Emptage v Financial Services Compensation Scheme Ltd

Under the compensation scheme, FSCS must identify the precise breach giving rise to the claim and assess the losses directly flowing from that breach. Where negligent mortgage advice makes an interest-only mortgage unaffordable, fair compensation must address the resulting unaffordable mortgage liability. The advice cannot be divided artificially into protected mortgage advice and unprotected investment advice where the investment was an essential part of the mortgage’s proposed repayment mechanism. FSCS retains a broad discretion to determine what compensation is essential, but that discretion must be exercised rationally and consistently with the admitted basis of the claim. Compensation should, so far as possible, restore the claimant to the financial position that would have existed absent the negligent advice.

The claimant challenged a decision by the defendant, FSCS, awarding £11,522.98 under the compensation scheme. A mortgage adviser had recommended replacing a modest repayment mortgage with a substantially larger interest-only mortgage, funded and intended to be repaid through investment in a Spanish property development.

The investment failed, leaving the claimant with an unaffordable mortgage. FSCS accepted that the mortgage advice breached MCOB because it was unsuitable and unaffordable, but assessed compensation by excluding losses associated with the Spanish property investment. The central issue was whether that approach provided fair compensation under COMP 12.4.17.

1. Decision quashed. FSCS misdirected itself and acted irrationally in awarding only £11,522.98. The matter was remitted to FSCS for reconsideration.
2. COMP 12.4.17 gave FSCS a broad discretion to pay compensation only to the extent it considered essential to provide fair compensation. Consistently with R v Investors Compensation Scheme Ltd, ex parte Bowden [1996] 1 AC 261, FSCS could identify which elements of a valid claim were essential and exclude others.
3. That discretion nevertheless required a two-stage analysis: first, identify the precise breach; secondly, assess the actual losses directly flowing from it. Under FSCS policy MAA/3, fair compensation for negligent advice generally sought to restore the claimant, so far as possible, to the financial position that would have existed absent the advice.
4. The relevant breach was negligent mortgage advice under MCOB 4.7.2R. Suitability included affordability under MCOB 4.7.4R. The mortgage and investment advice formed an indivisible package because the Spanish investment was the proposed, and only realistic, repayment mechanism for the interest-only mortgage.
5. FSCS therefore erred by treating the claim as containing separable protected and unprotected elements and by excluding the consequences of the unaffordable mortgage. The loss was not properly characterised as a loss arising merely from the property purchase. The award bore no proper relation to the mortgage liability which the negligent advice had imposed.
6. The decision was quashed and FSCS was ordered to reconsider compensation in accordance with the judgment.