Jane wanted to subdivide, and build a new boarding house on her existing property, however she could not get finance through mainstream lending institutions as she had no current job.
In September 2014, Jane’s financial adviser, Craig, secured initial finance from a second-tier lender, JKL Lenders. The loan amount was approximately $700,000 at an interest rate of 11.95% per annum with a term of one year. Craig charged a fee of $7,850 for arranging the loan.
Variation number 1
At the end of one year, the construction was not complete. Craig arranged a loan extension for a further 6 months with JKL Lenders, who charged a variation fee of $16,400.
Variation number 2
After this further 6 months, the construction was still not complete and o Craig arranged an extension for a further 3 months with JKL Lenders, who charged a variation fee of $8,500.
Variation number 3
After this further 3 months, the construction was still not complete and an extension for a further 4 months was granted. JKL Lenders charged a variation fee of $9,500. Craig received a fee of $4,600 for this variation.
Variation number 4
After this further 4 months, the construction was still not complete and Jane needed to refinance a fourth time. An extension for a further 3 months was granted and JKL Lenders Ltd charged a variation fee of $19,000.
Variation number 5
After this further 3 months, the construction was still not complete and Jane was forced to refinance a fifth time. An extension for a further 3 months was granted and JKL Lenders Ltd charged a variation fee of $20,250
The complaints
Jane claimed that as the building was not going to be completed by the end of the first-year loan, Craig should have arranged to refinance for another year at the expiry of the first one year term (as opposed to shorter periods) to save her from having to pay multiple fees to JKL Lenders (of over $70,000) each time the loan agreement was varied and extended. Jane felt that the multiple short-term extensions made on her loan with JKL Lenders, organised by Craig, were not in her best interests.
Jane further claimed that she accepted the initial loan offer, with a higher interest rate, on the understanding that she would be able to refinance with a mainstream bank at the end of the initial loan agreement. As a result of Craig not organising refinance through a mainstream bank, Jane claimed to have missed out on a longer refinancing option with a lower interest rate.
Jane also said that the fees paid to Craig, of over $12,500, were unreasonable and unjustified.
Finally, Jane complained that Craig failed in his obligation to exercise care, diligence and skill when organising finance through JKL Lenders and failed to advise her that there would be additional fees involved if an extension to the original loan was required.
When Jane was unable to resolve her complaints, she asked FSCL to investigate.
FSCL investigates
We noted that Craig had waived his fees for the first and second extensions of the loan.
Craig’s fee was $4,600 for the third extension to the loan. Craig’s professional indemnity Insurer said that Craig did not participate in securing loan extensions 4 or 5.
The fees charged by JKL Lenders and Craig, if the build was not complete after the initial 12-month loan agreement, had not been disclosed to Jane when she drew down the loan. Jane said that she was only made aware of further fees when the first loan term had expired, and she needed to refinance or extend the loan.
Craig claimed that he did disclose that there would be fees if Jane required a rollover, but did not particularise what the fee might be as the rollover (in the first instance) would have been 12 months away. He felt that it was inappropriate to do so as the amount could have changed within that time. Craig was unable to provide any notes to show that fees were explained at the initial meeting, or any subsequent meetings. Nor was there any mention of variation fees in the initial loan agreement which was entered into.
There was evidence in e-mail correspondence which showed that Craig knew that Jane was “confused” as to the figures at the variation stage.
FSCL contacts industry representatives
We decided to obtain some industry representatives’ expert opinions.
The industry experts both considered that Craig had “dropped the ball” as a professional in their industry and not conducted his professional duties up to standards that they expected. Both experts believed that the initial fee Craig charged was justified, as his work in obtaining finance had enabled the boarding house to be built.
The experts said that Craig should have made Jane aware of the potential fees that both he and the lender would charge if a loan extension was required, and that a reasonable adviser would have exercised more care and diligence, given that they were dealing with a high interest loan for a large amount. Craig should have ensured that all fees were discussed, disclosed, and well- documented. Best practice principles were not adhered to.
The industry experts both said that the $4,600 fee charged by Craig was not justified in the circumstances.
FSCL’s review
Craig was not involved in negotiating the duration of the variations, nor the fees and charges set by JKL Lenders. JKL Lenders confirmed that the lengths of each extension were decided between JKL Lenders and the construction team. Craig had not been involved in these negotiations.
We found that Craig had exercised reasonable efforts to obtain refinance through mainstream banking institutions on various occasions and the failure to obtain a loan from a bank was out of his control. Jane’s employment situation, and lack of income, meant that a bank was not prepared to lend to her.
Craig should have exercised more prudence in advising and disclosing to Jane the costs involved in making a variation to the initial loan agreement. His failure to display the care, diligence and skill that a reasonable adviser should have taken in the circumstances had caused Jane stress and inconvenience.
The fee that Craig received for the third extension of the loan was not warranted as Craig had not undertaken sufficient work to justify a fee of $4,600.
Settlement is offered
After discussing our views with both parties, Craig decided to offer a refund of the $4,600 fee charged and the interest associated with this fee.
We told Jane that Craig’s offer was reasonable and she accepted this.
FSCL’s Insight
Financial advisers are responsible for ensuring that their client is aware of all fees that will be charged by the lender, and also the fees that will be charged (or commission receive) by the adviser both on the original loan and any variations.
It is good practice for financial advisers to ensure that reasonable file notes are kept in order to demonstrate that crucial elements of the loan agreement, including fees, have been discussed and acknowledged by their client.
