Landmark Decision for UK Financial Services Sector

The decision by Mr. Justice Hadden-Cave on 11 October 2012 in Emptage v Financial Services Compensation Scheme Ltd [2012] EWHC 2708 (Admin) is a watershed ruling in claims for compensation from the Financial Services Compensation Scheme (FSCS).

The FSCS covers business conducted by firms authorised by the Financial Services Authority (FSA), the independent watchdog set up by the UK government to regulate financial services in the UK and protect the rights of consumers. It is the UK's compensation fund of last resort for customers of authorised financial services firms. The FSCS pays compensation if a firm is unable, or likely to be unable, to pay claims against it. This is usually because the firm has stopped trading or has been declared in default.

In this case, the High Court upheld a judicial review of the FSCS in a move that could have far reaching implications for the way the FSCS assesses compensation claims for poor investment advice.

The case centred on how the FSCS calculates compensation packages to those who have suffered a loss as a result of negligent mortgage advice. The claimant had been advised by a mortgage broker to exchange a £40,000 repayment mortgage for an interest-only mortgage of more than £111,000. She was also advised to invest over £70,000 in Spanish property. She launched her claim after the Spanish housing bubble burst.

Mr. Justice Hadden-Cave was asked to examine the rules of the FSCS which provide that: "FSCS may pay compensation for any claim made in connection with protected home finance mediation only to the extent that FSCS considers that the payment of compensation is essential in order to provide the claimant with fair compensation."

The FSCS had only awarded £11,522.98 in compensation in January 2010 because of the principle that the FSCS only awards relief for bad mortgage advice and not for bad investment advice (for ploughing money into a Spanish property, for example). The FSCS has been given the right to appeal.

The ramifications of this decision will be hugely significant if the appeal by FSCS is unsuccessful. A floodgate of claims could follow from people claiming compensation for bad investment advice. Compensation was previously limited to those receiving bad mortgage advice and not bad investment advice. Now that the liability of the FSCS has been widened, many more claimants can pursue claims for compensation from the FSCS. In addition, the widening of the types of claims that can be compensated by the FSCS appears to now offer a more attractive route to claimants than the traditional process of suing the advisor for negligence in the courts.