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Quantification of compensation claims and mortgage mis-selling

Harriet Quiney reviews the recent Court of Appeal decision in Emptage v FSCS which concerned the quantification of compensation claims for mortgage misselling.

Introduction

The Court of Appeal held that the FSCS’s discretion as to the quantum of compensation did not enable it to withhold compensation for the lost property investment, in circumstances where the FSCS had accepted that the IFA had been in breach of duty in failing to consider how the claimant would be able to repay the principal at the end of the mortgage term.

Facts

Ms Emptage owned a property with a repayment mortgage balance of nearly £40,000 which had 10 years left to run. In 2005 she sought advice from her broker as to how she her could reduce the balance of her mortgage and also its term. Following her broker’s advice, she subsequently remortgaged with an interest-only mortgage for £110,000 and invested the balance raised by purchasing a Spanish property to provide rental and capital to service and pay off the mortgage and provide a surplus.

The Spanish property market crashed and, by 2009, Ms Emptage’s investment was worth virtually nothing.

Allegations

The broker was insolvent so Ms Emptage raised a claim with the FSCS who concluded that, although the broker’s advice was negligent, Ms Emptage’s claim for compensation should be rejected because it was based on advice to purchase Spanish property, which was not regulated advice. Regulated advice includes the provision of mortgage advice but not advice on the sale or acquisition of land. Ms Emptage’s claim related, therefore, solely to the mortgage advice that she had received, and not the investment advice in relation to the acquisition of the Spanish property.

The FSCS, however, subsequently reconsidered its decision and awarded Ms Emptage compensation of £11,522 which was broadly based on how much her previous mortgage would have reduced over the same time.

First Instance

Ms Emptage sought a Judicial Review of the decision. At first instance, the Court found in Ms Emptage’s favour: the FSCS had a broad discretion to compensate claimants with valid claims. It had to determine the elements of the claim it considered ‘essential’ in order to provide ‘fair’ compensation and to exclude other elements. The Court held that ‘fair’ compensation meant that which fairly compensated for the mischief and loss caused by the particular breach. That required identification of the precise nature of the breach, and assessment of the losses directly flowing from it. ‘Fair’  compensation for negligent advice meant that losses should be calculated in such a way as to restore the claimant to the financial position which they would have been in but for the breach.

Therefore, by failing to approach the assessment of compensation in accordance with the required principles, the FSCS had failed to compensate Ms Emptage for the breach in question, namely the negligent mortgage advice which left her with a much increased mortgage debt which she had no ability to pay, and to properly restore her to the position which would have been in but for that advice.

The Court said that, had the FSCS approached the matter correctly, it would have concluded that, if a mortgage was unsuitable because the borrower could not afford it, then the loss was the borrower’s obligation which they were unable to afford.  Affordability was an essential element of suitability.

The FSCS, however, had continued to view the claim as one that included protected and unprotected elements, one element of which was deemed to be ‘compensatable’ whilst the other was not. It had failed to recognise that the two elements were inseparably linked, namely that mortgage advice which included investment advice (the latter being an essential element of the former because, without it, the mortgage was not feasible) and that together they formed a package of negligent advice which gave rise to the claim. The FSCS appealed.

Court of Appeal

The Court of Appeal dismissed the appeal, upholding the first instance decision. In order to achieve ‘fair compensation’ it was ‘essential’ for the FSCS to compensate Ms Emptage for the unaffordability of the mortgage itself.  The loss suffered by Ms Empatge flowed from the bad advice in relation to remortgaging her home, which was a regulated activity. Lord Justice Moore-Bick said the advice “...was unsuitable, not because she could not meet the monthly interest payments, but because she had no prospect of paying back the loan if her investment failed to live up to expectations”.  On this basis Ms Empatge was entitled to recover her full loss.

Comment

The original FSCS decision was quashed and the amount due in compensation was ordered to be reconsidered. This decision could have far-reaching implications, not only in terms of the levels of FSCS compensation payments, but it is arguable that these same principles may also apply in respect of other claims against mortgage advisers in respect of mortgage advice which includes both ‘regulated’ and ‘unregulated’ aspects as part of a package of advice.

We will continue to monitor developments in the area and will report further in future editions of this Update.

Contact

For more information please contact Harriet Quiney, Partner on +44 (0)20 7280 8873 or email harriet.quiney@dwffishburns.co.uk

By Harriet Quiney

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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