'Sensitive' Banking

15/06/2006

Banks have always needed to manage their relationships with customers carefully, particularly when dealing with those who are in debt. A recent case has highlighted the benefits of taking a sensitive approach with customers who blame their bank for their own indebtedness.

In Wright v HSBC [1] , the customer, Mrs Wright, claimed damages from HSBC (the Bank) for misrepresentation, undue influence and duress and a failure to give proper advice in relation to the cancellation of a life insurance policy. The customer and her husband had an unsatisfactory borrowing history at the Bank with whom they had taken out a mortgage and overdraft facilities.

Mr and Mrs Wright met with a financial planning manager from the Bank, with the aim of reducing their outgoings. This resulted in a restructuring of their borrowing, with their joint life insurance policy being cancelled and replaced with a pension plan with insurance. The Wrights subsequently complained to a senior compliance officer for the Bank that they had been pressured into setting up the pension plan. The Bank concluded that the financial planning manager had not mis-sold the product to the Wrights, but offered to settle the pension term insurance claim at approximately £500.

Mr Wright died that month, and the following month a representative of the Bank met with Mrs Wright to discuss her indebtedness. During the meeting, the settlement of the claim with the Bank was discussed, as was the possibility of Mrs Wright selling her home and purchasing a smaller property. Mrs Wright subsequently accepted the Bank's offer, on the condition that it provided her with a mortgage on the new home she was purchasing, and overdraft facilities. When she then began to incur further debt, she claimed that she had not been in a fit state to make any decisions at the meeting with the Bank following her husband's death, and claimed that the settlement agreement should not be binding.

The High Court rejected all of her claims and held that the Bank had acted properly towards Mrs Wright throughout. The Bank had been entitled to demand the money owed by the Wrights, and the Court held that had it done so, it would have been well within its legal rights. However, the Bank did not put the customer under pressure (owing to her vulnerable position following the death of her husband), nor did it make it a condition of continued lending that Mrs Wright give up her claims. Under the 'sensitive hand' of the senior compliance officer, the Bank sought a mutually agreeable way forward. The Bank had also encouraged Mrs Wright to seek independent legal advice in connection with the settlement agreement, but she had not done so. The judge held that the facts did not support a finding of undue influence or duress.

The Bank's success in this case is a reminder of the need for banks to tread carefully when seeking to safeguard their commercial interests against debtors, particularly vulnerable ones. Many customers in financial difficulty will require sensitive treatment and any claims should be dealt with diplomatically, even where the bank is within its rights to pursue more direct methods of recovering the debt. Getting the balance right is not easy, and, as this case shows, even where banks act ethically litigation may be unavoidable.

The position for mortgage lenders may shortly become even more delicate. A new bill introduced to Parliament in May – the Regulation of Mortgage Repossessions Bill – is intended to assist responsible borrowers who default on their mortgage repayments owing to circumstances beyond their control, for example through unemployment or ill health. Whilst the Bill may not make it onto the statute book (Parliamentary time may not allow it) some of the proposals are radical and include:

• a pre-action protocol for mortgage repossessions

• taking a number of factors into consideration before a repossession order is made, including any irresponsible lending, the effect on children of a forced repossession, the duration of the occupation, and the level of equity in the property.

If the Bill becomes law, lenders will need to adjust their current policies and practices. Watch this space.

[1] [2006] EWHC 930 (QB)