Emptage v Financial Services Compensation Scheme Ltd

The Court of Appeal dismissed the FSCS's appeal against the Administrative Court's decision. The court held that FSCS had accepted that the adviser breached MCOB 4.7.2R by recommending an interest-only mortgage that was unsuitable because the borrower had no realistic prospect of repaying the capital except from a proposed investment. COMP 12.4.17R and the FSA policy MAA/3 require FSCS, when assessing compensation, to seek so far as practicable to restore the claimant to the position she would have occupied but for the breach. FSCS erred by treating the mortgage advice and the investment advice as separable and by concluding that it "could not" compensate for losses flowing from the failed investment rather than properly applying its compensation policy and rules to the loss caused by the admitted breach.

Background and parties. In 2005 Ms Emptage remortgaged her home on interest-only terms on the advice of a financial adviser, Mr Sharratt, and invested the proceeds in Spanish property. The Spanish investment collapsed and the claimant was left with a large loan secured on her home. The adviser and his firms were unable to satisfy a claim and the matter was referred to the Financial Services Compensation Scheme (FSCS).

Procedural history. The respondent pursued a claim to FSCS which accepted breach of MCOB 4.7.2R but offered a limited compensation award on the basis that losses from the Spanish property purchase were unregulated and therefore not compensatable. After exhausting FSCS's internal complaints stages the claimant sought judicial review of FSCS's decision. The case came from the Administrative Court (Haddon-Cave J, [2012] EWHC 2708 (Admin)) to the Court of Appeal.

Nature of the claim and issues. The claimant sought to compel FSCS to assess and pay fair compensation for the loss caused by the adviser’s negligent mortgage advice. The principal issues were (i) whether FSCS was entitled to regard the loss flowing from the failed Spanish property investment as outside the scope of the scheme because that advice was unregulated; (ii) whether FSCS lawfully exercised any discretion under COMP 12.4.17R and MAA/3 to exclude losses associated with the investment; and (iii) whether the claimant should be required to give credit for funds received under the mortgage (with reference to the decision in R v Investors Compensation Scheme Ltd, ex parte Bowden).

Court’s reasoning and subsidiary findings. The court accepted that FSCS correctly characterised the adviser’s conduct as a breach of MCOB 4.7.2R: the interest-only mortgage was unsuitable because repayment depended on an uncertain investment. The loss therefore flowed from negligent mortgage advice, a regulated activity, and FSCS had power to compensate for that loss. FSCS, however, proceeded on a mistaken basis by treating the mortgage advice and the investment as separable and by asserting that it "could not" compensate for losses stemming from the unregulated investment. The Court of Appeal agreed with the judge below that FSCS had not genuinely exercised a discretion under COMP 12.4.17R in line with the policy set out in MAA/3 but instead misapplied the exclusion for unregulated activities. The CA further distinguished ex parte Bowden: there was no comparable double recovery here because the Spanish property had no residual value to be credited against compensation.

Remedy and wider context. The appeal was dismissed, upholding the Administrative Court’s conclusion that FSCS had wrongly assessed compensation. The court emphasised the obligation to apply COMP and MAA/3 consistently so as to provide fair compensation for loss caused by regulated mortgage advice.

Appeal dismissed. The Court of Appeal held that FSCS had erred in law by treating the mortgage advice and the associated investment advice as separable so as to exclude the principal loss from compensation. FSCS had accepted breach of MCOB 4.7.2R and, under COMP 12.4.17R read with the FSA policy MAA/3, should have assessed compensation by seeking as far as practicable to restore the claimant to the position she would have been in but for the negligent mortgage advice. FSCS had not properly exercised a discretion to exclude the investment losses and its decision therefore failed.

Appeal to the Court of Appeal (Civil Division) from the Administrative Court, Queen's Bench Division (Haddon-Cave J) [2012] EWHC 2708 (Admin); Court of Appeal judgment reported [2013] EWCA Civ 729. The FSCS was the appellant; Ms Emptage the respondent.