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FSCS loses appeal over landmark High Court advice ruling


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.”


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There are 15 comments at the moment, we would love to hear your opinion too.

  1. without a recording of exactly who said what to whom, this sort if situation will never be clear. Did the mortgage adviser, advise her to invest in Spanish Property? Or did she some to him saying she wished to raise £x in the most efficient and cheapest way possible to buy a property? If the former then fine the advised may be at fault,, but even then, this was an unregulated investment, so why should the Regulated firms pick up the tab for this? What if firms refuse took pay the element of the FSCS fee that the judge has deemed appropriate? The FSCS should continue to refuse to pay as it is not there to cover unrefukated activities involving Spanish property. We cover REGULATED UK investments, not unregulated Spanish stupidity

  2. On the face of it, this appears to be a good decision, as the unregulated investment appears was a clearly associated part of the mortgage salesman’s advice.

    Sadly, I suspect that his potential commission earnings were in the forefront of his mind, when meeting the client and, therefore, the Court was right to judge both aspects as a connected package and compensate accordingly.

    Unfortunately, behavioural psychology suggests that people’s behaviour is heavily influenced by their remuneration and, as this individual’s income appears to have been contingent on associated investment sales, it is not surprisingly that he saw the mortgage as a means to an end.

    What interests me is whether, had RDR been in place at the time, he would have advised differently? If not, then the FSA has cocked up again.

  3. The point of this court case action is that a client trusted the advice of a UK regulated adviser. We shouldn’t blame a client for doing so! But whether the IFA community should have to pay for the misdeeds of one of its members is a moot point with me. I think the Government should pick up the tab as it was it who set up such a poor Regulator (FSA).

  4. As far as I can see, this is the biggest travesty of justice. How did this couple walk into a mortgage brokers with a view to REDUCING their mortgage, only to walk out this it nearly tripled, and with an extra house to boot.

    What is more, they didn’t moan about it all whilst the property bubble was expanding, but..hey..get this, they did when property prices in Spain imploded.Moreover, they were originally happy with their overseas property, because everyone else they knew had one.

    To me at least, it is inconceivable that they didn’t actually walk in to that broker asking the question, “We’d like to buy a place in Spain like all our mates of whom we are currently very jealous, haven’t got the income or means for it, but hey, how do we wangle the system so we can get one?” I might be wrong, but I doubt it. Now I’m having to pay for it.

  5. She took her claim to the FSCS after Berkeley went bust and the Spanish property bubble burst in 2009
    No burst bubble – no complaint.
    Clients can be as reckless as they please. They will be winners whatever happens.
    As my own property has gone down in value due to the recession I wonder if I can bring a claim against myself?

  6. @Bryan Jones

    Joe Public will never complain when someone is blowing the bubble up, only when it goes pop.

    That is behavioural psychology.

  7. Who said there was no mileage in interest only mortgage claims?

  8. The decision is correct. The customer sought advice and was recommended a re-mortgage from repayment to interest-only and a significant increase in outstanding indebtedness with no means of repaying the capital. The only asset to net off against the apparent increase in the customer’s indebtedness was the Spanish investment. The point was never taken but it seems eminently possible that this was actually an unregulated collective investment scheme rather than a simple property purchase. Either way, the value of the property is obviously relevant and was reckoned to be minimal.

    To err is entirely human but payers of FSCS levies have the right to be concerned at the waste of legal expenses by the Scheme in defending the original challenge and above all else fighting the appeal in view of the opinion expressed by the judges in this case.

    It is impossible to identify how the advice given could be regarded as suitable by a competent IFA and was not regarded as suitable by either the FSCS or the four judges who considered it. It is correct that unsuitable advice will remain concealed if the resulting transaction proves beneficial (a sale of term assurance to a single person without dependants who dies during the term is an example). The beneficial outcome does not change the unsuitable of the advice and when such an outcome is not achieved, compensation is the correct outcome.

  9. Was the mortgage adviser authorised to advise on mortgages only OR on mortgages AND investments? My point is that although the investment in propoerty might be unregulted, the use of a fixed asset as a repayment vehicle okn interest knly is nkt in itself unreasonble and if the adviser was mortgage only he should have reccomended speaking to an investment authorised firm about repayment method. An investment authorised adviser may then have concluded that this was an acceptable risk based k. the clients attitude to risk OR advised against it. Only had an investment adviser been involved should the FSCS be paying out so I think they may have been right to right it and this may be a failure of the system as I certainly did not agree to pay my FSCS fees as an investment adviser to bail out unregulated investments. I am mortgage authorised, but have NEVER done a selfcertmkrtgage as non of my clients could self certificate without iT contradicting the info J had ck,ected in my fact find and checked with their accountant! large numbers itself cert mortgages J suspect with other firms may have been fraudulent as I could never understand how a lot of people got their mortgages in the first place without someone massaging figures. The lenders were complicite in this though I believe.

  10. RegulatorSaurusRex 20th June 2013 at 9:45 am

    Another extinct ‘regulator’.

    The sheer ineptitude and wanton waste is unacceptable.

  11. Depends on the specific facts 20th June 2013 at 10:14 am

    Unless this transaction was “connected” (ie the client had no intention of buying a spansih property at all before seeing the adviser) then I dont see how advice on a loan can then be extended to a liability for the use the customer chooses to put the money to. Will this apply if a UK residential property goes down in value as well? This is CRAZY, IF they were unconnected.
    If however they were connected, ie the adviser “persuaded” the clients to buy the spanish property (of which they were previously unaware) and effectively got them to “borrow to invest” then the clients (however naive) under current system (however daft that is!) should have protection as “regulated advice” IS fully protected regardless of whether unregulated products are used, I think?

  12. “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.”

    That means no investments should be made at all then using that logic as everything carries risk.

    As I don’t know the full details of the case I can’t really comment on whether I agree with the outcome or not.

  13. @ Sean

    The judge did take account of the relative risk involved which was judged unacceptable. This was because the ability to repay the mortgage was inextricably linked to the financial performance of the Spanish property.

    So, the case was decided on the basis that the loan was fundamentally unsuitable, not on whether the Spanish property was a good investment or not.

    Full case can be read here for those interested…

  14. If this was unregulated advice, does this mean it was the responsibility of the individual as opposed to the regulated firm I wonder?
    I have read the case as Grey area pointed to and agree the judge pretty much got it right, the only questionmark I wouild have is whether the judge is correct in believeing that the FSCS is the last and final port of call. BB went out of business and were a REGULATED firm the failure was on the part of the UNREGULATED and the adviser has since moved on and set up an LLP with an accountancy practice. Should the FSCS be looking to recover these monies from tha ADVISER rather than the firm for selling unregulated investments which are NOT covered by the FSCS?
    I don’t know, but it is a question which needs an answer to before we all get an extra FSCS levy…..

  15. The crux of the matter in this case is that the advisor appears to have totally ignored the MCOB rules on suitable advice and duty of care. The advice given should have been to stay with the original lender. This should have also been the case if Ms Emptage and her partner had gone to another advisor as the same rules would have to be followed. I am not an IFA or work in the financial sector, but when I do talk to IFA’s about the MCOB rules it astounds me at how little they know about their content.

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