Etridge: Guidelines for banks when taking security over the matrimonial home

On Thursday 11th October 2001 the House of Lords gave its decision in the Royal Bank of Scotland -v- Etridge (and 7 other cases).

In doing so, they finally laid to rest the ghost of Barclays Bank Plc -v- O’Brien and set out clear guidelines which lenders must follow when taking security from a wife in respect of her husband's debts. The House of Lords found:

• A bank is put on inquiry whenever a wife offers to stand surety for her husband's debt (or vice versa), including cases when a wife stands surety for the debts of a company whose shares are held by her and her husband, even when the wife is a director or secretary of the company.
• Although a bank must take reasonable steps to satisfy itself that a wife is aware of the practical implications of the proposed transaction, it is not necessary for a bank to hold a private meeting with her. Ordinarily, the bank's duty will be discharged by relying on confirmation from a solicitor acting for the wife that he has advised the wife properly.
• Their Lordships provide guidance for solicitors when advising wives in such circumstances, noting that the solicitor does not need to act for the wife alone, provided he is satisfied that it is in the wife's best interest and that it does not give rise to a conflict of interest.
• A bank is entitled to proceed in the belief that a solicitor advising a wife has done so properly unless it knows that that is not the case or it knows facts from which it ought to realise that is not so.

In future a bank should take the following steps:

• communicate directly with the wife, informing her that for its own protection it requires written confirmation from a solicitor acting for her, that the nature and effect and the practical implications of the documents have been fully explained to her. The wife should be informed that the solicitor may be the same solicitor as is acting for her husband, but should be asked if she would prefer a different solicitor. The bank should not proceed until it has received a response directly from the wife;
• with the consent of its customer, provide the solicitor with the financial information he needs to enable him to explain the husband's financial affairs to the wife;
• inform the wife's solicitor if he believes or suspects the wife has been misled by her husband or is not entering into the transaction of her own free will;
• in every case obtain the wife's solicitors' written confirmation that they have advised the wife in accordance with (i) above.

Finally their Lordships pointed out that these guidelines do not only apply to situations where banks take surety from wives but apply to every case where security is taken and the relationship between the surety and debtor is non-commercial.

For further information please contact Belinda Hackett on +44 (0)20 7367 2807 or by e-mail at belinda.hackett@cms-cmck.com