The Court of Appeal has upheld the High Court’s decision which held that the FSCS was wrong not to award compensation for negligent mortgage advice in relation to Spanish property.


The claimant approached an IFA for mortgage advice with a view to paying off her mortgage earlier than its repayment date of 2015. The outstanding amount of the mortgage was £39,633.13 with about 10 years to run. The claimant and her husband were both on moderate incomes and neither had any substantial assets apart from the equity in their home. The IFA advised the claimant and her husband to remortgage their home for the much larger sum of £111,810.67 on interest-only terms, and invest the balance in the purchase of property in Spain. Unfortunately, the Spanish market collapsed and by 2009 their investment had become virtually worthless.

The claimant and her husband sought compensation from the FSCS. The FSCS accepted that the IFA had been negligent in failing to take reasonable steps to ensure that the interest-only mortgage which he recommended was suitable for the claimant. The FSCS, however, only awarded £11,522.98 to the claimant on the basis that the majority of the loss was caused by the advice to invest in property and advice on the sale or purchase of land is not a regulated activity. The claimant started proceedings for judicial review of the decision of FSCS not to increase the amount of compensation. The judge at first instance found for the claimant. It found that compensation of £11,522.98 was irrational. See our Law-Now for the reasons behind the decision. The defendant appealed.

Court of Appeal decision

The defendant submitted that:

  1. the bulk of the claimant’s loss fell outside the scheme because it flowed from bad advice about investing in property rather than entering into a mortgage; alternatively,
  2. the FSCS had a broad discretion and was, therefore, entitled to exclude losses arising from the failure of the Spanish investment; and
  3. the FSCS could properly require the claimant to give credit for the amount she had received under the mortgage.

Upholding the first instance decision and dismissing the appeal, the Court of Appeal held that the mortgage was unsuitable because the claimant had no prospect of paying back the loan if her investment failed to live up to expectations. The bad advice exposed the claimant to the risk of losing her capital and with it her home. The loss suffered, therefore, clearly flowed from the IFA’s negligent advice in relation to the mortgage, which was a regulated activity.

Rejecting the second submission, the Court of Appeal held that whilst the FSCS has a broad discretion to decide how fair compensation is to be assessed, it could not see any evidence of the FSCS exercising this discretion. The internal correspondence only showed a debate about whether the loss fell within the scope of the scheme at all, rather than whether the FSCS should use its discretion to exclude the losses flowing from the failure of the Spanish investment.

The Court of Appeal also rejected the final submission that the FSCS could properly require the claimant to give credit for the amount she had received under the mortgage. Although the Court of Appeal held that the claimant would have been obliged to give credit for the residual value of the Spanish property, the property had no value. There was no double recovery in this case.


The result of the Court of Appeal supporting the High Court decision has potentially far-reaching consequences. This decision will make it more difficult for IFAs and their insurers to argue that elements of loss fall outside of the scheme on the basis that part of the loss flows from unregulated activities. This is likely to result in larger redress payments being awarded by both the FSCS and the FOS, as although separate regimes, both are guided by similar principles.

Further reading: Charmain Emptage v Financial Services Compensation Scheme Limited [2013] EWCA Civ 729