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FSCS: Landmark High Court case defeat is no disaster

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In June, the FSCS lost a judicial review in the Court of Appeal in a case brought by a consumer, Ms Emptage, whose claim for compensation we had turned down

Though I would be disturbed if the FSCS frequently lost such cases – we don’t, by the way – I don’t see this as disaster. Far from it.

Cases such as Ms Emptage’s serve helpfully to clarify the rules under which the FSCS operates. Let me illustrate this by saying something about this case.

Ms Emptage had gone to an authorised mortgage adviser to seek advice about reducing the cost of her repayment mortgage. The advice she received was to take out a much bigger, interest-only mortgage, to use in part to repay her original mortgage and the bulk to invest in a speculative Spanish property scheme.

The idea was the rental income from the Spanish property would meet the interest payments and the eventual sale would re-pay the capital.  Great advice, except the Spanish property scheme collapsed, leaving Ms Emptage with much higher interest payments and a big capital loss. Meanwhile the mortgage adviser went bust.

So what was Ms Emptage’s right to compensation from FSCS?

The FSCS initially took the view we could not compensate for the lost capital in the Spanish property because it was an unregulated investment.  We offered compensation instead to cover the higher mortgage payments because we considered the advice to take out the interest-only mortgage failed properly to consider Ms Emptage’s ability to repay given the risks associated with the Spanish property investment.

Our decision reflected, in other words, our rules as we understood them. Ms Emptage challenged that decision in judicial review.  That process,  which ultimately resulted in a Court of Appeal judgment as the FSCS sought clarity by appealing the original decision, clarified the handling of future such cases.

The Court found the FSCS, in applying the principle that the claimant should be returned to the position she would have been in had she not received bad advice, should take into account the full loss to which Ms Emptage was exposed by the failure of her adviser to properly consider the affordability risk. That included the capital loss on the Spanish property. The FSCS accepts that judgment and will now apply it in this and similar cases.

So what are the implications of this judgment? To be clear, we do not think the effect of the judgment is to extend FSCS protection to any advice by a regulated intermediary to invest in an unregulated product.

The FSCS can only compensate where a loss arose from a risk to which an investor was exposed as a direct result of regulated advice: in Ms Emptage’s case to take on a mortgage which would be unaffordable if the Spanish property speculation failed – as it did.

Nor is there a straightforward read-across to the majority of claims arising from advice about interest-only mortgages.  The distinction here is most such claims arise from property transactions which the claimants themselves are keen to enter into to provide somewhere to live. They do not involve, as in Ms Emptage’s case, an adviser recommendation to buy property for investment purposes.

So the Emptage case is important – and illustrates how judicial review can be helpful in clarifying the rules under which we operate. But we doubt its impact will be significantly to enlarge the scope of FSCS protection.

Mark Neale is chief executive of the Financial Services Compensation Scheme

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. So let me get this correct this was an unauthorised mortgage adviser who also gave investment advice (I am assuming they were also unauthorised to give regulated advice) on an unregulated investment and the FSCS provided compensation.

    Lunacy or what.

  2. 1)The idea was the rental income from the Spanish property would meet the interest payments and the eventual sale would re-pay the capital. Great advice
    2))We offered compensation instead to cover the higher mortgage payments because we considered the advice to take out the interest-only mortgage failed properly to consider Ms Emptage’s ability to repay given the risks associated with the Spanish property investment.
    Make your mind up for goodness sake.
    Wonder how many rulings against advisers would stand up in court.

  3. I can see much similarity of this case to those claims FSCS has been rejecting for clients of Abbey Brokers Limited. But these clients cannot afford the legal cost for a judicial review! I call upon FSCS to do the decent thing and re-visit all the claims for compensation brought by clients of Abbey Brokers Limited (an authorised and regulated IFA firmat the time) who are now left with mortgages they didn’t ask for (but were pushed into taking out) and cannot afford.

  4. When asked for a view on this judgement by another publication, I gave an explanation that tallies quite nicely with this FSCS clarification. So in that regard, this is a good article!!

    One point I would pick the author up on though is the statement that “we do not think the effect of the judgment is to extend FSCS protection to any advice by a regulated intermediary to invest in an unregulated product.” This is a confusion of language here that might lead to mis-understanding. What matters is whether or not the investment is ‘specified’ in the RAO, not whether or not it is regulated. So an authorised adviser recommending an unregulated collective *is* covered by the FSCS: any collective is a ‘specified’ investment. By contrast, a single off-plan holiday property is not a specified investment, such that an authorised adviser recommending it(!) is not ordinarily covered by FSCS.

  5. MIssold Investor 16th August 2013 at 4:00 pm

    This case serves to illustrate that FSCS doesn’t always get it right. Luckily for Ms Emptage, she had the resources to take this to the High Court. But what about other cases? Apart from the courts, there is no independent scrutiny of FSCS decisions. Most claimants do not have the resources to go to court, and Mr. Neale knows that.

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