Charmaine Emptage v Financial Services Compensation Scheme Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Moore-Bick,Lord Justice Sullivan,Lord Justice Underhill |
| Judgment Date | 18 June 2013 |
| Neutral Citation | [2013] EWCA Civ 729 |
| Docket Number | Case No: C1/2012/2811 |
| Court | Court of Appeal (Civil Division) |
| Date | 18 June 2013 |
[2013] EWCA Civ 729
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION, ADMINISTRATIVE COURT
Mr. Justice Haddon-Cave
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Moore-Bick
Lord Justice Sullivan
and
Lord Justice Underhill
Case No: C1/2012/2811
Miss Monica Carss-Frisk Q.C. and Mr. Andreas Gledhill (instructed by SNR Denton UK LLP) for the appellant
Mr. Mark Cannon Q.C. and Mr. Can Yeginsu (instructed by Manley Turnbull Solicitors) for the respondent
Introduction
In early 2005 the respondent, Ms Emptage, and her partner, Mr. Ball, were living in a property in Sandhurst, Berkshire held in Ms Emptage's name and subject to a repayment mortgage with Abbey National. The outstanding amount of the mortgage was £39,633.13 with about ten years to run. Although both Ms Emptage and Mr. Ball had good jobs, their income was moderate and neither had any substantial assets apart from the equity in their home. They decided to see whether there were any steps open to them to reduce the balance of the mortgage and the outstanding period, so they approached their insurance and mortgage broker, Mr. Peter Sharratt, for advice. Mr. Sharratt was employed by Berkshire Financial Services Ltd, a representative of Berkeley Independent Advisers Ltd, itself a body regulated by the Financial Services Authority under the Financial Services and Markets Act 2000.
Following a meeting with Ms Emptage and Mr. Ball in early February 2005, in the course of which the possibility of buying property in Spain was raised, Mr. Sharratt sent them a report in which he set out in some detail the means by which they could buy an apartment in a new development in Spain and the financial benefits to be obtained from an investment of that kind. He indicated that the necessary funds could be raised by borrowing on interest-only terms a sum sufficient to pay off their existing debt to Abbey National and to provide the cash needed to buy a Spanish property. The bulk of the report is set out in the judgment below and need not be repeated here. Suffice it to say that it set out a detailed comparison over a ten year period between the projected outcome under their present arrangements and that which could be expected if they were to make an investment in Spain, which clearly favoured the latter course. In effect, as the judge found, Mr. Sharratt's advice to Ms Emptage and Mr. Ball was that they should take the latter course, remortgage 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 in May 2005 Ms Emptage mortgaged their home to Standard Life as security for a loan of £111,810.67 over 15 years on interest-only terms. (In April 2006 Ms Emptage refinanced the Standard Life mortgage with a mortgage from the Woolwich Building Society, also on Mr. Sharratt's advice, but nothing turns on that.) They invested about £70,000 in the purchase of a property in Spain in the expectation that in due course it would provide sufficient capital to pay off the loan. Unfortunately, however, the Spanish property market collapsed and by 2009 their investment had become virtually worthless. As a result, Ms Emptage and Mr. Ball were saddled with a debt to the Woolwich which they had no means of repaying otherwise than through the sale of their home. Neither Berkshire Financial Services nor Berkeley Independent Advisers was in a position to meet a claim and neither had professional indemnity insurance that would respond. In those circumstances Ms Emptage and Mr. Ball made a complaint to the Financial Ombudsman Service, which referred their case to the Financial Services Compensation Scheme ("FSCS").
