Photo: RNZ
A financial adviser has been ordered to pay clients $87,000 after helping them set up a "deception plan" that meant they borrowed $100,000 more than they admitted to their lender.
In early 2022, the couple wanted to buy an investment property. Their mortgage adviser approached a non-bank lender on their behalf, inquiring about a loan using the equity in their home.
In March of that year, the couple had an offer accepted on a property for $796,000, subject to finance.
The lender told the adviser it would approve the loan if the couple could show they had savings or cash of $100,000.
The couple told Financial Services Complaints Ltd (FSCL), an ombudsman service for financial services providers, that the adviser helped them to borrow $100,000 from another lender as a personal loan.
They said the adviser told them to get a family member to sign a gift certificate saying he would gift them $100,000.
The properly was settled in April.
By October, the couple was having trouble paying the loan and told their adviser.
Early this year, the two-year fixed period on the loan came to an end and their interest rate increased from 5.4 percent to 9 percent.
"With great regret, [the couple] decided they had no option but to sell the investment property," FSCL said in its case note.
"To add to their stress, the value of the investment property had dropped with the market so, although they purchased it for $796,000, they were only able to sell it for $728,000."
They complained to FSCL that he adviser had come up with the "deception plan" and led them to believe it was not uncommon.
They said without that advice they would not have bought the property and would not have suffered the losses.
The adviser said he always thought the loan was for the woman's father and he was overseas for most of the time. His staff, who were not advisers, were dealing with his emails before he could see them, he said.
But FSCL said the evidence showed that the adviser came up with the plan and knew the couple were borrowing the $100,000.
"Although the adviser said that he was not seeing emails in his inbox while he was overseas, it was clear he had seen some emails because he personally replied to them. This raised doubt about the adviser saying he had not seen emails about the $100,000 loan being for [the couple] not [the woman's father]."
"The adviser's staff clearly knew that [the couple] were simultaneously borrowing a further $100,000, and getting a gift certificate signed. The fact they did not raise this with the adviser suggested he knew about the deception plan."
But FSCL said the buyers were not "unsavvy" and they decided to continue with the plan knowing it was wrong.
"We also took into account that [they] must have deceived the third-party lender about the purpose of the $100,000 loan."
FSCL said it was fair that the couple and the adviser should bear half of the losses each.
It said the couple lost $164,000 including loss in the value of the investment property, less 15 percent to account for market forces outside the adviser's control, the interest they paid and the losses from the cost of buying and selling the property such as a builder's report and real estate agent fees.
FSCL said the adviser should pay $82,000 plus $5000 for non-financial losses.
Glen Mcleod, a financial adviser at Edge Mortgages said he was surprised that the compensation was only set at that level.
"Unfortunately, this type of situation has happened in the past. It is a real concern that is still around in our industry at all.
"Customers will come up with a lot of different things from time to time when trying to make a deal work. It is our job as an adviser to let them know where something is contravening the law. Like non-disclosure providing false documents is illegal. It is also not in the best interest of the client which goes directly against what our mandate as advisers to put the customers interest first.
"I feel for the customer in this particular case. Trying to hide behind your staff is not an adequate excuse. We are liable for anything that happens with our practices."
Sign up for Ngā Pitopito Kōrero, a daily newsletter curated by our editors and delivered straight to your inbox every weekday.