Investors Compensation Scheme Ltd v West Bromwich Building Society

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
Judgment Date01 Nov 1996
Judgment citation (vLex)[1996] EWCA Civ J1101-3
Docket NumberCHANF 96/1378/B CHANF 96/1457/B CHANF 96/1393/B CHANF 96/1433/B CHANF 96/1458/B

[1996] EWCA Civ J1101-3





Royal Courts of Justice


London WC2


Lord Justice Leggatt

Lord Justice Swinton Thomas

Lord Justice Mummery

CHANF 96/1378/B

CHANF 96/1455/B

CHANF 96/1457/B

CHANF 96/1393/B

CHANF 96/1433/B

CHANF 96/1458/B

Alford & Ors
West Bromwich Building Society
Armitage & Ors
West Bromwich Building Society
Armitage & Ors
West Bromwich Building Society
Investors Compensation Scheme Limited
West Bromwich Building Society
Alford & Ors
West Bromwich Building Society Investors Compensation Scheme
West Bromwich Building Society

MR N STRAUSS QC with MR N KITCHENER (Instructed by Messrs Barnett Sampson, London W1M 7AE) appeared on behalf of the Plaintiffs in Alford

MR N STRAUSS QC with MR J MIDDLEBURGH (Instructed by Messrs J Keith Park & Co, St Helens WA10 1RX) appeared on behalf of the Plaintiffs in Armitage

MR G VOS QC with MR D BROCK and MR G MORPUSS (Instructed by Messrs Clifford Chance, London EC1A 4JJ) appeared on behalf of the Investors Compensation Scheme

MR D OLIVER QC with MR A HOCHHAUSER and MR V FLYNN (Instructed by Messrs Eversheds, Birmingham B3 3LX) appeared on behalf of West Bromwich Building Society

MR N THOMAS QC with MR M CANNON (Instructed by Messrs Reynolds Porter Chamberlain, and Messrs Weightmans) appeared on behalf of the Hopkins & Sons


Friday, 1 November 1996


Before the Court are appeals by the plaintiffs Eric John Alford and others in Ch l995-A-No.2266, Gladys Armitage in Ch l995-A-No.3129, to all of whom I shall refer as 'the investors' and by the plaintiffs, Investors Compensation Scheme Ltd, in Ch l995-I-No.7087 and 8106, to whom I shall refer as 'the ICS'. They appeal against the decision of Evans-Lombe J. on 3rd October l996 on two preliminary issues. The investors also appeal against the judge's decision on 17th October l996 on three further preliminary issues. The defendant in both the actions brought by the investors and in the first of the actions brought by the ICS was West Bromwich Building Society, which I shall call the 'Building Society'. In the second such action the defendants were a representative firm of solicitors called Hopkin & Sons, to whom I shall refer as 'the Solicitors'.


The judge had before him a statement of facts agreed only for the purposes of the preliminary issues. They were agreed as setting out the investors' allegations of fact, which were however not admitted by the Building Society or by the Solicitors. I shall briefly summarise the statement of facts.


From October l99l the ICS received claims from investors, most of whom were elderly. Between l989 and l99l they had entered into Home Income Plans ('HIPs') on the advice of independent financial advisors regulated by FIMBRA. The investors alleged that the financial advisors had negligently and in breach of contract and statutory duty failed to give them proper advice. The financial advisors having become insolvent, the investors made claims against the ICS for compensation under section 54(1) of the Financial Services Act l986 and rules made thereunder. The financial advisors the subject of these actions were Fisher Prew-Smith Ltd ('FPS').


The actions brought by the ICS against the Building Society and the Solicitors were brought as assignees of investors pursuant to written assignments executed by each of them in one of two standard ICS compensation claim forms. The investors' actions were brought by those who, though they had made assignments in favour of the ICS, were nevertheless pursuing actions of their own against the Building Society, but not against the Solicitors. While the ICS seeks damages for breaches of duty, the investors seek rescission of their mortgages with the Building Society on terms, and damages and abatement in respect of them.


