Emptage v Financial Services Compensation Scheme Ltd

The court considered the appropriate approach for the Financial Services Compensation Scheme Limited when assessing compensation under the Scheme for negligent mortgage advice which was given together with investment advice intended to make the mortgage affordable. The judge identified MCOB 4.7.2R (requirement of suitability) and COMP 12.4.17 (FSCS discretion to pay only what is essential to provide fair compensation) as the controlling provisions. FSCS accepted liability for negligent mortgage advice but limited compensation to a figure based on excluding losses said to stem from the unregulated property investment. The court held that FSCS misdirected itself and acted irrationally because it failed to treat the mortgage and linked investment advice as an indivisible package, and thereby failed to compensate for the mortgage liability which the claimant could not afford. The FSCS decision awarding £11,522.98 was quashed and FSCS was ordered to reassess compensation in accordance with the judgment.

This was a claim for judicial review by Ms Charmaine Emptage seeking quashing of FSCS's decision of 13 January 2011 which awarded £11,522.98 under the compensation scheme administered under the Financial Services and Markets Act 2000. The factual background was that, in 2005, on the advice of an appointed representative's adviser, the claimant replaced a modest repayment mortgage with a much larger interest-only mortgage and invested the surplus in a Spanish property development intended to provide the redemption mechanism. The Spanish development failed, leaving the claimant with a large, unaffordable interest-only mortgage. The advised firm (BIA) was insolvent so the claimant applied to FSCS.

The procedural posture: the FOS passed the papers to FSCS; FSCS initially rejected the claim as involving unregulated investment advice, but after representations accepted there was negligent mortgage advice in breach of MCOB and invited details to quantify loss. FSCS then assessed compensation as £11,522.98 on the basis that it could not compensate for losses arising from the unregulated Spanish property purchase and that only certain elements were essential to provide fair compensation under COMP 12.4.17.

The court framed the principal issues as (i) whether FSCS misdirected itself by treating the bulk of the claimant's loss as unprotected and therefore irrelevant to compensation for the negligent mortgage advice; and (ii) whether FSCS's assessment of fair compensation was irrational or an improper exercise of discretion. The judge analysed the regulatory framework (including FSMA 2000, the Regulated Activities Orders, COMP, MCOB and FSCS policy MAA/3) and applied the principles in Ex parte Bowden concerning FSCS's broad discretion to include only elements essential to provide fair compensation.

The court's reasoning was that once FSCS accepted liability for negligent mortgage advice under MCOB 4.7.2R, it should have identified the loss directly flowing from that breach. Because affordability is an essential element of suitability, the mortgage advice was inseparable from the advice as to the investment which purported to be the repayment method. FSCS erred by treating the investment loss as an excluded, unregulated element and by assessing compensation without restoring the claimant, so far as practicable, to the financial position she would have occupied but for the negligent mortgage advice. The judge therefore concluded FSCS misdirected itself and acted irrationally in awarding only £11,522.98 and ordered FSCS to reconsider the quantum of compensation in light of the judgment.

The claim for judicial review succeeded. The court quashed FSCS’s decision of 13 January 2011 awarding £11,522.98 because FSCS misdirected itself and acted irrationally in assessing compensation; FSCS was ordered to reconsider the question of compensation in light of the judgment and applicable principles (including MCOB 4.7.2R and COMP 12.4.17).