Mortgaged your home for BTL deposits? The deposits may be recovered.

1. The FSMA 2000 Act was amended in 2004 by the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 1) Order 2003/1475 Pt 2 art. 13 (October 31, 2004) to bring "regulated mortgage contracts" ("the RMC") within its ambit by the addition of s. 53A.

2. Section 53A provides:

"53A.- Advising on regulated mortgage contracts

(1) Advising a person is a specified kind of activity if the advice:

"(a) is given to that person in his capacity as a borrower or potential borrower; and

(b) is advice on the merits of his doing any of the following-

(i) entering into a particular regulated mortgage contract, or

(ii) varying the terms of a regulated mortgage contract.

3. Two conditions, therefore, must be fulfilled in order for the business of advising a customer to constitute a "regulated activity". The first relates to the content of that advice, i.e. it has to relate to the "on the merits" of the person entering into the RMC. [regulated mortgage contract]?The second relates to the capacity in which the person is given that advice, i.e. it has to be as "a borrower or potential borrower".

4. Part II - Chapter XV - Regulated mortgage contracts

5. Part II, Chapter XV, sets out the provisions relating specifically to Regulated Mortgage Contracts ("RMCs"). Section 61(3)(a) defines the term "regulated mortgage contract" to mean a contract under which "the lender" provides credit to "the borrower", with the repayment obligation "to be secured by first legal mortgage on land", and "at least 40% of that land is used as a dwelling by the borrower".

6. Section 64 empowers the FSA to "issue statements of principle with respect to the conduct expected of approved persons" (s.64(1)), and to "issue a code of practice for the purpose of helping to determine whether or not a person's conduct complies with the statement of principle" (s.64(2)).

Part XV - The Financial Services Compensation Scheme

Statutory instruments - S.I. 2001/544 - Specified "regulated activities"

7. The "regulated activities" referred to in the 2000 Act are those specified in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544) ("the Regulated Activities Order 2001"), in amplification of s.22(2)-(3) and Schedule 2 of the 2000 Act. It is common ground that advising on the sale or acquisition of land, whether situated in the UK or overseas, is not "specified", and is consequently not a "regulated activity". (See above as to S.I. 2003/1475).

8. (C) Compensation Rules (COMP)

Mortgages and Home Finance: Conduct of Business sourcebook ("MCOB")

9. The Mortgages and Home Finance: Conduct of Business sourcebook ("MCOB") sets out the requirements and standards applying to firms with mortgage business customers. MCOB 4.7.2R is the key rule and provides:

10. "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. " (emphasis added)

11. (see also MCOB 4.3.4 R (2), MCOB 4.3.5 G and MCOB 4.3.6 G).

12. The definition of "Personal recommendation" is to be found in the Glossary, viz.'. "advice on a home finance transaction ... presented as suitable for the person to whom it is made, or is based on a consideration of the circumstances of that person".

13. MCOB 4.7.4R defines "suitable" as follows:

"For the purposes of MCOB 4.7.2 R:

(1) a regulated mortgage contract will be suitable if, having regard to the facts disclosed by the customer and other relevant facts about the customer of which the firm is or should reasonably be aware, the firm has reasonable grounds to conclude that:

(a) the customer can afford to enter into the regulated mortgage contract;

(b) the regulated mortgage contract is appropriate to the needs and circumstances of the customer; and

(c) the regulated mortgage contract is the most suitable of those that the firm has available to it within the scope of the service provided to the customer;

(2) no recommendation must be made if there is no regulated mortgage contract from within the scope of the service provided to the customer which is appropriate to his needs and circumstances; [...]"

14. Suitability includes a customer's ability to afford to enter a particular mortgage contract (see MCOB 4.7.2R). MCOB 4.7.7.E provides:

"(1) In assessing whether a customer can afford to enter into a particular regulated mortgage contract, a firm should give due regard to the following:

(a) information that the customer provides about his income and expenditure, and any other resources that he has available;

(b) any likely change to the customer's income, expenditure or resources; and

(c) the costs that the customer will be required to meet once any discount period in relation to the regulated mortgage contract comes to an end (on the assumption that interest rates rema remain unchanged).

(2) Contravention of MCOB 4.7.7 E(1) may be relied upon as tending to show contravention of MCOB 4.7.4 R(1)(a). "

15. MCOB 4.7.10(G) provides that, in complying with its obligations under MCOB 4.7.4(R) to assess whether a RMC is "suitable" for a customer, a firm is not required to consider whether the potential borrower might be better served by?

(a) using savings instead of borrowing,?

