Banking update: report and review on recent cases and issues

Mortgage fraud leads to return of funds to lender

A lender is entitled to the return of its money where the solicitors it instructs complete a mortgage transaction with fraudsters in breach of the terms of its instructions.

In Mortgage Express v Iqbal Hafeez Solicitors, the defendant was approached by mortgage brokers acting for clients who had allegedly exchanged contracts with the vendors of three properties and paid a substantial deposit directly to those vendors. The claimant was approached to provide the finance. The approval for the loan was an automated process based upon the value of the properties being approved by the claimant's underwriter. The claimant then instructed the defendant in accordance with the Council of Mortgage Lenders' Handbook to act on its behalf in the usual way. The mortgage advance was transferred to the defendant who transferred it to the solicitors purporting to act for the purchasers.

The transaction was a fraud. The owners of the properties knew nothing about the transactions. The purported purchasers' solicitors did not exist. The claimant sought the return of the monies.

The court confirmed that the defendant was in breach of contract, in breach of trust and negligent. The defendant's actions were not dishonest but incompetent and showed there was little knowledge of conveyancing law or practice.

The defendant should have been put on notice as the same firm of solicitors purported to act in all three purchases. There had also been unusually large deposits, which had allegedly been paid direct to the vendors, the source of those deposits had not been ascertained, exchange had already allegedly taken place and completion was set for the same day on all three properties. The defendant had also failed to ascertain the existence of the solicitors. There had been no contributory negligence or imprudent lending on behalf of the claimant and without the defendant's negligent actions, the claimant would not have suffered a loss.

Things to consider

With a more experienced firm of solicitors, the alarm bells should have started ringing early on in such a transaction. The evidence here strongly suggested that the transaction was not the normal sort of conveyancing transaction and required further investigation to protect the lender.

First past the post

The court has confirmed that where there is no insolvency, the general principle of 'first past the post' applies between judgment creditors unless undue prejudice would be caused to the other creditors.

In British Arab Commercial Bank PLC and others v Algosaibi and Brothers Company and others, HSBC obtained interim charging orders against properties owned by the defendants. HSBC's claim and a number of other banks' claims raised similar issues and had been ordered to be tried together. When HSBC applied to make the charging orders final, the other banks, who had subsequently also obtained interim charging orders over the same properties, objected on the basis that the proceeds of enforcement should be shared equally between them. The banks argued that:

• They had all agreed to co-operate to obtain their various judgments against the defendants.
• HSBC had only obtained details of the defendants' properties through luck.
• The banks and HSBC had all met together to discuss enforcement issues and HSBC had suggested they would continue co-operating with the other banks when in fact they were about to take enforcement steps.
• HSBC's application for the interim charging order had been without notice.

The court held that where there is no insolvency, creditors will be treated on a 'first past the post' basis. However, the court had discretion whether to make the charging order absolute and could refuse to do so if the creditor's conduct, or other exceptional circumstances, justified a departure from the general rule.

This would only occur if the other creditor would suffer some prejudice over and above the prejudice that it would inevitably suffer if an order was made in favour of the judgment creditor. The prejudice would only be undue if there was something in the judgment creditor's behaviour that would cause undue prejudice or there were some other exceptional circumstances.

The judge held that there was no undue prejudice in this case. HSBC's conduct was not such that it had obtained an unfair advantage over the other banks. There was no litigation sharing agreement between all the banks and the co-operation between them arose out of court case management. There was no obligation between the banks to share any settlement monies, had settlement been achieved.

HSBC had worked hard to find out the information about the defendants' properties. Nothing relating to enforcement had been agreed between the banks and HSBC when they had met. HSBC had not been misleading either bank at the meeting or at the without notice hearing when it could not refer back to that meeting which the banks had agreed was privileged.

Things to consider

The first creditor to obtain a charging order will generally take priority where there is no insolvency situation. The court will only exercise its discretion not to follow the 'first past the post' principle in exceptional circumstances. Where there is a statutory insolvency situation, creditors will be treated on a pari passu basis, i.e. on an equal footing.

However, a creditor's best interests are not always served by looking after its own interests and getting involved in a race. In our experience, in many situations, the opposite can be true. A collaborative approach where risk and reward are shared appropriately among creditors can minimise the erosion of the 'pot' through multiple parties' legal costs and thereby increase returns in real terms. This was recognised by the Financial Times' Innovative Lawyers Awards 2010, in which Wragge & Co was commended for taking this initiative on a leasing fraud case where it successfully represented eight finance companies on such a basis.

No need to disclose names of employees

Where a bank had notified its suspicions of potential money laundering, it did not have to disclose the names of the individual employees who had held those suspicions during the standard disclosure exercise.

In Shah and another v HSBC Private Bank (UK) Ltd, Shah instructed HSBC to execute certain transactions. HSBC suspected (wrongly) that those transactions may have been connected with money laundering and made a report to the Serious Organised Crime Agency seeking consent to proceed. Because of this the transaction was delayed and Shah subsequently brought a claim for breach of contract against HSBC.

During the disclosure exercise in the proceedings, HSBC redacted documents to remove the names of the employees who had reported their suspicions to HSBC's nominated officer. The judge at first instance had ordered that HSBC was, under its duty of standard disclosure, obliged to reveal the employees' names, but that it was prima facie entitled to maintain their anonymity on the ground of public interest immunity.

The Court of Appeal held that to fall within the obligation of standard disclosure, the material had to adversely affect HSBC's case or support or adversely affect Shah's case. The only point that remained in issue in this case was whether HSBC had held genuine suspicions of money laundering or not. The issue was whether the material adversely affected HSBC's case. The court held that Shah's request for the names of the employees was a fishing expedition and disclosure was not necessary to meet the standard disclosure requirement. The question of public interest immunity did not therefore arise.

Things to consider

Decisions of this nature will be fact specific. However, it would be an unusual case in which the identity of the employee who notifies of a suspicion of money laundering will be sufficiently relevant to either support or adversely affect a case. This is particularly so where the employees are simply following standard procedure and there is nothing out of the ordinary.

OFT mental capacity guidance for consumer credit businesses

The Office of Fair Trading (OFT) has published guidance for consumer credit businesses which are considering granting credit to borrowers understood to have, or suspected of having, some form of mental capacity limitation that might constrain their ability to make an informed borrowing decision. The guidance sets out the general approach when considering applications for credit from, or making offers of credit to, such borrowers.

Published on 28 September 2011, the guidance is designed to provide greater clarity for consumer credit businesses as to practices that it considers may be unfair or improper for the purposes of section 25(2A)(e) of the Consumer Credit Act 1974 (CCA).

The guidance focuses mainly on the adoption of appropriate practices and procedures to assist such borrowers. These include:

• Providing borrowers with clear information and explanations about credit agreements and any associated risks.
• Giving borrowers adequate time to weigh up the information and explanations provided, in order to better enable them to reach responsible borrowing decisions.
• Carrying out sufficiently stringent assessments of their ability to afford to meet repayments in a sustainable manner.

The guidance also updates and amends (for consistency) relevant aspects of the OFT's irresponsible lending guidance.

Key Contact

Ian Weatherall, partner, +44 (0)870 730 2882,ian_weatherall@wragge.com

Greg Standing, partner, +44 (0)121 214 1047, greg_standing@wragge.com