The above investigation into Shared Appreciation Mortgages was broadcast by BBC Inside Out South on 8 September 2014.
It came about because of an email my colleagues received in March this year from a Mr Brian Dawtrey. Mr Dawtrey told us about a financial product he had taken out which is slowly ruining him.
It's known as a Shared Appreciation Mortgage or SAM. These products were sold in their thousands by Barclays and the Bank of Scotland between 1996 and 1998. Nearly half are still active.
The deal is simple. The bank gives you 25% of the value of your property as an interest-free cash loan, in return for 75% of your home's future increase in value. The only way to redeem the mortgage is to sell the house.
The owner of a £200,000 house in 1998 would sign up to a SAM and be given £50,000 cash.
If that house were sold in 2014 for £600,000, the owner would be required to hand over £350,000 to redeem the mortgage.
Sale price: £600,000
House value when SAM taken out: £200,000
Increase in value: £400,000
75% of increase in value: £300,000
Original loan: £50,000
Total repayable: £350,000 (a return for the bank of 600%)
SAMs are equity-release products. They were offered to mainly retired people who had paid off their mortgages and were looking to release some of the value (equity) tied up up in their home.
Brian Dawtrey's case
Mr Dawtrey is 85 and lives near Lymington in Hampshire. He is quite upfront about the way he was sold his Shared Appreciation Mortgage. He was a financial naïf. He needed cash to live on, and when he heard the Bank of Scotland was handing out interest-free loans, he wanted a piece of the action.
To put this in context, Mr Dawtrey spent the first ten years of his career as a tenant farmer in Norfolk, living off the land in austerity Britain. In 1960 he took a job as part of the British overseas aid programme, moving his family to Africa to help newly-independent governments build houses, agricultural systems and transport infrastructure.
As a British guest worker of an impoverished foreign government he was never given a pension, and no one told him that if he didn't pay his National Insurance stamps back home he might be in trouble.
In the 1970s Brian had the good sense to buy a bungalow in the New Forest with his savings. When he retired there in 1985 he found (because of his non-stamp-paying years overseas) he only qualified for a reduced state pension.
Times got tight. In the nineties a neighbour told him about these interest-free loans the Bank of Scotland were throwing about, so he applied directly, without speaking to a lawyer or financial advisor. All the paperwork was done, and in 1998 he found himself the recipient of £35,000 cash from the Bank of Scotland on a home valued at £140,000. He had let a trojan horse into his home.
As Mr Dawtrey tells us in the film above: "a property value... is just something in the air, but giving us cash to live on, was a great idea."
Now he sings a different song. His property is worth £450,000. If he sells it tomorrow he will have to give Bank of Scotland £267,500. A return for the bank of 664%.
You may lose sympathy for Mr Dawtrey at this point, and on the face of it, that's fair enough. Many of those who took out SAMs consider themselves fools. I've seen and spoken to SAM holders in turmoil at their own stupidity, constantly beating themselves up about a financial decision taken by them or their partner nearly two decades ago, which has now ruined their lives.
You might think banks are perfectly entitled to take whatever they can, legally. Banks exist to make money for their shareholders, customers are there to be fleeced. Right? No one forced Mr Dawtrey, or the thousands like him, to grab the interest-free carrot dangling in front of them. It was their own greed.
Well, yes, but... does that make it okay?
"They were toxic. They were poisonous. They should never have been issued."
Julian Lewis, Brian Dawtrey's MP
Mr Dawtrey was 69 years old when he took out his SAM. It seems hard to believe now, but banks in the eighties and nineties had a rock solid reputation for safety, probity and looking after their customers' interests as much as their own. People trusted them.
Older people, who may have known their bank manager for years, trusted them even more. The idea a bank would sell a product which could slowly and deliberately eat away your children's inheritance was unthinkable. A bank was supposed to be interested in looking after your assets for your mutual benefit, not stripping them from you.
"It usury. It's a form of lending which is exploiting the ignorance of the customer."
Ian Fraser, financial journalist.
SAMs are perfectly legal. They could still be sold today. But the rules governing the way they could be sold are very different.
In the nineties, mortgages were not really regulated. There was some loose oversight. Banks operated under the (voluntary) Banking Code and mortgage lenders operated under the (voluntary) Mortgage Lenders Code. The FSA (now the FCA), didn't regulate mortgages until 2004.
