Insights for consumers and participants
This case highlights that if consumers and/or advisers are dishonest in a finance application, it can lead to serious consequences.
What happened?
In early 2022, Mr and Mrs Prakesh were keen to buy an investment property. Their mortgage adviser approached a non-bank lender about financing the purchase of a property for around $750,000 to $800,000, by using the equity in Mr and Mrs Prakesh’s existing home. The lender indicated that they would be willing to lend.
In March 2022, Mr and Mrs Prakesh’s offer to purchase a property for $796,000 was accepted, subject to a finance condition. A few days later the lender told the adviser that they would approve a loan, but only if Mr and Mrs Prakesh could show that they had savings/cash of $100,000. This was the very best offer the lender could make, based on Mr and Mrs Prakesh’s ability to repay the loan.
Mr and Mrs Prakesh said that the adviser then facilitated them borrowing the $100,000 by way of a personal loan from another lender, but said they should get a family member to sign a gift certificate saying they would gift Mr and Mrs Prakesh the $100,000 (the ‘deception’ plan). Mr and Mrs Prakesh were concerned about how this further lending would affect them being able to afford the loan with the main lender, however, they proceeded with the plan. Mr and Mrs Prakesh settled the purchase of the investment property in late April 2022.
By October 2022, Mr and Mrs Prakesh were struggling to pay their loans and told their adviser about this. They continued struggling to meet their payments for the next few years. By early 2024, with the two-year fixed period on their loans soon to come to an end, and with their interest rate moving from approximately 5.4% to 9% per annum, they became very stressed. With great regret, Mr and Mrs Prakesh decided they had no option but to sell the investment property. To add to their stress, the value of the investment property had dropped with the market so, although they purchased it for $796,000, they were only able to sell it for $728,000.
Mr and Mrs Prakesh complained to FSCL that the adviser had come up with the deception plan and had led them to believe that it was a viable and not uncommon way for people in their situation to obtain a loan to buy an investment property. They said that if not for the adviser’s poor advice, they would never have bought the investment property and wouldn’t have suffered financial losses as a result.
What were the parties’ views?
Mr and Mrs Prakesh said the adviser had strongly influenced them to proceed with the deception plan and they simply followed his lead. They said that the adviser should compensate them for all the losses and costs that had flowed from them buying the investment property.
The adviser said he had always thought that the $100,000 personal loan was for Mrs Prakesh’s father for ‘contingencies’, seeing he was gifting them the $100,000, and that he would service that loan. The adviser also said that he was overseas for most of the critical period when Mr and Mrs Prakesh were engaging with his advice firm, and that his staff (who were not financial advisers) were dealing with his emails before he could see them. He said that this was how it appeared he knew that Mr and Mrs Prakesh were themselves seeking the $100,000 personal loan from the third-party lender, when he actually had no idea.
What was FSCL’s view?
In our view, the evidence showed that the adviser came up with the deception plan and that he knew Mr and Mrs Prakesh were borrowing the $100,000, not being gifted it. In summary this was because:
- Mr and Mrs Prakesh were clearly dubious about the plan.
- Although the adviser said that the $100,000 loan was for Mrs Prakesh’s father, text messages between Mr and Mrs Prakesh and the adviser in October 2022 showed that the adviser had been aware that the $100,000 loan was in Mr and Mrs Prakesh’s names.
- Although the adviser said that he was not seeing emails in his inbox while he was overseas, it was clear he had seen some emails because he personally replied to them. This raised doubt about the adviser saying he had not seen emails about the $100,000 loan being for Mr and Mrs Prakesh, not Mrs Prakesh’s father.
- The adviser’s staff clearly knew that Mr and Mrs Prakesh were simultaneously borrowing a further $100,000, and getting a gift certificate signed. The fact they did not raise this with the adviser suggested he knew about the deception plan.
However, we also took into account that Mr and Mrs Prakesh were not ‘financially unsavvy’. Even though we considered the deception plan was the adviser’s idea, we did not agree that the adviser’s influence over Mr and Mrs Prakesh was as strong as they said it was. Mr and Mrs Prakesh decided to continue with the deception plan, knowing it was wrong, and when they could have pulled out of the investment property purchase several times. We also took into account that Mr and Mrs Prakesh must have deceived the third-party lender about the purpose of the $100,000 loan.
We said a fair outcome was that the adviser and Mr and Mrs Prakesh should each bear 50% of the losses and costs Mr and Mrs Prakesh incurred from purchasing the investment property.
How did FSCL suggest that the complaint should be resolved?
In total, Mr and Mrs Prakesh had suffered losses of $164,000 from purchasing the investment property, including:
- The loss in value of their investment property, less 15% to account for the contribution of market forces; house values had reduced, which was outside the adviser’s control.
- The interest Mr and Mrs Prakesh had to pay on their loans, less the rental income they’d received from the investment property.
- Losses incurred in purchasing the investment property (for example a builder’s report), and then selling the property (for example, the real estate agent’s fee).
- Costs incurred in owning the investment property, such as rates and insurance, and general upkeep.
We said the adviser should compensate them $82,000 for financial loss being 50% of the total loss.
We also said that Mr and Mrs Prakesh had suffered significant stress because of the adviser’s actions, and we awarded $5,000 as compensation for non-financial loss. In particular, Mr and Mrs Prakesh came under severe financial pressure in early 2024, and in the previous years, when they were trying to ensure they could keep up with their loan repayments.
This meant that the adviser paid Mr and Mrs Prakesh $87,000 in final resolution of their complaint. Mr and Mrs Prakesh accepted this, and the complaint was resolved.
