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Financial Services Compensation Scheme Claims clarified by important Court of Appeal decision

Where negligent mortgage advice is given, the advisor can be held liable for compensation for losses arising.

If that advisor is no longer in business then borrowers are left with making claims to the industry compensation fund, the Financial Services Compensation Scheme.

The FSCS has a discretion to pay up to £50,000 of losses attributable to negligent mortgage advice.

In Emptage v Financial Services Compensation Scheme Ltd [2013] EWCA the Court of Appeal has clarified how the FSCS should calculate claims for defective mortgage advice on private homes.

In 2005 Ms Emptage had a small repayment mortgage. She was advised to raise over £70,000 to invest in Spanish property, taking her mortgage up to £111,000 on an interest-only basis.

That advice was negligent because it failed to properly consider the risks of investing in foreign property and failed to consider what would happen should the investment fail. With the Spanish property crisis, the investment did fail, and Ms Emptage was faced with having to sell her home to repay the mortgage. Her claim could not be brought against the mortgage advisor, whose business had closed down.

The FSCS argued unsuccessfully that Ms Emptage’s compensation claim should be limited to £11,000 based upon a calculation of what would have taken place if her original repayment mortgage had been maintained. The FSCS argued that it should disregard the Spanish property investment because that was not a regulated investment.

With legal representation from Manley Turnbull Solicitors and specialist Counsel, Ms Emptage argued successfully in High Court proceedings that this was the wrong approach, and the Court of Appeal has now dismissed the FSCS’ appeal against that finding.

Where someone has been wrongly advised to take out borrowing on their home in order to make an investment elsewhere, it is now clear that the FSCS should compensate them on the basis of the increased debt they owe on their home rather than on the basis of other considerations such as a the position of their former borrowing.

The FSCS should not ignore considerations of how the mortgage is expected to be repaid when it assesses whether the advice was negligent and how much of the loss should be compensated. The Court of Appeal has said that it is “difficult to see how it is possible to assess fair compensation without taking into account the loss cause by the occurrence of that risk”.

This decision is very important for anyone who has been advised to extend their mortgage borrowing on an interest only basis, in order to make an investment elsewhere.

For specialised advice on bringing claims for negligent financial advice please contact James Taylor of Wards Solicitors.

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