The Financial Services Compensation Scheme
At this point is necessary to refer to the statutory framework under which FSCS operates. The judge set it out in detail in paragraphs [28] – [58] of his judgment, and it will suffice for present purposes to summarise the effect of the relevant provisions in rather simpler terms before considering some of them in greater detail in due course. Since the date of the judgment below the amendments to the Financial Services and Markets Act 2000 ("the Act") made by the Financial Services and Markets Act 2012 have come into effect. As a result, the regulator, formerly known as the Financial Services Authority ("FSA"), has been re-named the Financial Conduct Authority and some of the provisions of the Act are now to be found in differently numbered sections. It is convenient, however, to describe the position as it was at the time of the events giving rise to the appeal and I shall therefore refer throughout to the FSA and to the terms of the legislation as it existed at that time.
Section 213 of the Act imposes on the FSA a duty to set up 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 and to establish a scheme manager to run it. As Miss Carss-Frisk Q.C. was anxious to emphasise, the Act and the subordinate legislation draw a sharp distinction between activities which are regulated and those which are not. Only persons who are approved by the FSA or exempt may carry out regulated activities. A contract under which a lender provides credit secured by a first legal mortgage on land, at least 40% of which is used as a dwelling by the borrower, is a regulated mortgage contract and accordingly advising a person in his capacity as a borrower on the merits of entering into a particular contract of that kind is a regulated activity. By contrast, advising on the sale or acquisition of land, whether in the United Kingdom or abroad, is not a regulated activity. The compensation scheme applies to regulated activities alone.
Under section 64 of the Act the FSA has power to issue statements of principle with respect to the conduct expected of approved persons and, where it does, to issue a code of practice for the purpose of helping to determine whether a person's conduct complies with that statement of principle. In addition, under section 138 of the Act the FSA has the power to make rules governing the way in which authorised persons carry on regulated activities. In the exercise of those powers the FSA published a sourcebook entitled Mortgages and Home Finance: Conduct of Business ("MCOB"), which contains rules ("R"), guidance ("G") and evidential provisions ("E") relating to the provision of financial services in connection with home loans. They include the following rule (MCOB 4.7.2R):
"A firm must take reasonable steps to ensure that it does not make a personal recommendation to a customer to enter into a regulated mortgage contract, or to vary an existing regulated mortgage contract, unless the regulated mortgage contract is, or after the variation will be, suitable for that customer."
A "personal recommendation" for these purposes includes advice on a home finance transaction which is presented as suitable for the person to whom it is made. A transaction will be "suitable" in this context only if, having regard to the facts disclosed by the customer and other relevant facts about her of which the firm is, or should reasonably be, aware, the firm has reasonable grounds to believe that she can afford to enter into it, that it is appropriate to her needs and is the most suitable of those which the firm has available to it for the purpose. A mortgage will not be suitable for the customer if she does not have the means to repay the loan on the terms proposed.
As part of the duty to assess whether a transaction is appropriate to the needs and circumstances of the customer, a firm is required to consider, among other things, whether she should have an interest-only mortgage, a repayment mortgage, or a combination of the two: MCOB 4.7.11(E).
Section 213 of the Act also imposes a duty on the FSA to formulate rules governing the payment of compensation. These have been published in the form of the Compensation sourcebook ("COMP"). COMP 12.4.17(R) provides:
"The FSCS may pay compensation for any claim made in connection with protected home finance mediation only to the extent that the FSCS considers that the payment of compensation is essential in order to provide the claimant with fair compensation."
This provision provides considerable scope for the FSA to exercise a measure of judgment about the way in which compensation is to be assessed, but its judgment must be exercised in a consistent and principled manner. Accordingly, in July 2009 the FSA approved a statement of policy, known as "MAA/3", on the payment of compensation, which sets out its policy on the assessment of compensation for what are described as "protected home finance mediation claims" (claims arising out of regulated mortgage transactions). In relation to compensation for negligent or bad advice it provides:
"The underlying principle is to provide the level of compensation which is essential in order to be fair. Generally the basis of compensation will seek to return claimants to the position they would be in had the negligence or bad advice not occurred, as far as is possible or practicable under the Scheme's rules and the complementary polices approved by the Board of Directors."
As the judge pointed out, there are two questions which FSCS has to...
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