We have previously reported on this topic on a number of occasions, but, since our last comments, a particular aspect has been taking prominent space in the trade press and it has been under the headline of another potential mis-selling scandal.
Various Claims Management Companies (CMCs) have been focussing on the potential for individual borrowers to seek redress, from lenders in particular, on the premise that interest only products were either sold incorrectly or that the risks involved were not fully explained to mortgage applicants at the outset.
Interest only loans were sold on a simple premise – they were cheaper than the alternative – and it’s difficult for us to believe that there were hundreds of thousands of borrowers that didn’t know what they were getting into. There were undoubtedly borrowers that simply could not have afforded repayments on a capital and interest basis and they continue to pay their mortgages and are content not to concern themselves with what may happen in 15-20 years’ time.
On the other hand, a number of borrowers, when facing a potential financial crisis later in life, will try to blame someone else rather than accept any personal responsibility for the initial decision to go down the interest only route.
Unfortunately there are bound to have been some cases that were mis-sold, and they will need proper investigation before any compensation is considered, but it is important to note that not every interest only loan is a potential mis-selling claim, as some like to suggest.
Irrespective of whether the claims are valid or not, there is bound to be a resourcing issue for lenders and/or intermediaries in trying to sort out the genuine claims from the fishing expeditions. At the very basic level, the establishment of the sales and advice trail will be a challenge – who was responsible for the advice, was it appropriate at the point of sale and were proper records kept? Do the recipients of mis-sell complaints have the resources to investigate them and the ability to set strategies to deal with them?
The detailed identification of the risks by individual file assessments can be critical to form strategies for handling mis-selling complaints and although we do not believe that all interest only loans are fundamentally bad, there are some significant combinations of risk that are simply too potent to ignore.