According to the investors the HIP scheme was designed to attract elderly investors who had little income but significant equity in their homes. The investors entered into the scheme in order to obtain cash to spend as they wished. The investors allege that they were advised by FPS to take out from the Building Society one of three types of so-called Equity Release Mortgages, under which the mortgagor borrowed a sum equivalent to up to 50% of the value of the property. Interest repayments were either rolled up or substantially deferred. No repayments were required until the mortgage debt exceeded two-thirds, or in some cases 60%, of the value of the mortgagor's property. When that happened the mortgagor had to maintain the debt at that level. The Building Society charged interest at 1.45% above its base lending rate.


Although the investors could use the proceeds of the mortgages as they wished, FPS advised them to keep about 20% of the advance and to use the balance in discharge of any previous mortgage and to buy investment bonds. The purpose of the bonds was to meet repayments to the Building Society. In most cases interest rates rose, homes declined in value, and the bonds performed poorly and were eventually sold at a loss. The Solicitors acted for the investors when they took out their Equity Release Mortgages.


The ICS was established under section 54 of the Act of l986, which so far as material provides as follows —

"(1) The Secretary of State may by rules establish a scheme for compensating investors in cases where persons who are or have been authorised persons are unable, or likely to be unable, to satisfy claims in respect of any description of civil liability incurred by them in connection with their investment businesses.

(2) Without prejudice to the generality of subsection (1) above, rules under this section may —


(b) establish a fund out of which compensation is to be paid;


(e) provide for treating compensation payable under the scheme in respect of a claim against any person as extinguishing or reducing the liability of that person in respect of the claim and for conferring on the body administering the scheme a right of recovery against that person, being, in the event of his insolvency, a right not exceeding such right, if any, as the claimant would have had in that event…"


An "authorised person" means a person authorised under the Act.


In March l99l a Disciplinary Committee of FIMBRA found that FPS had acted in breach of the FIMBRA Rules in that they had failed to ensure that their clients understood the risks of entering into HIPs. The investors therefore would have had a claim in damages against FPS for breach of statutory duty, but the company went into members voluntary liquidation and was dissolved in July l993. On 2nd October l99l the ICS declared FPS to be in default under the Rules. The ICS apprised the investors of their right to claim compensation. Eventually each of the investors completed a claim form as a condition of receiving compensation. The claim form constituted a contract between the ICS and the investor. For present purposes the details of the arrangements made by the ICS for the compensation of investors are immaterial. Some of the investors tried by judicial review proceedings to improve the scope of the compensation payable.


The rules under which compensation was paid were the Financial Services (Compensation of Investors) Rules l990. In the language of the Rules the "management company" is the ICS. Rule 2.02 provides that —

"2.02.1 The management company is responsible for paying compensation to investors in accordance with these Rules.

2.02.2 The management company may pay compensation where it is satisfied on the basis of evidence provided by an investor…. that:

b. the investor has a claim against a participant firm in default….

d. the investor has agreed …. that the whole or any part of his rights in the claim and, if the management company so determines, any rights of his in a claim against any other person which relate to the subject matter of the claim, should pass to it."


Rule 2.10 relating to "recoveries" provides that —

"1. Where, in connection with the payment of compensation, an investor agrees that the whole or any part of his rights in a claim against any person are to pass to the Management Company, the payment of compensation extinguishes the liability of that person to the investor in respect of that claim or part and confers on the Management Company a right of recovery against that person which is otherwise identical to the investor's former rights in the claim or part thereof…."


We were told that the claim form was peculiar to the ICS's part in the payment of compensation to investors in HIPs, and that ICS has now adopted a revised claim form which omits Section 3(b). That Section was drafted by counsel. Headed "ICS Declaration", it provided that —

"ICS agrees that the following claims shall not be treated as a Third Party Claim for the purposes of this agreement and that the benefits of such claim shall enure to you absolutely:

Any claim (whether sounding in rescission for undue influence or otherwise) that you have or may have against the …. Building Society in which you claim an abatement of sums which you would otherwise have to repay to that Society in respect of sums borrowed by you from that Society in connection with the transaction and dealings giving rise to the claim (including interest on any such sums)."


Section 4 of the claim form dealt with investor's agreement and acknowledgement (rights against participant firm). The expression "the claim" was used to mean the claim against the Participant Firm (in this case FPS). The investor agreed that his rights against the Participant Firm in respect...

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