Rosie and her wife Huan owned a home in South Auckland, a rental property in Whangārei, and were looking to purchase another investment property. On 14 February 2021, Rosie contacted a financial adviser who offered to help them get finance and recommended that she sign up to their “property program”. Between 18 February and 18 March 2021, Rosie provided the financial adviser with information about her and Huan’s financial situation and they discussed how much they might be able to borrow. Rosie was assessed as being able to borrow up to $1,600,000, so she started searching for houses.
On 9 April 2021, Rosie told the adviser that there was an auction on 11 April 2021 for a property in Te Atatu South and she intended on bidding, asking if she was “good to go for this from a title, sale and purchase agreement and LIM perspective?”. The adviser responded on the same day saying that there were some issues with the property, that the lender would likely ask for more information because of those issues, and that they may need to get a safety report.
Despite this, Rosie and Huan bid on the property for $1,600,000 and were successful. Their bid was unconditional, meaning that they had to go ahead with the purchase.
Rosie and Huan told their adviser about their success, assuming the adviser would then help to arrange finance. Rosie said the adviser had previously told her that they did not need to have pre-approval for a loan. Rosie understood that the adviser’s assessment of the amount they could borrow took the place of the requirement for pre-approval. This was not the case, and banks were unwilling to lend the money due to the problems with the house. The adviser was able to arrange the lending with a non-bank lender so they could settle the purchase. However, this was at a higher interest rate and for a 10- month term. Rosie and Huan eventually refinanced with a bank without any help from their adviser.
Rosie and Huan complained that the adviser had not advised them about the pre-approval process properly and they sought to recover their losses. They were unable to resolve their complaint with the adviser, and they complained to FSCL.
Dispute
Rosie said that the adviser had encouraged them to bid on the property without ensuring they had loan pre-approval. She said that she and Huan thought that the adviser’s financial assessment replaced any need to get pre-approval. Rosie said that they suffered a loss of $126,571, including late settlement fees, fees to arrange non-bank finance, additional interest, and $5,000 for inconvenience and stress.
The adviser said they had not told Rosie and Huan that there was no need to get pre-approval, and had not encouraged them to bid on the property without it.
Review
We noted that the adviser had not kept full records of the conversations, so we had only a small number of documents to rely on, as well as the parties’ recollections, to reach our decision.
Although it appeared that the adviser probably did tell Rosie that she could make an offer on the property up to $1,600,000, we received additional evidence from the adviser that:
- Two separate documents had been provided prior to the purchase referencing the need for Rosie to get pre-approval. This suggested that it was unlikely that the “property program” had been advertised as a substitute for pre-approval or that the adviser had told Rosie that she did not need pre-approval.
- The $1,600,000 quote for finance was based on the adviser believing that the property was going to be owner-occupied. That figure would have likely changed if they had known it was an investment property because a bank would have likely required Rosie and Huan to have a larger deposit. It was unclear to FSCL whether or not Rosie had told the adviser the intended use for the property.
- Rosie had bought properties before and should have known the risks of making an unconditional bid without finance confirmed.
When providing the additional information, the adviser offered Rosie $20,000 to settle the complaint. The adviser did not agree with all Rosie had to say, however they recognised they had not complied with their record-keeping obligations. Further, they had not responded adequately to Rosie’s approach on 9 April 2021. When Rosie made contact that day, the adviser was aware that Rosie did not have pre-approval and that she intended to bid. While the adviser pointed out difficulties with the property, she had not cautioned Rosie about the risks and possible consequences of making a bid without pre-approval from a lender. These factors contributed to Rosie and Huan’s difficulties.
Weighing all these factors, we considered $20,000 to be a fair and reasonable offer.
Resolution
Rosie accepted the $20,000 compensation, and we closed our file.
Insights for participants and consumers
This case highlights the importance of making sure that pre-approval for lending is discussed and secured before an unconditional bid is placed to purchase a new property. This case is also a reminder for advisers to keep full records to comply with their record-keeping obligations.
