SPECIAL FEATURE: Emptage FSCS win will be costly

Sam Cordon

August 22, 2013

It was thought by some that when the Financial Services Compensation Scheme lost a judicial review in the Court of Appeal in June that the implications would be minimal. The action was brought by a consumer, Ms Emptage, whose claim for full compensation had been “watered down” by the FSCS. Many commentators suggested that the circumstances were so unusual they felt the decision would not set a precedent for many other cases.

Oh, how wrong could such commentators be?

Mortgage adviser firms are concerned that their levy will increase to cover the cost of this judicial review however, despite there being some £150,000 of FSCS legal costs that need to be funded, the increased levy for the legal costs may become miniscule compared to the potential for increased pay-outs as a result of the judgment.

So while the FSCS considers “the implications in respect of similar claims”, mortgage advisers will be concerned that they will now be footing an even larger bill which will inevitably cover poor advice in respect of a wider range of unregulated investments including commercial investments and buy-to-let investments.

Increased pay-outs as a result of the judgment?

Numerous column inches are still taken up covering the potential fallout from this judgment. The thrust of the discussion surrounds the way the FSCS considers cases and how it is funded. On one side of the debate the FSCS said: “The case raised complex issues which it was appropriate for FSCS to ask the Court of Appeal to consider.” On the other side of the debate, those which pay the FSCS levies are worried by the statement in the FSCS August ‘Outlook’ magazine which stated: “The costs of this case will be borne by home finance intermediation firms.”

The ruling sets the record straight

As a result of advice Ms Emptage took out an interest only remortgage of £110,000 on her home with no “way of paying it off” in order to purchase a property in Spain in the expectation that, in due course, it would provide sufficient capital to pay off the loan.

Unfortunately the Spanish property market collapsed and by 2009 her investment had become nearly worthless. As a result, Ms Emptage had a debt which she had no means of repaying other than through the sale of her UK home.

Since the adviser firm involved was insolvent and had no professional indemnity cover available, Ms Emptage claimed through the FSCS and was awarded £12,000 to compensate her for the advice to take out the interest only mortgage.

The FSCS initially decided it would only award compensation for the inappropriate mortgage advice and not on the investment advice relating to the unregulated investment in Spanish property despite the principle that victims of bad advice should be returned to the same position they would have been in prior to it.

That decision was overturned by the Court of Appeal in the judicial review and the FSCS will now compensate Ms Emptage for the poor mortgage advice and the unregulated investment advice putting her back into a position she would have been in had she not taken the advice.

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