As a condition of operating under the Banking Code, banks had to sign up to the Banking Ombudsman, which has the statutory power to tell the bank to fix things, if it decided a bank had broken the Code, made an error or acted unfairly.
In the case of Shared Appreciation Mortgages, although Barclays and Bank of Scotland marketed them under their usual company branding, they set up separate companies to administer and issue the mortgages. These separate companies weren't signatories to the banking code, so the Banking Ombudsman had no powers to even investigate whether customer complaints about SAMs were valid. Essentially Barclays and the Bank of Scotland hung their customers out to dry.
After getting nowhere with the Banking Ombudsman many complainants went to their MPs. It seems between 2002 and 2008 a fair head of steam was built up at parliament. The Shared Appreciation Mortgage Action Group (SAMAG) was created by SAM holders. They joined forces with the Struggle Against Financial Exploitation (SAFE) group to work with members of parliament to see what could be done.
I've seen some excellent correspondence from MPs to Barclays and Bank of Scotland spelling out exactly how unfair they think these SAM products are and demanding to know what the banks were going to do about it.
The campaign did get some movement in the middle 2000s as pressure on Barclays led them to set up a hardship scheme. This either allowed customers a grant to make good problems with their home (eg buy a new roof) or it allowed them a special loan to buy a new property if they needed to downsize or move into special accommodation.
The former provision is fairly straightforward. If the roof is falling in and you need some money to fix it, Barclays will give you the cash on condition you never ask for anything again.
After all, as they are slowly taking over the ownership of your home, they need to get a decent price for it when it is sold. Paying the customer to keep their appreciating asset in good nick is good business. I spoke to one very bitter SAM holder who refused to use the Barclays scheme. She said "I should just let the place rot. Why should I keep the place looking nice the way I do, just so they can take the benefit of the hard work I've put into maintaining my home all these years?"
The latter provision of the Barclays SAM Hardship Scheme is a little more complicated. If you are getting on - perhaps unable to climb the stairs, or prone to falling - you may need to move into more suitable housing.
If your home is worth £500,000 and Barclays are due to take £300,000 of that when your property is sold, you are going to be left with £200,000 to buy a new property. This may not be enough. The Barclays hardship scheme provides interest-free loans, repayable on the sale of your new property (most likely when you die) to make up the difference between the cash you have and the cash you need, up to 50% of the value of the new property.
In this way you are still shafted by the SAM, but at least you can maintain your quality of life by moving into suitable accommodation.
Whilst Barclays was recognising there was a serious problem with SAMs, Bank of Scotland (which had mutated into HBOS) was at the very height of its "dangerously out-of-control and riddled with fraud and alleged criminality" phase.
It is perhaps unsurprising, therefore, that the chancers in charge of this soon-to-be-taxpayer-supported enterprise felt able to ignore MPs and the anti-SAM campaign and refuse to set up or join any formal hardship scheme.
One of the Bank of Scotland's PR people did tell me recently that they assess every hardship case on its merits. If a SAM holder contacts them in need, BoS may offer them a special mortgage or "be able to provide them with a grant for a stairlift."
Unable to win redress via the regulators or using political pressure, some of the campaigners took a legal route, which ended disastrously.
One firm of solicitors believed the contracts customers signed when taking out their SAMs could be considered fundamentally unfair. And unfair contracts are unlawful under the Consumer Credit Act.
If I ask you to sign a deal which has very little potential downside for me, but which has a huge amount of potential downside to you, it doesn't actually matter if you willingly sign it. If the contract is unfair and can be proved to be so, you can get out of it.
In 2009, anti-SAM campaigners raised £1.5m in legal fees for a class action. They took it to court, fighting the banks' lawyers who felt their clients had no case to answer. In 2010, a judge agreed the case could be heard. The banks appealed that decision. A different judge partially sided with them and agreed to shift the goalposts a bit. The campaign lawyers had to regroup and think up a new strategy.
Before they could do this, the £1.5m ran out, so the campaign lawyers had to go back to the litigants and ask for more money. The campaigners couldn't do it. They withdrew their case and were hit with the banks' costs, which ran to several million pounds.
To avoid paying the banks' costs, a deal was struck. The litigants had to sign stringent gagging orders which stopped them ever complaining about their SAM to anyone ever again.