(b) renting instead of buying, or

?(c) deferring purchase to a later date by which time property prices or interest rates might be expected to have fallen.

16. MCOB 4.7.11(E) provides that, in complying with its obligations under MCOB 4.7.4(R)(1)(b) to assess whether a the RMC is "appropriate" to the needs and circumstances of the customer, a firm "is required to consider", inter alia, whether the customer should have an interest-only mortgage, a repayment mortgage, or a combination of the two (MCOB 4.7.1 l(1)(b)(E)).

17. MCOB 4.7.12(1)(G) makes it clear that MCOB 4.7.11(E) does not require a firm to provide advice on investments and goes on to provide that "[w]whether such advice should be given will depend upon the individual needs and circumstances of the customer" and a firm can refer a customer to another source of investment advice.

Relevant case

Emptage v FSCS

?[2012] EWHC 2708 (Admin)Case No: CO/3196/2011

Appeal of this case

Emptage v FSCS [2013] EWCA Civ 729

18 The nature of broker’s breach of duty

Moore-Bick LJ identified that “the central question was whether the breach of duty was to be characterised as giving bad advice in relation to a mortgage or giving bad advice in relation to an investment in land.”

He found that the mortgage advice was unsuitable “not because she could not meet the monthly interest payments, but because she had no prospect of paying back the loan if her investment failed to live up to expectations.”

Accordingly, he viewed the broker’s bad advice about the interest only mortgage as inextricably bound up with the purchase of the Spanish Property. The mortgage advice had been bad largely because the investment advice had been bad.

19 Claim against broker (damages)

Moore-Bick LJ held that an application of Bowden to Ms Emptage’s case would oblige her to give credit for the value of the Spanish Property (of which there was none). But it would not oblige her to give credit for the monies she invested in the Spanish Property, because her loss was the loan on the Berkshire Property, which she had no prospect of repaying. There was therefore no risk of double recover

20 Case conclusion

The court identified as the central question in the appeal. whether the breach of duty was to be characterised as giving bad advice in relation to a mortgage or giving bad advice. In. relation to an investment in land. The court accepted that the brokers advice related to both kinds of transaction but considered it significant that the FCS had accepted liability on the?basis of the broker recommending a mortgage which was unsuitable because the borrower had no prospect of repaying the loan if the investment failed to prosper. The court accepted that the Emptage loss flowed from the broker’s advice.

The court held that assessment of fair compensation must take into account the loss caused by the occurrence of the risk of being unable to pay the mortgage.

21 Responsibility of network for AR’s actions

A section of Mr Justice Jacobs’ judgement from the case of Anderson v Sense Network:

“ The basis of the decision in TenetConnect was that the relevant advice on "unregulated" investments was sufficiently closely linked to the advice on regulated investments, which the AR [appointed representative] was authorised to give. The case therefore again supports the proposition that in ascertaining the scope of section 39, and the question of the business for which the principal has accepted responsibility, it is relevant to consider the terms of agreement between the principal and the AR. It is implicit in the decision that if the advice on the unregulated investments had not been sufficiently closely linked to advice which the AR was authorised to give, then there would have been no liability under section 39. I also agree with the Claimants that the authorities indicate that it is appropriate to take a broad approach when seeking to identify the "business for which he has accepted responsibility". The fact that there may not be actual authority for a particular transaction, for example because of breach of an obligation not to offer an inducement (Ovcharenko), or because there was no authority to advise on a related transaction (TenetConnect), or because certain duties needed to be fulfilled before a product was offered, does not mean that the transaction in question falls outside the scope of the relevant "business" for which responsibility is taken. Equally, the approach must not be so broad that it becomes divorced from the terms of the very AR agreement relied upon in support of the case that the principal has accepted responsibility for the business in question.”

22 Conclusion?

The Emptage case and all the FOS decisions centre around the question of good advice. Centres on?MCOB 4.7.2R. The “R” denotes a breach of statutory duty if breached, with the penalty being damages under s138D of FSMA 2000.

The issue of location of the investment property is irrelevant. The issue is the quality of advice.

The Financial Ombudsman’s public register of successful claims contains multiple examples of successful claims. These include both cases where the broker sold the investment and cases where the broker recommended the mortgage but a third party sold the investment.

I did not see any case where the mortagor purchased the investment property of his own accord but I would maintain the principle still holds.

Claims should be made either to the FCA under the FOS scheme or to the FSCS where the broker is no longer trading. It should be noted the FCA refused to invoke th Statute of Limitations, extending the time period to make a claim.

B Clarke LL.M.

Email: [email protected]

18/03/2022