HNW couples taking out joint loans are likely to face increased checks from lenders, following a Supreme Court ruling cracking down on coercion.
In the case of Waller-Edwards vs. One Savings Bank Plc, decided on 4 June, the court ruled that when more than a trivial portion of a joint loan is used to repay one partner’s personal debts – leaving the other partner financially disadvantaged – lenders must investigate for potential coercion before approving the loan.
Prior to this ruling, inquiries were only made when the use of the entire loan disadvantaged one individual, creating a grey area for more complicated financial situations.
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It was decided that in 2013, Catherine Waller-Edwards had been coerced by her then-partner Nicholas Bishop to take out a joint loan, of which £40,000 was used to pay off Bishop’s personal debts. One Savings Bank had not put this loan on inquiry, resulting in its approval and Waller-Edwards being put in a significantly worse financial situation than she was in prior to the loan.
The trial resulted in Waller-Edwards not being liable for the loan’s repayment, as she was found to be under undue influence when agreeing to be a guarantor for the loan. Where there is suspected undue influence, such as a more powerful individual exerting their influence to pressure their partner, a lender must investigate, halting the borrowing process.
A HNW individual could easily be seen as having far more power in a romantic relationship owing to the gravitational pull of their large fortune, making this ruling particularly relevant to them.
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Similarly, there could be motivation to influence the decision-making of a HNW individual regarding a will or other financial matter, owing to the appeal of their wealth.
The need for the portion of the loan paying off personal debts to be more than ‘trivial’ is particularly relevant to wealthy couples, as even one percent of a loan they take out could be considered a significant amount of money.
For instance, if £100,000 of a £10 million loan was used to pay off personal debts, that would likely be deemed more than ‘trivial’, even though it barely dents the overall figure.
To help navigate this potential change in regulation, some of the UK’s top legal minds have provided advice for HNW individuals on how to identify undue influence, what happens when a bank or lender identifies such a case, and how this may improve the way lenders monitor financial coercion.
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Coercion: HNW individuals need to take extra care
Wealthy individuals may be at extra risk of undue influence through having non-family members dealing with their finances, explained Rachel Waller, contentious wills, trusts and estates partner at Excello Law.
‘This could arise where someone is trusted to look after their affairs, such as with a solicitor, a trustee or an attorney under a lasting power of attorney,’ she said, adding that questionable transactions may raise concerns,’ she said.
‘Undue influence often arises for banks in relation to guarantors,’ she added. ‘If a bank discovers evidence of undue influence, it must take steps to ensure that the guarantor has received independent legal advice and fully understands the transaction.’
Waller said the judgment has ‘refined the circumstances’ for when lenders must investigate.
Clementine Dowley, partner at Payne Hicks Beach, emphasised the particular risks for HNW individuals. ‘In the high net worth context, this can often arise where a person trusts someone else to look after their financial affairs and that trust is betrayed, or where a vulnerable person is exploited financially.’
How much is a trivial amount of money?
A ‘trivial’ amount of money would be subject to interpretation in cases involving HNW families, argues Sarah O’Grady, Managing Associate in the Disputed Wills & Estates team at Michelmores.
‘The parties’ individual and overall wealth will likely be a relevant factor in determining “de minimis” [trivial] in the context of loans, however I would also expect the amount in question to need to be small overall, regardless of the wealth of the parties.’
O’Grady added: ‘It doesn’t matter if the disadvantaged party is also benefiting from the loan to a greater or lesser extent; the fact that there is a degree of disadvantage to them means that the possibility of undue influence being involved is raised and the lender is put on inquiry.’
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The burden of proof remains high
While the Supreme Court’s ruling has added clarification over ‘hybrid’ cases involving undue influence, it has not made it any easier to prove, according to Sangita Manek, partner in Irwin Mitchell’s Wills, Trust & Estate Disputes team.
‘Undue influence claims carry a high burden of proof,’ she said. ‘We will need to show not simply that the protagonist was in a position of influence over the relevant individual or that persuasion had taken place. Rather, we need to establish that coercion took place.’
It is paramount to contact a solicitor for advice when suspecting someone of being unduly influenced in the making of a will, investments or loans, said Thomas Klemme, an associate at Wedlake Bell.
‘It is unlikely that a bank would be aware of undue influence given its secret and insidious nature,’ he added. ‘That is why the present case has expanded the duty of lenders to make enquiries.’
While claims of financial coercion require rigorous proof, the case demonstrates courts are increasingly attuned to economic abuse disguised as financial decision-making among wealthy couples – and confirms that HNW finances must stand up to legal scrutiny.
