As more Kiwis struggle to secure lending, it is not uncommon for family members to work together to find suitable finance. A recent case, investigated by Financial Services Complaints Limited (FSCL) highlights why it is important for consumers to get legal advice and understand what they are agreeing to, when entering into agreements with family members.
The complaint, made to Financial Services Complaints, a free service which investigates complaints against financial services providers, saw a family dispute become an accusation against a mortgage adviser, after one family member became unhappy with another being a sole borrower.
Ariki’s father, Wiremu, owned a property and wanted to free up some money to do some renovations. He also wanted to have some money available to invest. Together with his family he decided that some of his children would purchase the property to free up the money he needed.
Ariki asked a mortgage adviser to help get a loan of $300,000 to purchase the property from his father. However, given Ariki was self-employed and had a bad credit history, the adviser recommended that other members of the family apply for the loan.
The only family member who was able to secure the lending was Ariki’s sister, Marama, with the bank taking a mortgage over the property. The adviser then referred Ariki and his family to a lawyer who helped them set up a family trust. The family trust was set up to own the property and it was intended to protect the interests of all family members.
After the loan was taken out, Ariki complained that the adviser had given bad advice and breached professional standards. He accused the adviser of working secretly with Marama to get the loan in her sole name.
He said that once the loan was approved, the adviser pressured him into accepting the arrangement, and this gave Marama all the power to do what she wanted with the property. He also said this put the other family members at a disadvantage, and even meant Wiremu was worse off because he was left paying rent to Marama. Ariki was unhappy with the home renovations Marama had arranged. He also said Marama had stopped him from accessing the property.
Ariki said the adviser should have applied to second- tier lenders, so that more members of the family could have been joint borrowers.
After reviewing all the correspondence between Ariki and the adviser, FSCL decided the adviser had done what he was engaged to do, which was to obtain a loan of $300,000. We didn’t accept that the adviser had pressured Ariki, particularly because of an email where Ariki confirmed he agreed with Marama being the sole borrower.
“We were satisfied that the adviser’s advice about Ariki’s prospects as a borrower was reasonable. We didn’t think it would have been appropriate for the adviser to apply to second-tier lenders once the bank approved Marama’s application,” explains FSCL CEO, Susan Taylor, adding that second-tier lenders would have charged higher interest rates than a bank, leaving the family in a worse financial position.
“Instead, we thought the adviser had acted reasonably by referring the family to a lawyer to get advice about protecting their collective interests. It is important to understand the extent of an adviser’s responsibilities when arranging finance. Advisers need to act with reasonable care and skill and can’t mislead or deceive consumers. However, in a case like this where the adviser acted reasonably, they can’t be held responsible for the impact of a wider family dispute,” says Ms Taylor.
“Generally, if you are borrowing money with a family member, make sure you discuss and understand the terms of the loan from the beginning. Not having these discussions early on can negatively impact the relationship later. If you are being asked to lend money to, or act as a guarantor for someone, make sure you understand the extent of your liability and read the guarantee document very carefully. Always seek independent advice.”
You can read the full case note here.