On 11 October 2012, the High Court handed down judgment in a judicial review of a decision of the FSCS which potentially has far-reaching consequences for FOS complaints about advice in relation to unregulated investments.

In 2005, the claimant approached an IFA for mortgage advice with a view to paying off her mortgage earlier than its then repayment date of 2015. The claimant and her partner were on modest incomes, were both in their mid-forties and had an outstanding mortgage balance of approximately £40,000. The IFA recommended the claimant borrow £110,000 with an interest only mortgage to fund the purchase of a Spanish investment property. The IFA advised that, unless “drastically incorrect”, the Spanish property would increase in value sufficiently by 2015 to pay off the capital on the loan and leave the claimant approximately £100,000 better off.

The Spanish property was never built and the claimant lost the whole of her investment. She was unable to repay the increased mortgage debt before retirement. By the time this had become clear, the IFA had been wound-up and, therefore, the claimant sought compensation from the FSCS.

Initially the FSCS rejected the claim on the ground that the loss was caused by the advice to invest in foreign property which is not a regulated activity. The FSCS reconsidered its decision, accepted that the IFA had given negligent mortgage advice and that the claimant was entitled to some compensation. The FSCS maintained that the majority of the loss was caused by the advice to invest in foreign property only and awarded £11,522.98 in compensation.

The High Court quashed the FSCS’s decision on the basis that to award only £11,522.98 was irrational. It found that the IFA’s advice formed a single “package” because it was mortgage advice which included investment advice with the latter being an essential element of the former as, without it, the mortgage was not feasible. The claimant’s loss could not be separated out into those elements relating to the “protected” and “unprotected” advice and, therefore, the award was entirely inadequate given that the claimant faced a capital repayment of £110,000 which she could not afford.

This decision may make it more difficult for respondents in FOS complaints to argue that elements of a claimant’s loss are not recoverable because they relate to unregulated activities. Although a separate regime, the FSCS is guided by similar principles to the FOS and it may well take heed of this decision. The inherent irony in this decision is the High Court’s willingness to go behind the FSCS’s discretion to determine what is fair and reasonable in all the circumstances; usually the boot is on the other foot.

Watch this space as the FSCS is appealing this judgment.  

Further reading: Charmaine Emptage –v- Financial Services Compensation Scheme Limited [2012] EWHC 2708 (Admin)