The UK Supreme Court has ruled that One Savings Bank should have recognised the risk that a woman remortgaging her home was acting under the undue influence of her partner, in a judgment that significantly clarifies the responsibilities of lenders in domestic financial arrangements.

In a unanimous decision, the court allowed the appeal brought by Catherine Waller-Edwards, overturning earlier rulings by the County Court, High Court and Court of Appeal. The court held that the bank was “put on inquiry” that undue influence may have been at play when it approved a £384,000 loan in 2013, part of which was used to pay off the personal debts of Waller-Edwards’ partner, property developer Nicholas Bishop.

Lady Rose, giving the lead judgment, concluded that the circumstances of the loan meant the bank was on notice that the transaction might not be in Waller-Edwards’ interests. Crucially, while most of the loan was used for joint purposes, £39,500 was directed to settle Bishop’s debts. The court found that this introduced a sufficient element of personal disadvantage to Waller-Edwards to trigger a duty of inquiry by the bank.

NECESSARY STEPS

Under established principles from Royal Bank of Scotland v Etridge (No 2), lenders are required to take steps where there is a non-commercial relationship and the loan appears not to benefit both parties equally. The court reaffirmed this test and applied it to the facts of this case, finding that One Savings Bank should have taken reasonable steps — such as ensuring Waller-Edwards received independent legal advice — to protect against the risk of undue influence.

As Waller-Edwards had not been advised independently, and because the bank failed to take adequate precautions, the court ruled that the remortgage was voidable as between her and the bank. This means the possession order granted in favour of the bank must now be reconsidered in light of the judgment.

CASES “VERY RARE”

Reacting to the decision, One Savings Bank said it was “naturally disappointed” and described the case as arising from “a very particular set of facts”. While it noted that “this is a complex case arising from a loan in 2013 and we are assessing the implications of the ruling, although we note that cases involving undue influence are rare,” the lender said it would review its procedures in response.

Jennifer Richardson, financial crime partner at Blackfords LLP, said the ruling “significantly increases the liability on lenders” and raises questions about whether similar duties might soon extend to mortgage brokers: “Will this liability extend to them as well? Should this lead to a more stringent regulatory regime? Solicitors for example are often expected to identify similar situations when dealing with clients, and face regulatory investigations by the SRA if they fail to do so.”

She added: “It may be that we see a similar tightening of regulation amongst lenders as a result of this case.”