The recent Court of Appeal case of Emptage -v- Financial Services Compensation Scheme Limited (“Emptage”) has provided guidance in relation to the quantification of compensation for mis-sold mortgages.  Specifically, the Court of Appeal has recognised that a borrower may recover compensation for the entirety of a loss occasioned by negligent advice as to the suitability of a mortgage, when that advice included both regulated and unregulated elements.


Ms Emptage lived with her partner, Mr Ball, in a house in Sandhurst which was subject to a repayment mortgage. Ms Emptage and Mr Ball approached an insurance and mortgage broker, Mr Sharratt, for advice on how to reduce the balance of the mortgage and the outstanding period. Mr Sharratt was employed by a representative of Berkeley Independent Advisers Ltd (“BIA”), which was regulated by the Financial Services Authority under the Financial Services and Markets Act 2000 (the “Act”).

Mr Sharratt advised Ms Emptage and Mr Ball to re-mortgage their home for a much larger sum on interest-only terms and invest the balance in the purchase of property in Spain. Ms Emptage and Mr Ball followed Mr Sharratt’s advice and invested some £70,000 in a property in Spain with the expectation it would provide sufficient capital to pay off the loan. Following the collapse of the Spanish property market, the investment became practically worthless.

Faced with a debt they could not repay other than through the sale of their home, Ms Emptage and Mr Ball sought to bring a claim against BIA for negligence. As BIA was insolvent and its professional indemnity insurer unresponsive, Ms Emptage made a complaint to the Financial Ombudsman Service and was referred to the Financial Services Compensation Scheme.

Ambit of the Financial Services Compensation Scheme (“FSCS”)

FSCS was created pursuant to section 213 of the Act, which requires the FSA establish a scheme for providing compensation in cases where financial advisers whom it has authorised to act as such are unable to satisfy claims against them in respect of regulated activities.

Pursuant to section 138 of the Act the FSA published rules governing the way authorised persons carry on regulated activities in Mortgages and Home Finance: Conduct of Business (“MCOB”). MCOB 4.7.2R requires a firm to take reasonable steps to ensure it does not make a personal recommendation to a customer to enter into a regulated mortgage contract, or vary an existing regulated mortgage contract, unless it is suitable for the customer.

Pursuant to section 213 of the Act the FSA published rules governing the payment of compensation in the form of the Compensation sourcebook (“COMP”), which provides at 12.4.17(R) that the FSCS may pay compensation only to the extent that the FSCS considers that the payment of compensation is essential in order to provide the claimant with fair compensation.

In any claim for compensation FSCS will therefore consider (i) whether there has been a breach of MCOB; and (ii) if there has, what sum would constitute fair compensation for the breach.

Decision of the FSCS

In Ms Emptage’s case FSCS accepted Mr Sharratt had breached MCOB4.7.2R for failing to take reasonable steps to ensure the mortgage which he recommended was suitable for Ms Emptage, bearing in mind that he knew she was unlikely to be able to repay the principal amount on maturity unless the value of the investment in Spanish property provided the necessary funds. The relevant issue was therefore the sum which would provide fair compensation for the breach.

FSCS assessed Ms Emptage’s compensation on the basis that her claim incorporated both protected elements (being the mortgage advice) and unprotected elements (being the advice to purchase the Spanish property). FSCS therefore did not compensate Ms Emptage for any losses associated with the Spanish property purchase, as that was an unregulated transaction.

The amount of compensation provided by FSCS left a substantial amount owing on Ms Emptage’s mortgage and she commenced proceedings for judicial review of the decision of FSCS.

Court Proceedings

Mr Justice Haddon-Cave allowed Ms Emptage’s application for judicial review and quashed the decision of FSCS. The Court of Appeal dismissed FSCS’s appeal, agreeing with Mr Justice Haddon-Cave that the loss suffered by Ms Emptage flowed from Mr Sharratt’s bad advice in relation to mortgaging her home.

The Court identified as the central question in the appeal whether the breach of duty was to be characterised as giving bad advice in relation to a mortgage or giving bad advice in relation to an investment in land. The Court accepted that Mr Sharratt’s advice related to both kinds of transaction, but considered it significant that FSCS had accepted liability on the basis of Mr Sharratt recommending a mortgage which was unsuitable. It was unsuitable because Ms Emptage had no prospect of repaying the loan if her investment failed to prosper. Thus the Court accepted that Ms Emptage’s loss flowed from Ms Sharratt’s breach.

The Court held that an assessment of fair compensation must take into account the loss caused by the occurrence of the risk of being unable to pay the mortgage. FSCS’s failure to do so resulted in an award of compensation to Ms Emptage which bore no relation to the breach of Mr Sharratt’s duty, or to the reason why the mortgage was unsuitable.

In light of the Court’s decision FSCS will now have to reconsider its assessment of Ms Emptage’s compensation payment.

Practical Implications

This case demonstrates the approach FSCS should take in assessing compensation claims. In particular, it indicates the Court’s reluctance to artificially divide the activities of financial advisers into regulated and non-regulated elements. These principles are likely to also apply to the Financial Ombudsman, which similarly assesses compensation based on fairness.

It is also a reminder that the Court is likely to consider any financial advice involving disparate elements as a ‘package’ and, for the purposes of determining compensation, attempt to put the claimant back in the position she would have been in had the advice not been given. Although fact-specific, this case is likely to have consequences which reach further than FSCS claims, and result in higher compensation payments in respect of negligent financial advice generally.

For further information, please contact Georgina Squire or the Partner with whom you usually deal.