At a stroke the campaign collapsed, everyone was several thousand pounds poorer and the banks could continue their legal right to slowly take peoples' homes away from them.
But at least every lawyer involved got paid.
Why this affects you
"It's a fundamentally unfair product." Barry Taylor, SAM victim's son.
Edna Robson lives in Chelmsford. She also features in the film embedded in this blog post. In 1998 she took out a £15,000 SAM on her house. Two years ago Edna's dementia got so bad she needed to go into a care home. With the help of her son, Barry, Edna sold her house for £183,000. Because Edna had a SAM, Barclays helped themselves to more than half of it, leaving Edna with £87,000 in savings.
Since 2012 Edna has been paying £640 a week from her savings to fund her care. Now her savings have fallen below the means-testing threshold, the state will pick up the bill. So taxpayers will start paying sooner for Edna's care because the money she would otherwise use has gone to Barclays shareholders. There will be many more cases like Edna's.
I put it to both Barclays and the Bank of Scotland that by selling Shared Appreciation Mortgages in the way they did, they broke the Banking Code, specifically the sections noting a bank will:
a) “help you understand the financial implications of a mortgage”
b) “ensure all services and products comply with this code”
c) “act fairly and reasonably in all our dealings with you”
With regards to a), I can't help thinking if any customer were aware of the real financial implications of a SAM, they wouldn't go near one.
On the subject of b) - the product was being marketed by Barclays and Bank of Scotland (signatories to the Banking Code) but administered and issued by companies (eg BoSSAM No.1) which were not signatories to the Banking Code. That seems to be a direct breach of the code.
On the subject of c), one of the defences the banks fall back on when discussing SAMs is that they were shouldering a risk when issuing these products. If house prices went down they would lose money. Also, they say, no-one knew house prices were going to go up in the way they did. I would like to see their modelling on that.
Either they knew the risks to the customer (which queries how fair and reasonable their dealings were at the time), or they didn't. If the latter is the case, and they are now making profits in excess of expectations (ie excessive profits), wouldn't it be fair and reasonable to cap, time-expire or, heaven forfend, cancel their customers' SAM mortgage contracts?
I got this from Bank of Scotland:
"Bank of Scotland acted in line with normal codes of practice in place at the time when SAMs was launched.
It is worth noting that in the fourth paragraph of the SAM application form it reads "In return for a fixed interest rate for life you agree to the outset to surrender a known percentage of any future increase in the value of your home. Consequently, we strongly recommend that you consult your own Financial Adviser or Solicitor before making an application to ensure that SAM is suitable for you.
Customers then sign the application form declaring "I / We confirm we have received and read a copy of BOSSAM 5 brochure and fully understand the nature of the product." There is therefore not any need for the bank to help a customer "understand the financial implications of [the SAM] mortgage" as they have declared they already do."
And I got this from Barclays:
"Barclays recognised at the time it was offering SAMs that they would not be suitable for everyone, and we therefore ensured that:
1. The mortgage seller was required to explain the mortgage to the customer and evidence this by completing a Confirmation of Discussion Form, a copy of which was given to the customer.
2. Confirmation was required from the customer’s solicitor/legal advisor that they had obtained independent legal advice about the terms of the mortgage.
This complied with and exceeded our obligations under the Mortgage Code.
Barclays took extensive legal advice and Counsel relating to all aspects of the SAM scheme, including the contents of the brochure promoting it. Against this background, we are satisfied that the brochure was accurate and did not result in any mis-selling of this product.”
Both banks also tell me all their SAMs have been securitised and sold on. They cannot simply release people from their contracts as the future mortgage redemption proceeds have been bundled up into "securities" which are owned and traded by multiple investors on the financial markets.
Many SAM customers are decent people. They worked hard all their lives and put what they earned into their homes. They were never rich. Rich people do not need to raise cash by releasing the equity in their property at usurious rates.
Do these people deserve to be in this situation? Would you turn around to Brian Dawtrey, shrug your shoulders and say "them's the breaks, old man!"
What if you end up paying for Brian's care because the Bank of Scotland have taken the lion's share of his only real asset?
Nearly 12,000 SAMs were sold between 1996 and 1998 by Barclays and Bank of Scotland, and nearly 6,000 are still active. Many customers are now in their eighties and nineties. Some are consumed by the stress these products have caused. Far from being over, this is a live issue.