Guarantor as co-borrower.
The FSP entered into a loan with the applicant and her then husband. The purpose of the loan was to refinance existing liabilities. The substantial majority of those existing liabilities were loans between the FSP and the applicant’s husband. The applicant said that she did not obtain a benefit from the loan and should not have been signed up as a co-borrower. The FSP said that the applicant received a benefit from the loan because:
- the loan consolidated existing liabilities into one loan at a lower rate and that provided a benefit to the household
- the applicant benefited from the ability to redraw funds under the loan
- one of the loans that was refinanced was between the applicant and the FSP.
We considered whether the applicant received sufficient benefit under the loan to be regarded as a co-borrower or whether she ought to have been treated as a guarantor. As a matter of law, a guarantor is viewed as a ‘volunteer’ because they receive no benefit under the loan and the law provides special protection for them.
A number of court cases have found that a co-borrower will be treated as a volunteer if they receive no ‘benefit’ from the loan.
Consistent with case law, the Customer Owned Banking Code of Practice (Code) sets out a subscriber’s obligations when considering a joint loan application. Paragraph 11 states a subscriber “will not accept you as a co-borrower if we are aware, or ought to be aware, that you will not receive a benefit from the loan or other credit facility”.
The Code also uses the word “benefit” and so general case law provides relevant guidance as to what is a benefit from a loan or other credit facility.
The test that has been applied is a “real benefit” which must be a “direct or immediate gain”. A benefit through an improved lifestyle obtained through the loan is insufficient.
The FSP suggested that because the applicant received some benefit, that was sufficient for paragraph 11 of the Code. However such an approach is not consistent with general case law principles, which provide that where a person receives a limited benefit from a loan, their liability will be restricted to those loan funds from which they received a direct benefit.
We concluded that the reduction in household liability and the ability to redraw funds were not sufficient benefit for the purpose of the Code or case law. As a result the FSP was not entitled to accept the applicant as a co-borrower.
However, the applicant did receive a real benefit from:
- one loan that was refinanced as she was jointly and severally liable with her husband for that loan
- a very small proportion of the loan that was paid to the applicant’s savings account.
This resulted in an award that the applicant was only liable under the loan for the amount of the refinanced joint loan and the amount of the loan paid to the savings account. She was otherwise not liable under the loan.
The applicant was insured under a Medical Professional Indemnity Policy, with quarterly payments. The FSP cancelled the policy after it was unable to deduct a quarterly payment.
Although the FSP sent notices requesting payment by 7 May 2015, the Panel determined the requests were not effective notices of cancellation because the notices did not comply with the Insurance Contract Act 1984 (the Act).
To be effective, the notice must be a clear and unequivocal notice of cancellation. It cannot be a notice that gives an option to pay.
Under section 59(2) of the Act, the notice must be prospective, not retrospective. The relevant period of notice is the latest of the following times:
- 4pm on the applicable business day
- if a time is specified for the purpose in the contract – that time or
- if a time is specified in the notice – that time.
Under the terms of the applicant’s policy, when cancelling a policy the FSP was required to give three business days with notice.
The FSP sent the applicant a number of emails and letters advising the payment had not been made and requesting payment by 7 May 2015. The notices provided the option that the FSP would cancel the policy if payment was not received by that date.
The final reminder was issued on 1 May 2015 requesting payment by 7 May 2015. The FOS Panel considered this was not an effective cancellation notice but a final request for payment. The notice reflected the FSP’s intention to refrain from exercising any right to cancel the policy if payment was made by 7 May 2015. The notice was a threat to cancel rather than an unequivocal notice of cancellation of the policy.
The FSP wrote to the applicant on 11 May 2015 advising his policy had been cancelled effective 7 May 2015. The notice sought to retrospectively cancel the policy.
This is not consistent with s59 (2) of the Act which provides for the notice to be prospective or the policy terms which require three business days’ notice in writing of cancellation.
The effective time for this notice after allowing for the notice to be received in the ordinary course of post (four days) and three business days’ notice as per the policy terms, would at earliest be 20 May 2015. By that time the applicant had arranged a new policy cover with the FSP effective from 18 May 2015.
The FSP was required to reinstate the cover from 8 May 2015 to 17 May 2015.