood the complexities of the arrangement, as his mental health had started to fail at around the time he took the plan. The solicitors also thought it curious that they had not been asked to provide legal advice. The terms of the contract required the firm to ensure the couple took independent legal advice before signing up to the plan.

complaint not upheld
There was evidence to show that, at the time they received the firm's advice, Mr and Mrs J had been living beyond their means and were looking for ways of increasing their income. They had no assets that they could have used to generate additional income, other than their home. We considered that, in the circumstances, the firm's recommendation had been suitable.

The information we obtained about Mr J's mental health showed that there had been some deterioration in later years. However, we saw nothing to suggest that his judgement would have been impaired in any way at the time the advice was given - and neither Mrs J nor the firm's adviser had expressed any concerns about this at the time.

Although he had retired some years before he took out the plan, Mr J had formerly been a senior partner at the firm of solicitors that was now bringing the complaint. We thought it unlikely that he would not have understood the implications of the agreement he was entering into. And he had, in fact, taken legal advice about the plan - but not from the solicitors now bringing the complaint. It did not seem to us unreasonable that he would have wanted to keep his personal affairs separate from the family practice. We did not uphold the complaint.

next-of-kin complain about advice given to their late sister to take a home reversion plan

Mrs C named her three younger sisters as beneficiaries in her will. However, she did not tell them that, after seeking financial advice, she had entered into a home reversion plan. When Mrs C died, some years after the plan had been set up, her sisters found out about the arrangement from the executor of her will, a local solicitor.

They were shocked to discover that the firm that had given the financial advice was now entitled to most of the proceeds from the sale of Mrs C's house. When that firm refused to consider their complaint that it had wrongly advised their sister, they referred the matter to us.

complaint out of our jurisdiction - and better suited to the courts
Under our rules, we can only consider complaints brought by "eligible complainants". Executors are "eligible complainants" but beneficiaries are not, so the complaint did not fall within our jurisdiction and we were unable to look into it.

However, even if the complaint had been within our jurisdiction, we would probably have decided it was more appropriate for the courts to deal with it. This is because as well as disputing the advice provided by the firm, the sisters were in dispute with each other and with the executor about how much of Mrs C's estate they should each be entitled to.

elderly homeowner complains about mis-sale of shared appreciation mortgage

Some years after she had retired, Miss G took a "shared appreciation" mortgage from her lender. She needed to raise some capital to invest, in order to increase her income. Mortgages of this type are usually structured to require no monthly repayments from the borrower, when no interest will be charged on the debt. Instead, at whatever point the borrower decides to repay the mortgage (or on their death) the lender is entitled to a pre-agreed specified percentage of any increase in the property's value since the start of the mortgage.

In this particular case, Miss G took a loan of £36,250, representing 25% of the then value of her house. The mortgage agreement set out that the lender would receive 75% of any increase in the value of Miss G's property.

About eight years later, Miss G decided to sell up and move nearer to some of her family. Her house had increased very substantially in value since she had taken the mortgage, and she was dismayed to find she would have to pay the lender a significant proportion of the proceeds when she sold the house.

Miss G complained to the lender, saying it had advised her badly when it recommended the shared appreciation mortgage. She said the lender should have discussed alternatives with her. She also said she had been hurried into taking the mortgage and had not had time to give the matter proper consideration. Unable to reach agreement with the lender, Miss G brought her complaint to us.

complaint not upheld
Our investigations revealed that the lender had been broadly positive in its discussions with Miss G about the shared appreciation mortgage. However, we found nothing to convince us that the lender had advised Miss G, or given her the impression that it was doing so.

Instead, we saw clear evidence that her decision had been based on advice she received from her solicitor. In a letter written shortly before she asked the lender to arrange the mortgage, her solicitor had said that a shared appreciation mortgage "seemed to make very good sense" for her. The solicitor suggested ways in which the money raised by means of the mortgage could increase her income. He also told her that the mortgage could, when repaid, provide the lender with a "hefty benefit".

We were satisfied that the lender had not provided any misleading information about the features of the mortgage, or about how it would work in practice. And we noted that the agreement set out clearly and prominently the way in which the lender's share would be calculated. The lender's offer did include a time limit for acceptance (which is not an unusual feature of mortgage offers). However, we saw nothing to substantiate Miss G's view that the lender had rushed her into signing the agreement.

