Buck stops with borrowers

Personal Finance

Judge Robert Taylor's ruling that the manager of Lloyds Bank in Henley had actively encouraged Julia Verity and Richard Spindler to borrow money to buy a house to restore and re-sell at a profit may have gladdened the hearts of millions of customers who enjoy seeing a bank get its comeuppance.

Financial institutions will be equally happy to see the banks discomforted. These institutions compete with the banks and independent financial advisers and are liable for bad advice. They often feel the banks take unfair advantage of their relationship with customers to sell a range of services that may not actually be competitive.

Lloyds Bank insists that the case is unique and has no implications at all. The manager said he had assumed at the time - some seven years ago now - that the couple had a surveyor or adviser and were not relying just on him for advice. But he seems to have visited the house, been to the couple's own home, admired their skill in decorating and generally given his approval to the project. Certainly, the couple claim he encouraged them and the judge believed their version of events.

The crucial issue that the decision to make a loan does not by itself constitute advice to proceed or provide a guarantee was established in the 1958 case of Woods v Martins Bank (now part of Barclays Bank) and this has not been challenged.

In the circumstances, Lloyds Bank sees no point in appealing, and says the cardinal principle on which banks lend remains intact.

The decision to make a loan is a risk which all lenders have always taken since time immemorial. Lending rates reflect the degree of risk implicit in the project and the amount of security the borrower can offer. But a loan is not the same thing as a joint venture.

Providing the credit is not the same as agreeing to participate in a project, still less to guarantee its financial success.

The decision to grant a loan does not constitute a guarantee to the borrower, nor is it advice to proceed. If it did, then Third World countries could sue international banks for several hundred billions in compensation on top of the billions the banks have been forced to write off when the loans went bad. The Reichmann brothers would be able to sue the lending banks for the losses they suffered on building Canary Wharf and still expect to buy the building back on the cheap.

Lloyds Bank claims that it has not altered its instructions to managers in the light of the judgment. They will continue to follow bank rules to assess a proposition and ask probing questions about the viability of the project.

And they will ask customers whether they have considered various financial options and taken specific and general risks into consideration. But even if the bank considers the proposal an acceptable risk, the decision to proceed must always be left to the customer.

Perhaps this is just as well. If the decision to lend money ever did come to constitute advice to the borrower to proceed with the proposal, no bank manager would ever dare to approve a single proposal. In the long run, one of the more significant aspects of the case is the judge's reported remark that the manager should have told the couple plainly that their proposal was not a wise one and that they should forget about it.

With hindsight that is perfectly clear, but not everyone shared the view way back in 1988 that the property market was about to collapse.

Paradoxically, one of the actual consequences of the judgment could be to make banks reluctant to give borrowers any guidance at all in case they are subsequently blamed for talking customers out of an opportunity for the profitable use of credit.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
Arts and Entertainment
booksPhotographer Richard Young has been snapping celebrities at play for 40 years - but he says it wasn’t all fun and games...
News
i100
Sport
Aguero - who single-handedly has kept City's Champions League dreams alive - celebrates his dramatic late winner
footballManchester City 3 Bayern Munich 2: Argentine's late hat-rick sees home side snatch vital victory
News
Muhammad Ali pictured in better health in 2006
peopleBut he has enjoyed publicity from his alleged near-death experience
Arts and Entertainment
Tony breaks into Ian Garrett's yacht and makes a shocking discovery
TVReview: Revelations continue to make this drama a tough watch
News
news
News
peopleSinger tells The Independent what life is like in rehab in an exclusive video interview
News
The assumption that women are not as competent in leadership positions as men are leads to increased stress in the workplace
science... and it's down to gender stereotypes
Arts and Entertainment
Inner sanctum: Tove Jansson and friends in her studio in 1992
booksWhat was the inspiration for Finland's most famous family?
News
i100
Arts and Entertainment
Singer songwriter Bob Dylan performs on stage
films
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Citifocus Ltd: Product Development - Asset Management

    £Attractive: Citifocus Ltd: High calibre individual with significant product d...

    Citifocus Ltd: Credit Ratings - Banking Sector

    £Negotiable: Citifocus Ltd: Leading global bank seeks experienced credit analy...

    Citifocus Ltd: Economic Crime Investigation & Analysis

    £Attractive Package: Citifocus Ltd: High calibre individual with a high degree...

    Citifocus Ltd: Snr Risk Analyst - Capital & Liquidity

    £Attractive: Citifocus Ltd: High calibre individual with superior academics an...

    Day In a Page

    Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

    Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

    Our partner charities help veterans on the brink – and get them back on their feet
    Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

    Putin’s far-right ambition

    Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
    Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

    Escape to Moominland

    What was the inspiration for Finland's most famous family?
    Nightclubbing with Richard Young: The story behind his latest book of celebrity photographs

    24-Hour party person

    Photographer Richard Young has been snapping celebrities at play for 40 years. As his latest book is released, he reveals that it wasn’t all fun and games
    Michelle Obama's school dinners: America’s children have a message for the First Lady

    A taste for rebellion

    US children have started an online protest against Michelle Obama’s drive for healthy school meals by posting photos of their lunches
    Colouring books for adults: How the French are going crazy for Crayolas

    Colouring books for adults

    How the French are going crazy for Crayolas
    Jack Thorne's play 'Hope': What would you do as a local politician faced with an impossible choice of cuts?

    What would you do as a local politician faced with an impossible choice of cuts?

    Playwright Jack Thorne's latest work 'Hope' poses the question to audiences
    Ed Harcourt on Romeo Beckham and life as a court composer at Burberry

    Call me Ed Mozart

    Paloma Faith, Lana del Ray... Romeo Beckham. Ed Harcourt has proved that he can write for them all. But it took a personal crisis to turn him from indie star to writer-for-hire
    10 best stocking fillers for foodies

    Festive treats: 10 best stocking fillers for foodies

    From boozy milk to wasabi, give the food-lover in your life some extra-special, unusual treats to wake up to on Christmas morning
    Phil Hughes head injury: He had one weakness – it has come back to haunt him

    Phil Hughes had one weakness – it has come back to haunt him

    Prolific opener had world at his feet until Harmison and Flintoff bounced him
    'I have an age of attraction that starts as low as four': How do you deal with a paedophile who has never committed a crime?

    'I am a paedophile'

    Is our approach to sex offenders helping to create more victims?
    How bad do you have to be to lose a Home Office contract?

    How bad do you have to be to lose a Home Office contract?

    Serco given Yarl’s Wood immigration contract despite ‘vast failings’
    Green Party on the march in Bristol: From a lost deposit to victory

    From a lost deposit to victory

    Green Party on the march in Bristol
    Putting the grot right into Santa's grotto

    Winter blunderlands

    Putting the grot into grotto
    'It just came to us, why not do it naked?' London's first nude free runner captured in breathtaking images across capital

    'It just came to us, why not do it naked?'

    London's first nude free runner captured in breathtaking images across capital