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Issue 24 - January 2016

Case studies


This is a collection of case studies that have appeared elsewhere in this edition of The FOS Circular. It includes some of the case studies from the FOS Approach to Misleading Conduct in this edition. More case studies are available on our website at

Misleading conduct by silence over construction funds
The applicants applied to the FSP for low doc loans to buy two blocks of land, which they intended to build on. The FSP was aware of their plans at the time. However, when they later applied for finance to develop the blocks, the FSP declined their application.

The FSP’s loan file included a handwritten note to the lending officer saying it could not provide a low doc loan for construction. Its policy also stated that low doc loans were not available for property development. Yet the FSP did not communicate this to the applicants when they applied for the original loans.

FOS found that the applicants had a reasonable expectation that the FSP would disclose its inability to fund construction as it was aware they were:

  • buying the blocks as investments and intended to build on them
  • likely to need funds for future development.

By remaining silent, the FSP misled the applicants and needed to compensate them.

This meant the FSP should take possession of the blocks, pay the costs of selling them and keep the proceeds. The FSP should then extinguish the applicants’ loans and:

  • refund all repayments the applicants had made to the loans
  • pay the applicants’ costs for obtaining the loans and purchasing the blocks (including deposits, stamp duty and legal costs)
  • pay their costs for owning the land (including council rates, water rates and pre-building costs)
  • pay $4,000 for stress and inconvenience.

Apportionment of loss for loan break costs
In 2008, the applicants took out a five-year fixed rate loan with the FSP. The applicants paid out the loan about one year later with a break cost of $32,795.

They told FOS they had expected this break cost to be no more than $3,000 based on phone conversations they had with FSP officers before entering into the loan contract.

FOS found it was more likely than not that the FSP discussed a break fee of around $3,000 but did not tell the applicants that a break cost might also apply based on falling interest rates.

We took into account that the applicants clearly and consistently recalled the conversations, while the FSP officers neither recalled nor recorded them.

We were satisfied that the applicants were misled, because any discussion about fees for ending a fixed rate contract early must be comprehensive. It must include both the known fees and the possibility that other fees might apply if interest rates fall.

However, we reduced the amount of compensation for the applicants by 70% because:

  • the FSP wrote to the applicants after their conversations to explain that a break cost might apply if the loan was prepaid and that it could not be calculated until it was actually prepaid
  • the applicants did not clarify the letter with the FSP, even though it went against what they had previously been told
  • they had always planned to sell their property and break the loan after 12 months, so they should have fixed it for 12 months rather than five years.

FOS found the FSP should repay the applicants 30% of the break cost paid – $9,838.70 – plus interest on this amount at the variable loan interest rate.