UK: The Package Deal: The Decision In Emptage v FSCS And What It Means For Advisers

Last Updated: 3 April 2013
Article by Laura Cooke

In October 2012 the English High Court handed down judgment in Emptage v Financial Services Compensation Scheme Ltd (2012) which is likely to have implications for similar claims against investment advisers and mortgage brokers.

The case involved a judicial review of a compensation award given to Ms Emptage by the Financial Services Compensation Scheme Ltd ("FSCS"). Ms Emptage asked the court to review her FSCS award on the grounds that it did not adequately compensate her for the losses suffered due to negligent advice to take out an interest-only remortgage in order to invest in Spanish property. The FSCS attempted to distinguish between losses arising from regulated mortgage advice and unregulated investment advice regarding the Spanish property. The High Court found in favour of Ms Emptage, stating that the award given did not adequately compensate her.


Ms Emptage's claim arose from advice she received from an IFA in 2005 relating to her mortgage arrangements. At that time, Ms Emptage and her partner (who together had a combined income of £54,000) had a repayment mortgage with an outstanding balance of around £40,000 with 10 years remaining.

The IFA advised Ms Emptage to remortgage her property with an interest-only mortgage for £110,000 and use the £70,000 proceeds to invest in property in Spain. The IFA claimed that the rental income and capital appreciation of the Spanish property would satisfy the mortgage at the end of the term and also provide Ms Emptage with an additional £107,000, unless his calculations were "drastically incorrect".

Following the advice, Ms Emptage remortgaged her property and used the proceeds to invest in a yet-to-be-built Spanish property development. Subsequently, the Spanish property market collapsed and left Ms Emptage with a virtually worthless investment. As a result, Ms Emptage and her partner were left with a £110,000 interest-only mortgage with no means of paying for it.

The FSCS claim

The FSCS is the compensation fund of last resort for customers of FSA-regulated firms which are unable to satisfy claims against them. There are limits on the amount of compensation which the FSCS can pay out – the cap is £50,000 per person per firm in respect of investment and home finance business, but the limit is higher for deposits, being £85,000. The FSCS is required to pay "fair compensation" and, in respect of claims relating to bad or negligent advice, the FSCS generally seeks to return the claimant to the position they would have been in had the negligent or bad advice not been given.

Ms Emptage filed a claim for compensation with the FSCS in November 2009 as the IFA's business was insolvent and carried no professional indemnity insurance.

The FSCS at first rejected Ms Emptage's claim on the grounds that the loss resulted from investment advice she received with regard to the Spanish property. The FSA does not regulate investment in property and, so, this was not regulated' advice that was liable to be compensated by the FSCS. Following further correspondence, the FSCS changed its position, agreeing that improper mortgage advice had been given (interest-only mortgages are FSA-regulated) as the IFA had, in breach of the MCOB rules, failed to consider the affordability of the lump sum payment at redemption for Ms Emptage and the suitability of the repayment method using the Spanish property.

The FSCS award

On 10 December 2010, a Decision Letter was sent to Ms Emptage, awarding her £11,522.98. The award was calculated with reference to:

  • The reduction in the original mortgage balance that would have occurred had Ms Emptage not switched mortgages


  • The relevant amount that Ms Emptage would have paid to maintain that mortgage


  • The mortgage payments made on the new mortgage, any fees incurred and interest

The FSCS considered that in exercising its discretion it was only able to compensate for losses arising directly from the improper mortgage advice (which is a regulated activity) and not with regard to the losses arising from the purchase of the Spanish property (as property investment does not fall within the remit of FSA regulation). Ms Emptage sought judicial review of the decision.

The Court's analysis

The main issue for the court to decide was whether the FSCS complied with relevant statutory regulations and guidelines in calculating the award in respect of the IFA's negligent advice. The issue for the purposes of judicial review was whether the decision was wholly irrational and an improper exercise of discretion.

Analysing the decision in light of relevant legislation and case law,1 the Court summed up the relevant principles and approach to be applied as follows:

  • The FSCS has a broad discretion to compensate claimants with valid claims under the scheme only to the extent that it considers that the payment of compensation is essential to provide the claimant with fair compensation (COMP 12.4.7)
  • It is for the FSCS to determine, in its discretion, which elements of the claim it considers essential in order to provide fair compensation and to exclude those elements that do not meet that requirement (Ex parte Bowden)
  • Fair compensation means compensation that fairly compensates for the mischief and loss caused by the particular breach, requiring a two stage analysis: (i) identification of the precise nature of the breach complained of; and (ii) assessment of the actual losses directly flowing from the particular breach
  • Fair compensation for negligent or bad advice designed to return a claimant so far as possible to the position the claimant would have been in had the breach not occurred means losses should be calculated in such a way as to restore the claimant so far as possible to the financial status quo (MAA/3)

The Court held that the FSCS had not approached the assessment of compensation correctly or in accordance with the principles set out above. The FSCS had failed to compensate Ms Emptage for the negligent mortgage advice and the award did not restore her to the position she would have been in had the negligent advice not occurred.

The essence of the claim had related to mortgage advice not investment advice. The key flaw was that the FSCS failed to view the IFA's negligent advice as an indivisible 'package' which included the investment advice as an essential element of the former because without the investment the remortgage was not feasible.

With regard to the issue of quantum, the Court stated that the proper amount of compensation if a mortgage is unsuitable because the borrower cannot afford it should be the obligation assumed which the borrower cannot afford. The Court held that properly analysed, the claim under MCOB 4.2.7R was for the IFA recommending a mortgage which was not suitable, and as affordability is an essential element of suitability the negligent advice as to suitability included the negligent advice as to affordability. The FSCS was in error in purporting to compensate on a basis that ignored the reason for that unsuitability. The Court therefore quashed the decision of the FSCS and ordered the FSCS to reconsider the question of compensation.


Although the FSCS is appealing this decision to the Court of Appeal, (with the appeal due to be heard in May) this decision raises interesting issues regarding the assessment of complaints against, and the potential liability of, firms whose business involves the provision of advice in respect of both regulated and unregulated investments as part of the same transaction. While the case has clear implications for future FSCS compensation awards, it may well also have implications for the FOS, which assesses complaints on the basis of what is "fair and reasonable" and also determines monetary awards based on what it views as "fair compensation".


1 The Financial Services and Markets Act 2000 ('FSMA'), SI 2001/544 and SI 2003/1475, Compensation Rules contained in the Financial Services Authority Handbook ('COMP'), MCOB and Policy MAA/3: Basic of compensation (as issued by the FSCS). The Court also considered Ex parte Bowden [1996] which involved a judicial review of compensation given under the Investors Compensation Scheme. The House of Lords held that the statutory rules and guidelines for the ICS allowed a broad discretion regarding which elements the ICS considers essential in order to provide fair compensation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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