In Emptage v Financial Services Compensation Scheme (FSCS), the claimant sought mortgage advice from her mortgage broker on reducing her repayment mortgage balance of around £39,000 on a 10 year term.
He advised her to re-mortgage with an interest only mortgage of £110,000 on a 15 year term and invest the balance in a Spanish property scheme. The investment abroad would provide rental and capital to service and pay off the mortgage, as well as give a surplus. She acted on that advice which proved to be negligent.
The Spanish property market collapsed and the claimant's investment became worthless, leaving her with no way of paying the mortgage. The claimant complained to the Financial Ombudsman Service and, because of the broker’s insolvency and lack of insurance cover, the complaint was referred to the FSCS. The FSCS conceded that the broker's advice was negligent and in breach of duty under MCOB 4.7.2R. However, it rejected the compensation claim on the basis the negligent advice was to invest in Spanish property and that was not regulated advice.
The FSCS subsequently reconsidered its decision and awarded compensation of £11,500. This compensation arose only from the unsuitable mortgage contract recommended - not from the loss arising from investing the capital released from the new mortgage in the Spanish property purchase.
Mrs Emptage applied for judicial review of the FSCS’s decision to award such low compensation. The High Court held that the FSCS had a broad discretion to pay "fair" compensation to claimants for the loss caused by the breach. The precise nature of the breach had to be identified and the losses directly flowing from that breach had to be assessed. However, the court agreed that the FSCS had failed to apply those principles properly in this case because they had failed to treat the broker's negligent advice as indivisible in relating to both the mortgage and property investment. 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 did not accept that decision and appealed, but in June 2013 the appeal court also agreed that the advice in relation to the Spanish investment was inseparable from the regulated mortgage advice. The FSCS are thus still liable to reconsider the question of compensation.
It remains unclear how much the FSCS will eventually pay Ms Emptage, although it is reasonable to think the full FSCS £50,000 limit should now be paid. This does not necessarily mean that the full compensation has been paid directly to the lender, Standard Chartered, but the funds are available where they would not otherwise have been. Lenders ought therefore to be aware of the remedies that their borrowers may have and encourage them to apply to the Ombudsman and/or FSCS where possible.