The Financial Services Compensation Scheme has lost a High Court appeal in a landmark case which could radically change the way it assesses compensation claims for poor advice.
The original case was brought by Charmaine Emptage, who was advised by Berkeley Independent Advisers mortgage broker Peter Sharratt to exchange a £40,000 repayment mortgage for an interest-only mortgage of more than £111,000. She was also advised to invest over £70,000 in Spanish property.
She took her claim to the FSCS after Berkeley went bust and the Spanish property bubble burst in 2009.
After initially rejecting Emptage’s complaint, the FSCS awarded Emptage £11,522.98 in December 2010, saying it would only award compensation in respect of the mortgage advice and not on losses associated with the Spanish property purchase as this was an unregulated transaction.
High Court judge Mr Justice Haddon-Cave ruled in October that the FSCS “failed to view Sharratt’s negligent advice as an indivisible ‘package’”. He said Emptage should be put back in the financial position she was in prior to the unsuitable advice and ordered the FSCS to pay her legal costs of £150,000. The FSCS appealed the judgment in November.
In his judgment on the appeal, published today, Lord Justice Moore-Bick says: “The loss suffered by Ms Emptage flowed from Mr. Sharratt’s bad advice in relation to mortgaging her home, which was a regulated activity. The FSCS had power under the [Financial Services and Markets]Act and the rules made under it to pay fair compensation in respect of that loss. I think the judge was right in finding that it was at this point that FSCS went wrong.”
He adds Sharratt’s recommendation to Emptage to take out an interest-only mortgage was unsuitable because there was a risk she would be unable to repay the loan when it matured.
He said: “It is difficult to see how it is possible to assess fair compensation without taking into account the loss caused by the occurrence of that risk. Failure to do so inevitably resulted in an award of compensation which bore no relation to the breach of duty or the reason why the mortgage was unsuitable. I do not think that any of the grounds so far put forward by FSCS for rejecting the claim can be justified in terms of an exercise of its discretion.”
FSCS chief executive Mark Neale says: “We have a duty to consider all claims objectively according to our rules. We believed we acted properly in deciding the claim by Ms Emptage and that we were unable to compensate for the full loss because we do not protect investments in property.
“However, the Court has found in the claimant’s favour and FSCS accepts the decision. We will consider the implications of the judgment for our handling of similar claims.”