Business borrower? What to do if you’re affected by mis-selling

RBS has recently been dealt a fresh blow after having to admit to the mis-selling of EFG Loans, after 15 months of legal dispute. In this article, Keystone’s Patrick Selley examines the case, providing insightful tips on what to do if you think you’ve been affected by a similar situation.

Case Background

In the wake of the announcement, it is understood that RBS will now review each of its Enterprise Finance Guarantee (EFG) loans to judge whether or not the guarantee element was sufficiently explained to customers. An internal review will also take place to discover exactly what went wrong.

The acknowledgment by RBS now means it will be difficult for the bank to resist liability where it is argued that it was, indeed, in breach of legal obligations to a customer -thereby giving rise to claims for damages, to be assessed by the Courts if necessary.

What is mis-selling?

Mis-selling is not a legal term in the sense of being something clearly definable, thus automatically giving rise to the breach of a clear legal duty. However RBS’ admission can be taken as recognition that it fell short of reasonable standards of conduct, in circumstances where a reasonable offer of compensation should be made.

What actually constitutes mis-selling will vary in each case but it is likely that borrowers were of the understanding that they were ultimately only liable for 25% of the original loan amount. This is, of course, incorrect.

Guidance from the Government

Here is an extract from the Government’s published guidance:

"The guarantee provides protection to the lender in the event of default by the borrower – it is not insurance for the borrower in the event of their inability to repay the loan. The borrower is responsible for repayment of 100% of the facility, not just the 25% outside the coverage of the government guarantee. Where defaults occur, the lender is obliged to follow their standard commercial recovery procedure, including the realisation of security, before they can make a claim against the government guarantee."

It is difficult to see how, with such clear guidance, banks could have mis-represented the position. However if it is the case that the Bank is liable to the borrower then the borrower may have a defence to some or all of any claim for repayment under the original loan in that either it was based upon a misrepresentation or a collateral oral warranty by the Bank as to the extent to which the loan would be enforced by it.

In addition, if the business owner was required to give a personal guarantee of the borrower’s liability then there are certainly arguments that the guarantee liability is substantially reduced or, in some cases, eliminated entirely. The arguments here will be that:

i) The guarantor is able to benefit from Defences available to the original borrower

ii) The guarantee may be susceptible to be set aside having been induced by a mis-representation as to the ultimate extent of the borrower’s liability, made not only to the borrower but also to the guarantor.

Are you affected?

If you find yourself facing a demand on a personal guarantee in these circumstances:

1. Do not admit liability.
2. Look for all contemporaneous communications you can find with the bank at the time the loan was taken out and the guarantee was given
3. Think of any reasons why you may not have proceeded with the deal had you properly understood the true position
4. Recall what alternative sources of finance you may have had at the time.

For more information, or further guidance on this issue please contact Patrick Selley or your usual Keystone contact.