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Negligence in the Banking Crisis. Do Banks have a duty of care?

Published May 13, 2019

Houses in negative equity after the Banking Crisis. Do the Banks have a duty of care to extend the mortgage term or reduce the mortgage by the amount you’ve lost in expected profit due to the Banks’ negligence?

The FCA have investigated the Banks’ position regarding interest rates hedging products and concluded the Banks have no duty of care. These products are not a loan and here is the difference between this duty of care and the mortgage which is a contract like any other contract.

The FCA did look at buy-to-let mortgage contracts, but in the end said they couldn’t comment because they are not regulated by the FCA. On that basis it’s a contract like any other commercial contract and as such falls to the legal system to decide if the Banks do in fact have a duty of care.

Everyone seems to blame the collapse of the American Banks and the follow on from that that caused Britain’s Banking Crisis. But, Lord Mervyn King (Governor of the Bank of England in 2007/8) has since come out and said the Banking Crisis was caused by the reckless lending of the Banks before the Banking Crisis.

Directors of Banks or any company for that matter, are legally bound to operate their business with due care, skill and diligence for the good of the company. To fail in this duty is negligent.

When the Global Financial Crisis hit the Banks held no reserves. Many failed completely, whilst others stopped lending and only exist to run down their mortgage book. The Government in most cases, picked up the pieces, took over the running of collecting in the mortgages and finally sold off the mortgage book (no doubt at a knock down price) to new banks who continued to collect in the mortgages but, guess what, they did not start lending. They didn’t have sufficient capital to comply with the new stringent rules introduced by the FCA for Banks to comply with when lending.

These new rules were implemented to prevent another Banking Crisis. BUT, where does this leave the small time buy-to-let landlord, who in good faith signed a contract saying that at the end of term they would repay the loan using the strategy of sale or refinance? They (the Banks) contemplated that this was an affordable strategy. It surely would have been, but for the negligent behaviour of the Banks. It is entirely foreseeable that when Banks stop lending property prices drop. Normally over a ten year period this drop in prices over this period of time is eaten up by inflation and the Banks resume lending. In this scenario it could not happen because the Banks did not over this long period of time resume lending.

Article Credit: Property118.com