Dodgy financial advice from unregistered adviser

Jim and Shirley owned a home decorating business that failed. The creditors appointed a liquidator who lodged a charging order against the title of Jim and Shirley’s home.

 

At around the same time, Jim and Shirley’s lenders, Lenders A and B, commenced mortgagee sale proceedings. Jim and Shirley were very stressed, and did not know what to do next, when they were approached by Adrian. Adrian had seen the advertisement for the mortgagee sale of their property and he said he had a solution. Adrian said if Jim and Shirley subdivided their property and built two new houses on the sections behind their home, they would make enough money to clear all their debts. This sounded like an excellent plan, so Jim and Shirley asked Adrian for help.

 

Adrian arranged finance for Jim and Shirley with two different lenders. Lender 1 purchased Lender A’s position as first mortgagee, lending Jim and Shirley $400,000. Lender 2 purchased Lender B’s position as second mortgagee and agreed to lend Jim and Shirley enough money to pay Lender 1’s loan repayments for six months and the development costs.

 

Jim and Shirley had legal advice, in their capacity as trustees of the family trust, before signing the loan agreements borrowing $400,000 from Lender 1 and $93,000 from Lender 2.

 

Unfortunately, Lender A’s lawyers accidentally discharged the first mortgage that Lender 1 had agreed to purchase. The liquidators caused Lender 1 a considerable amount of difficulty re-establishing its position as first mortgagee. Eventually Lender A was successful in having the mortgage discharge reversed, and Lender A was registered as first mortgagee. Lender A’s lawyers covered the costs associated.

 

Six months into the project Lender 2’s contribution to the loan payments was exhausted. Jim and Shirley say Adrian told them not to worry. Adrian explained that Lender 1 needed to begin mortgagee sale proceedings to get rid of the charging order on the title and that neither lender would charge any penalties or default interest.

 

Jim and Shirley defaulted on both loans and Lenders 1 and 2 issued Property Law Act notices (PLA notices). The PLA notices expired unremedied and Lender 1 began mortgagee sale proceedings.

 

Lender 1 attempted to sell the property, but it did not reach the reserve and was passed in at auction.

 

Lender 2 decided to try to sell the property. A valuer gave the property a forced sale valuation of $620,000. Lender 2 appointed a real estate agent, who marketed the property for four weeks and before it went to auction. This time the property sold for $900,000.

 

After Lenders 1 and 2, overdue rates and other expenses were paid, $36,000 was paid to Lender 1 and Lender 2’s lawyers and $61,000 was paid to the liquidators.

 

Jim and Shirley could not understand how they could have owned a property worth $900,000 but, after it was mortgagee sold, they were left with nothing. Jim and Shirley complained to FSCL and asked us to look at what had happened.

 

Dispute

Jim and Shirley were very confused about what had happened to them.

 

Jim and Shirley considered the amount paid to Lender 1 and Lender 2’s lawyers was too high, and did not accept the costs related only to the mortgagee sale. Jim and Shirley said the costs must have also related to getting the first mortgage re-established. Even if the amount was correct, Jim and Shirley could not understand why they were paying legal expenses because they had not engaged the lawyers themselves.

 

Jim and Shirley did not agree that the loan was in default. Adrian told them not to make payments when Lender 2’s funds had been exhausted because Lender 1 wanted to sell the property to cancel the liquidator’s claim. Adrian said that Lender 1 and Lender 2 would not charge default fees and interest.

 

The lenders replied that the loans were in default, that they issued PLA notices and, when the PLA notices expired unremedied, they were entitled to sell the property. Both lenders said they had followed a reasonable sales process and provided copies of valuations and dealings with real estate agents.

 

Lender 1 said it did not sell the property because it did not reach the reserve, but considered it was entitled to pass on all the selling and legal costs to Jim and Shirley under the loan agreement. Lender 1’s lawyer provided a copy of his invoice confirming the legal costs related only to the mortgagee sale.

 

Lender 2 said that it sold the house for the best price reasonably obtainable and provided all the documents to support the distribution of funds following the sale.

 

Review

We considered Jim and Shirley’s complaint about both lenders and advised that, on the information available to us, we could not see that either Lender 1 or Lender 2 was responsible for their loss.

 

Jim and Shirley had defaulted on their obligations under the loan agreements and Lenders 1 and 2 were entitled to take recovery action and pass the costs associated with the default and recovery action on to Jim and Shirley. All the costs attributed to Jim and Shirley were supported by invoices. While Jim and Shirley were adamant that the lawyers were charging them for re-establishing Lender 1’s position as first mortgagee, this was not reflected in the lawyer’s invoice.

 

However, we wondered whether Jim and Shirley might have a complaint about Adrian’s advice. We checked the Financial Services Providers’ register (FSPR), but neither Adrian nor his company were registered. We discovered that Adrian had been convicted of defrauding his clients some years ago and was currently in prison for another offence.

 

We asked both Lender 1 and Lender 2 why they had accepted a lending proposal from an unregistered financial adviser with such bad history. We were also concerned at the level of fees being charged by Adrian that were added to Jim and Shirley’s loan with Lender 2. As Jim and Shirley had no recourse against Adrian, we wondered whether Lenders 1 and/or 2 should carry some responsibility.

 

Lender 2 explained Adrian came to him as Jim and Shirley’s representative and it understood Adrian was helping them with the entire process, which explained the high fee. Lender 2 said that Jim and Shirley should also have checked Adrian’s credentials and noted that Jim and Shirley had legal advice.

 

We weighed the situation carefully, and decided not to hold Lender 1 or 2 responsible for Adrian’s actions. We were mindful that Jim and Shirley had legal advice, could have checked Adrian’s credentials, and that, even if Lender 1 or 2 had declined the application from Adrian, Jim and Shirley may well have submitted the application in their own right.

 

Resolution

As we could not see that either lender had done anything untoward, and we could not help with a complaint about Adrian’s advice, we suggested to Jim and Shirley that they withdraw their complaint. Jim and Shirley remained upset that they had lost everything and continued to believe that Lender 1 or Lender 2 were responsible, but agreed to discontinue their complaint.

 

Insights for consumers & participants

If someone approaches you offering financial advice you should check the FSPR to see if the person is registered. If a financial adviser is on the FSPR, you will be able to complain to an external dispute resolution service if something goes wrong. If the financial adviser is not on the FSPR, you should report them to the Financial Markets Authority and find a financial adviser who is registered.

We were very concerned to see the lenders in this case either failing to check the FSPR or, if they did, ignoring the lack of registration and accepting an application from an unregistered financial adviser. We expect lenders to check the FSPR and, if an adviser is unregistered, to decline to accept the business.

Search case studies