Widening the Net: Emptage v FSCS

We examine the decision by the Court of Appeal in Emptage which, by virtue of its broad interpretation of what does and does not amount to a regulated activity, serves to extend the duty on the FSCS to pay compensation

The Court of Appeal considered whether advice on an unregulated activity arising from a regulated activity was within the jurisdiction of the FSCS. It also considered the extent of the FSCS’ discretion determining whether, in the exercise of its discretion, it was entitled to exclude losses arising from an unregulated activity.

The Facts

Mrs Emptage, the claimant, sought financial advice from her financial adviser about reducing her repayment mortgage of almost £40,000 on her home in Sandhurst. He advised her to re-mortgage with an interest-only mortgage of £112,000 and invest the balance in a Spanish apartment. Mrs Emptage followed that advice. Subsequently, the Spanish property market crashed and her investment turned out to be worthless. She was unable to repay the interest only re-mortgage on her home. Her financial adviser was illiquid and uninsured, so the claim was dealt with by the FSCS.

The FSCS conceded that the advice was negligent and awarded compensation of £11,522 on the basis that it could only compensate for losses arising from the regulated re-mortgage on Mrs Emptage’s English property but not for losses arising from the Spanish investment (which was not regulated).

Subsequent litigation

Mrs Emptage disagreed and applied to the court. The judge at first instance agreed that the FSCS had awarded insufficient compensation, so the FSCS appealed to the Court of Appeal, which held:

  • The FSCS was not entitled to ignore the part played by the investment in Spanish property when assessing compensation for the admitted breach. The loss suffered by Mrs Emptage flowed from the financial adviser's bad advice in relation to re-mortgaging her home, which was a regulated activity.
  • The FSCS had acted unlawfully in awarding too little compensation to Mrs Emptage, who had received negligent mortgage advice from her mortgage broker.
  • The FSCS had not exercised its discretion to exclude losses which it considered flowed from the failure of the Spanish investment. The FSCS thought mistakenly that it had no power to pay compensation for the full loss suffered by Mrs Emptage because the major part of it related to unregulated business.

Practical impact

This decision is likely to have widespread implications in financial mis-selling cases. It raises issues regarding the assessment of complaints/liability of those who provide advice in relation to regulated and unregulated investments as part of the same transaction. The decision is likely to have implications for the way the FSCS and the FOS assess compensation claims for poor investment advice.

Author: Henrietta Gordon

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