Earlier this Summer FSCS lost a Judicial Review in the Court of Appeal in a case brought by a consumer whose claim for compensation we had turned down, Ms Emptage.
Though I would be disturbed if FSCS frequently lost such cases – we don’t, by the way – I don’t see this as disaster. Far from it.
Cases such as Ms Emptage’s serve helpfully to clarify the rules under which FSCS operates.
Let me illustrate this by saying something about this case.
Ms Emptage had gone to an authorised mortgage adviser to seek advice about reducing the cost of her re-payment mortgage. The advice she received was to take out a much bigger, interest-only mortgage, to use in part to re-pay her original mortgage and in part (the bulk) to invest in a speculative Spanish property scheme.
The idea was that the rental income from the Spanish property would meet the interest payments and the eventual sale would re-pay the capital. Great advice, except…..
…the Spanish property scheme collapsed, leaving Ms Emptage with much higher interest payments and a big capital loss. Meanwhile the mortgage adviser went bust.
So what was Ms Emptage’s right to compensation from FSCS?
FSCS initially took the view that we could not compensate for the lost capital in the Spanish property because it was an unregulated investment. We offered compensation instead to cover the higher mortgage payments because we considered the advice to take out the interest-only mortgage failed properly to consider Ms Emptage’s ability to re-pay given the risks associated with the Spanish property investment.
FSCS’s decision reflected, in other words, our rules as we understood them.
Ms Emptage challenged that decision in judicial review. That process – which ultimately resulted in a Court of Appeal Judgement as FSCS sought clarity by appealing the initial judgement – clarified the handling of future such cases.
The Court found that FSCS, in applying the principle that the claimant should be returned to the position she would have been in had she not received bad advice, should take into account the full loss to which Ms Emptage was exposed by the failure of her advisor properly to consider the affordability risk. That included the capital loss on the Spanish property.
FSCS accepts that judgement and will now apply it in this and similar cases.
So what are the implications of this judgement?
To be clear, we do not think that the effect of the judgement is to extend FSCS protection to any advice by a regulated intermediary to invest in an unregulated product.
FSCS can only compensate where a loss arose from a risk to which an investor was exposed as a direct result of regulated advice: in Ms Emptage’s case to take on a mortgage which would be unaffordable if the Spanish property speculation failed – as it did.
Nor is there a straightforward read-across to the majority of claims arising from advice about interest-only mortgages. The distinction here is that most such claims arise from property transactions which the claimants themselves are keen to enter into to provide somewhere to live. They do not involve, as in Ms Emptage’s case, an adviser recommendation to buy property for investment purposes.
So the Emptage case is important – and illustrates how judicial review can be helpful in clarifying the rules under which we operate. But we doubt its impact will be significantly to enlarge the scope of FSCS protection.
The Financial Conduct Authority website includes a searchable database of all firms authorised and regulated by the FCA and the Prudential Regulation Authority (PRA).