FOS has published its determination in relation to an application for relief by a wife who was made a co-borrower instead of a guarantor when her husband refinanced his existing liabilities.

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.

FOS 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.

A FSP has different obligations if a person should have been a guarantor rather than a joint debtor.

Clause 11.1 of the Customer Owned Banking Code of Practice 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”.

Similarly Clause 29.1 of the Code of Banking Practice states “We will not accept you as a co-debtor under a credit facility where it is clear, on the facts known to us, that you will not receive a benefit under the facility.”

What is a benefit?

FOS said:

“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.”

FOS 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 small proportion of the refinance amount was paid to the applicant’s savings account.

FOS decided 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.