The turn of the millennium marked a pivotal moment for the UK’s banking and legal landscape. A Court judgment, Royal Bank of Scotland plc v Etridge, didn’t just decide a single case; it fundamentally rewrote the rulebook for how lenders dealt with partners acting as guarantors for business loans. Prior to 2001, the system was a precarious one for vulnerable parties, often leading to devastating financial consequences. Etridge established a clear, practical set of procedures that lenders were obliged to follow, shifting the burden of responsibility firmly onto their shoulders.
The classic turn of the century scenario involved a husband [it usually was then]seeking a loan or increased borrowing for his business, with the bank insisting the loan be secured against the family home, which was often jointly owned with his wife [usually the vulnerable party then]. The wife, who may not have been involved in the business, would be asked to act as a guarantor. Courts recognised that in such situations, the wife could be under undue influence or misled about the risks. If the business failed, the bank would seek to repossess the home, and the wife would claim the bank should have known of the potential undue influence and had a duty to ensure she received independent advice. The pre-Etridge legal position was messy and inconsistent. To avoid later claims and to ensure the guarantee was enforceable, the lender had to take reasonable steps to satisfy itself that the guarantor had entered into the obligation freely and with a full understanding of the risks.
Lenders and brokers can no longer apply a one-size-fits-all approach, they must analyse the true purpose and structure of each transaction.
The judgment placed a heavy, non-delegable administrative burden directly upon lenders. Lenders were forced to hastily redesign their processes creating a new layer of compliance and operational cost for every transaction involving a third-party guarantor. This judgment set a new standard of care, making it considerably harder for banks to enforce such securities unless they could prove strict protocols had been meticulously followed.
Over the last 25 years these protocols have worked well, but what happens when a transaction isn’t a ‘pure guarantee’ and is a more complex arrangement where the vulnerable party also has a clear, personal interest in the loan; a so called ‘hybrid transaction’? Let’s say, the primary purpose of the loan is to benefit one party’s business, but the loan is advanced to them both, and they are both jointly and severally liable, i.e., the loan is secured against a property that is their shared home. This was the central question for the UK Supreme Court in Waller-Edwards & Anor v One Savings Bank Plc [2024] UKSC 4, a judgment that, again, has significant implications for UK lenders and mortgage brokers navigating so-called ‘hybrid transactions’.
The Waller-Edwards judgment does not overturn Etridge; it refines it and provides a more nuanced test for when its stringent requirements are triggered. Lenders and brokers can no longer apply a one-size-fits-all approach, they must analyse the true purpose and structure of each transaction. Is the loan a Pure Guarantee (e.g., a wife guaranteeing her husband’s business loan), a Pure Joint Loan or a Hybrid Transaction (e.g., a couple jointly borrowing for one party’s business)? Are there any “Unusual Features” or “Red Flags”. This is the new frontline for lenders and brokers. Their staff must be trained to spot features that should trigger further investigation, even in a hybrid or joint-borrower scenario. The new challenge is to spot circumstances such as, a vast disparity in income between the co-borrowers, one co-borrower being significantly older or in poorer health, the business purpose of the loan being overwhelmingly for one party’s benefit, with the other gaining nothing or any communication from the co-borrower expressing confusion or reluctance.
Waller-Edwards v One Savings Bank is a significant evolution of the Etridge principles. It moves the application of the law from a rigid, label-based test to a flexible, substance-based one. For UK lenders and brokers, the mandate is clear: enhance the due diligence processes to understand the true nature of a transaction and empower staff to identify and act upon those crucial “unusual features” that signal a vulnerable party may be at risk, regardless of their formal title as borrower or guarantor.
