The Court of Appeal has confirmed that the Financial Services Compensation Scheme Ltd (FSCS) must pay compensation to a borrower for all the losses suffered as a result of negligent advice given.

We first reported on Emptage v Financial Services Compensation Scheme Ltd, in the November 2012 edition of our Finance Litigation briefing. Briefly, the claimant sought mortgage advice from her mortgage broker regarding reducing both her repayment mortgage balance (of circa £39,000) and its term. On his advice she re-mortgaged her property on an interest only mortgage of £110,000, investing the balance in a Spanish property scheme to provide rental and capital to service and pay off the mortgage and provide a surplus. The advice proved to be negligent following the collapse of the Spanish property market leaving the claimant's investment practically worthless.

Following a referral to the FSCS, the FSCS conceded that the broker's advice was negligent. It initially rejected the compensation claim on the basis the advice related to buying Spanish property which was not regulated advice. It subsequently reconsidered its decision and awarded compensation of £11,500 being compensation for losses arising only from the unsuitable mortgage contract recommended and not from the loss arising from investing in the Spanish property.

On appeal, the High Court held that the FSCS had a broad discretion to pay "fair" compensation to claimants for the loss caused by a breach. The precise nature of the breach had to be identified and the losses directly flowing from that breach had to be assessed. The FSCS had failed to do that. The broker's negligent advice related to both the mortgage and property investment and was indivisible. The claimant had not been adequately compensated for that negligent advice. Her true loss was the £110,000 mortgage liability she had assumed which she was unable to afford.

The FSCS unsuccessfully appealed to the Court of Appeal. The losses had all flown from the bad advice given in relation to the unsuitable mortgage. The claimant had no prospect of paying back the loan if the investment failed to live up to expectations. Although the extent of the loss might have been unforeseen, the nature of the risk, and so the nature of the losses likely to occur, had been clear. The giving of the advice had been a regulated activity and the claimant should be fairly compensated for all the losses suffered.

Things to consider

The FSCS had too rigidly separated the advice given into mortgage advice, which was regulated, and investment advice, which wasn't. The Court of Appeal held all the losses flowed from the bad advice given in relation to mortgaging the claimant's home, which was regulated advice.