The Court of Appeal has today dismissed the appeal in the case of Emptage v Financial Services Compensation Scheme.
Ms Emptage was advised to remortgage her home using an interest only mortgage and to invest the proceeds into a Spanish property. The Spanish property market collapsed, leaving Ms Emptage with a worthless investment and an outstanding mortgage that she could not afford to pay off.
When Ms Emptage made a claim for compensation, the FSCS concluded that the mortgage advice she received was unsuitable. However, it also concluded that it could not award compensation in respect of the failed Spanish property investment because advice on the sale or acquisition of land is not a regulated activity. Accordingly, the FSCS only offered Ms Emptage a small amount of compensation to reflect the loss she'd suffered on the mortgage alone.
Rather than accept this offer, Ms Emptage challenged the FSCS' decision by way of judicial review. Last year, the High Court concluded that the FSCS had misdirected itself and acted irrationally when making its compensation award. The Court of Appeal has agreed with this decision and dismissed the FSCS' appeal.
The Court of Appeal concluded that the adviser's breach of duty (as accepted by the FSCS) was more properly characterised as giving bad advice in relation to a mortgage, which was a regulated activity, and not giving bad advice in relation to an investment in land. The mortgage advice was unsuitable because it exposed Ms Emptage to the risk of being unable to repay the loan at maturity if her investment failed to live up to expectations. In these circumstances, it was not possible for the FSCS to assess fair compensation without taking into account the loss caused by the occurrence of that risk – namely the failure of the investment in the Spanish property and Ms Emptage's consequent inability to repay the mortgage. Thus the High Court's decision to quash the FSCS's award stands and the FSCS will now have to reconsider the compensation due to Ms Emptage.
As we have previously commented, this decision will have an impact beyond future FSCS compensation payments and the increased levies on firms that this might result in. The principles involved are likely to apply equally to FOS complaints made against mortgage advisers in respect of mortgage advice involving both regulated and unregulated elements, and could result in increased redress payments.