Emptage v Financial Services Compensation Scheme Ltd

A compensation scheme has a broad discretion to assess fair compensation for unsuitable regulated mortgage advice. That discretion must be exercised consistently and in accordance with the scheme’s published policy, unless good grounds justify departure.

The decision-maker must first identify the breach and the risk that made the mortgage unsuitable. Where unsuitable advice exposed a borrower to an inability to repay the principal, compensation must take account of loss caused when that risk occurred. The loss does not become unprotected merely because the borrowed funds were placed in an unregulated investment. Credit for funds received is appropriate where needed to prevent double recovery, but not where the claimant received no surviving value and the taking of the loan created the very risk against which the duty protected.

The respondent was advised to replace a modest repayment mortgage with a substantially larger interest-only mortgage and to invest the released capital in Spanish property. The investment became virtually worthless, leaving her unable to repay the mortgage without selling her home. The Financial Services Compensation Scheme accepted that recommending the mortgage breached MCOB 4.7.2R but awarded only £11,522.98. It excluded the capital released for the property purchase because investment advice concerning land was unregulated.

The Administrative Court, in [2012] EWHC 2708 (Admin), held that the Scheme had proceeded on an erroneous basis. The Scheme appealed. The central issue was whether COMP 12.4.17(R) and its published policy required or permitted the Scheme to disregard the failed investment when assessing compensation for the admitted breach of regulated mortgage-advice duties.

1. Appeal dismissed unanimously. The loss flowed from bad advice concerning a regulated mortgage. The mortgage was unsuitable because the borrower had no prospect of repaying its principal if the investment failed. The advice therefore exposed her to the precise risk that occurred, namely loss of the invested capital and consequent inability to discharge the loan. The Scheme had power under the Financial Services and Markets Act 2000 and its rules to compensate that loss.
2. COMP 12.4.17(R) conferred a broad discretion over the assessment of fair compensation. Claimants were nevertheless entitled to expect that discretion to reflect MAA/3, absent good grounds for departure. A principled assessment had to begin by identifying the breach of duty. Once the Scheme accepted a breach of MCOB 4.7.2R, it could not assess fair compensation without considering the loss caused by the occurrence of the risk that made the mortgage unsuitable.
3. The Scheme had not exercised a discretion to exclude part of the loss. Its correspondence and internal documents showed that it believed it lacked power to compensate loss associated with an unregulated property transaction. It therefore proceeded on a false basis. An award limited to the additional mortgage costs bore no proper relationship to the accepted breach or to the reason why the mortgage was unsuitable.
4. The MAA/3 guidance concerning unnecessary excess borrowing did not govern the case. It addressed borrowing more than was needed and retaining the benefit of the excess. This case concerned an interest-only mortgage that was unsuitable because it exposed the borrower to an inability to repay the principal.
5. R v Investors Compensation Scheme Ltd, ex parte Bowden [1996] 1 A.C. 261 established the breadth of the compensation body’s discretion and permitted credit to prevent double recovery on its facts. It did not require credit here. The Spanish property had no residual value, and the borrower should never have been advised to incur the loan because of the risk it created. There was no comparable double recovery.

1. Court of Appeal (Civil Division): In [2013] EWCA Civ 729, the court unanimously dismissed the Financial Services Compensation Scheme’s appeal and upheld the conclusion that its assessment had proceeded on a false basis.
2. High Court, Queen’s Bench Division, Administrative Court: In [2012] EWHC 2708 (Admin), Haddon-Cave J held that the Scheme had failed properly to apply COMP 12.4.17(R) and MAA/3 when assessing compensation.