Financial Services Compensation Scheme
Negligent mortgage advice
Emptage v Financial Services Compensation Scheme Limited
 EWCA Civ 729
Mortgage advice that contains an element of investment advice may be regarded as indivisible. "Fair" compensation for negligent re-mortgage advice meant taking a sensible view of a claimant’s "before" and "after" positions.
E and her partner lived in a residential property owned by E subject to a repayment mortgage. They sought advice from an independent financial adviser who worked for a company, which was regulated by the Financial Services Authority under the Financial Services and Markets Act 2000. The advice was sought in relation to a proposal to invest in a Spanish property
The adviser recommended the replacement of the existing repayment mortgage with an interest-only mortgage, which would redeem the existing mortgage, and enable investment of the balance in the purchase of a Spanish property. E duly followed the advice. The Spanish property market subsequently crashed, and the developer went into liquidation, leaving E with no means of servicing the mortgage payments.
It was common ground that the financial adviser had been negligent, but his company was insolvent, with no professional indemnity insurance. E therefore made a complaint to the Financial Ombudsman Service, who referred the claim to the FSCS.
The FSCS considered that the claim involved both protected elements (the mortgage advice) and unprotected elements (the advice to purchase the Spanish property). They said that they would only compensate for the losses incurred in respect of the mortgage advice. E sought to quash the FSCS’s decision by way of judicial review.
The judge quashed the decision of the FSCS and directed that the question of compensation to be reconsidered. Fair compensation for negligent advice was designed to return a claimant, so far as possible, to the position the claimant would have been in had the breach not occurred. The FSCS had failed to view the adviser’s negligent advice as an indivisible package ie. mortgage advice which included investment advice. The FSCS appealed to the Court of Appeal.
The principal issue on appeal was whether the FSCS was required or entitled to ignore the part played by the investment in Spanish property when assessing compensation for negligent mortgage advice.
Decision on appeal
The Court of Appeal dismissed the appeal and found for E.
The FSCS had a discretion to decide what elements of a claim should be taken into account when deciding how much it was essential to pay in order to award compensation fairly, and to decide what credit should be given for money received under the scheme in order to avoid double recovery (R v Investors Compensation Scheme Ltd, ex p Bowden  1 AC 261 applied). The Compensation sourcebook 12.4.17R gives the FSCS a broad discretion to decide how fair compensation is to be assessed, but claimants have a right to expect that the exercise of that discretion will reflect the policy set out in an FSA approved statement of policy (known as MAA/3) unless good grounds are shown for departing from it.
The interest-only mortgage was unsuitable not because E had no prospect of paying back the loan if her investment failed to live up to expectations. Although the extent of the loss may have been unforeseen, the nature of the risk, and therefore the kind of loss likely to occur if it happened, was clear. The loss suffered flowed from bad advice to re-mortgage which was a regulated activity.
The decision to exclude from consideration the losses which flowed from the failure of the Spanish investment reflected a belief by FSCS that it had no power to compensate Mrs E for the full loss she suffered. The FSCS therefore proceeded on a false basis.
Here, E did not have to give credit for the money received from the re-mortgage. She would have to give credit for the residual value of the Spanish property, but it had no value. In her case the loss was represented by a substantial loan secured on her home, which she has no prospect of repaying. There is therefore no double recovery.
The first instance decision (reported at  EWHC 2708) and this decision on appeal helpfully set out the relevant statutory and regulatory framework for consideration of compensation claims against the FSCS for negligent mortgage advice.
There are three main points: (1) that mortgage advice which contains an element of investment advice may be regarded as indivisible; (2) that "fair" compensation meant taking a sensible view of a claimant’s "before" and "after" positions; and (3) that on the particular facts of this case, whilst the borrower would ordinarily have to give credit for the residual value of the investment (which was nil) she would not have to give credit for the balance of the re-mortgage funds.
Note that the Financial Services Authority has now been replaced by the Financial Conduct Authority and the FSA Handbook has been replaced by the FCA Handbook.
Back to top