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Ethical and Professional Standards

Mis-sold Investment Mortgages

What are Investment Mortgages?

When the Labour Government deregulated buy-to-let mortgages in the late 1990s, it encouraged financial advisers to sell both property investments and mortgages to finance them. When housing stock was insufficient for BTL investments, IFAs turned to off-plan property. A red line was crossed as selling off-plan property to retail clients as investments is considered high risk and contravenes FSMA 2000. Where residential equity release interest only mortgages were used to finance them, it also contravened the Mortgage Conduct of Business regulations brought in on 1st November 2004. However, no enforcement by the FCA or internal compliance gave IFAs carte blanche until the 2007/08 banking crisis, when mortgages were unavailable. Instead they turned to pension transfers.

If selling and financing off-plan property investments was bad, offshore off-plan made it far worse. This became rife during the second half of the 2000s because free availability of interest only equity release mortgages enabled high net worth but otherwise cash poor retail clients to raise the funds to invest. Fat commissions on offshore off-plan property could only be earned if IFAs helped clients remortgage their homes to raise the capital to invest with. This created both a significant conflict of interest and financial mis-selling on an industrial scale.

The first claim against an IFA for selling an “unsuitable” equity release interest only mortgage was in 2010 brought by a client against the Financial Services Compensation Scheme (FSCS). Her IFA had recommended she pay off her repayment mortgage early by moving from a £40k repayment mortgage to a £111k interest only one and invest in two offshore off-plan Spanish properties. When the developer went bankrupt, the client had no investment to sell to repay the mortgage. The FSCS denied her claim because although the mortgage was regulated the investment wasn’t. In November 2012 she won her case in the High Court because the investment used as the repayment vehicle was unsuitable to repay the mortgage. FSCS appealed and in June 2013, they lost.

Obligations of a Financial Adviser for Recommending an Unsuitable Mortgage

Some Key Obligations

How was this service mis-sold?


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