The proportion of the increase in the property's value that the lender would receive had been agreed at the outset, and could not be changed. And the extent to which the lender would benefit from the eventual sale of the property depended on the movement of the housing market, rather than on any factor within the lender's control.

It was clear that Miss G had not anticipated that the value of her house would increase to the extent that it did. It was also evident that she had been shocked by the effect this had on the amount she had to pay the lender. However, the lender had done nothing wrong in providing her with the shared appreciation mortgage. We did not uphold the complaint.

whether the bank wrongly advised couple to take shared appreciation mortgage

Mrs T complained about the advice she and her husband received from their bank to take a shared appreciation mortgage. They were both retired and in 1997 had approached the bank for advice, as they were finding it difficult to meet the £90 monthly repayment on their building society mortgage.

The bank set up a meeting for them with one of its mortgage advisers, a Mrs G, who was already known to the couple socially, through a charitable organisation to which they belonged. Mrs T said that Mrs G had advised them to arrange some form of equity release - and had said that the only product of this type that she would recommend for their particular circumstances was the bank's shared appreciation mortgage.

Mrs G told the couple they would need to borrow a further £7,700, over and above the amount needed to repay their building society mortgage. This was because she said the shared appreciation mortgage had to be for 25% of the value of their property.

The local solicitor, to whom Mrs G referred the couple for advice and to complete the legal formalities, told Mr and Mrs T that they should return to the bank and ask for a full explanation of the arrangement. The couple did this, and said Mrs G had confirmed that the mortgage was secured on only 25% of their property. The couple then proceeded with the mortgage.

Seven years later, Mrs T wanted to move to a smaller, more convenient house, as her husband's health was beginning to fail. It was at this point that she discovered the mortgage had, in fact, been secured on the whole of their property, as there would not be enough money left over from the sale of their house to enable them to buy the smaller property.

When the couple complained that the bank had misled them, the bank denied having advised them at all, and said that the couple had taken the mortgage after receiving advice from their solicitor.

complaint upheld
We looked at the paperwork that Mrs G had completed in relation to the couple's mortgage. This suggested to us that she had not fully understood either the nature of shared appreciation mortgages or the requirements of the Mortgage Code (the relevant rules in place at the time) concerning different levels of mortgage service.

She had initially noted that she had given the couple "level A" service (advice and a recommendation). She had later crossed that out and written "level C" (signifying that she had only provided information).

From our examination of the evidence, we concluded that Mrs G had specifically advised the couple to take out the shared appreciation mortgage. Whether or not she had understood that she was providing formal advice and a recommendation under the Mortgage Code, the fact was that she had done so in the legal sense - and Mr and Mrs T had relied on what she told them.

Her advice that they had to top-up their application to 25% of the value of the property seemed to be based on a mistaken understanding that the mortgage had to be for a minimum of 25% of the property's value. In fact, it was available up to a maximum of 25%. We considered, on balance, that Mrs G had told the couple that the mortgage was applied against 25% of their home - again because she had not fully understood the features of the product.

We accepted the bank's point that the couple had signed an agreement setting out clearly how the product worked and what would happen when the property was sold. However, we thought the circumstances of this case were unusual. Mr and Mrs T had placed particular trust in Mrs G's opinion and advice, and relied on her as their sole source of information about the implications of the shared appreciation mortgage. They had made their reliance clear to Mrs G at the time, and we were satisfied that their decision was based on the information and recommendation that she had given them.

We accepted Mrs T's assertion that if Mrs G had explained the shared appreciation mortgage accurately, she and her husband would not have taken it - but would have chosen a different type of equity release product.

Sadly, Mr T had died soon after the couple complained to the bank, and Mrs T was no longer certain whether she would sell her house. It was therefore unclear what the eventual cost of redeeming the mortgage would be. That would depend on how the value of the property moved in future. We said that when the mortgage loan was eventually repaid, the bank should calculate:

  • what the balance of the loan was under the shared appreciation mortgage; and
  • what the balance of the loan would have been, if the bank had charged its standard variable rate during the term - and had "rolled" this into the debt (added it to the balance each month instead of requiring monthly repayments).

We said the bank should then allow Mrs T (or her estate) to clear the mortgage by paying whichever was the lesser amount. We also said the bank should pay Mrs T £500 for the distress and inconvenience she had been caused.

image of ombudsman news

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.