Law Report: Home losers win compensation: Regina v Investors' Compensation Scheme Ltd, ex parte Weyell and others. Queen's Bench Divisional Court (Lord Justice Glidewell and Mr Justice Cresswell), 21 July 1993

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Small investors who lost their homes after being badly advised by financial brokers to take out 'home income plans' were entitled to compensation under the Financial Services (Compensation of Investors) Rules 1990, even though they had first entered into the plans before the compensation scheme came into effect, because the brokers' liability continued to arise for so long as they mismanaged the plans and failed to advise of the risks.

The Queen's Bench Divisional Court granted two applications for judicial review, brought by (i) Margaret Weyell and John Veniard, and (ii) Ivor Last and Joyce Rowden, in respect of the refusal by the Investor's Compensation Scheme Ltd (ICS) to award them compensation.

The brokers in default, (i) Aylesbury Associates and (ii) Fisher Prew Smith Ltd, were members of Fimbra (Financial Intermediaries, Managers and Brokers' Regulatory Association Ltd) and so were authorised to carry on investment business under the Financial Services Act 1986.

The ICS was set up, and the 1990 Rules enacted, pursuant to section 54 of the Act, in order to compensate investors where such 'authorised persons' were unable to satisfy civil liability claims.

Nicholas Strauss QC and Neil Kitchener (Barnett Sampson) for the applicants; Michael Beloff QC and Richard McManus (Wilde Sapte) for the ICS.

MR JUSTICE CRESSWELL, giving the judgment of the court, said the purpose of a home income plan was to release part of the capital represented by a home that was not subject to a mortgage.

The scheme was to raise a loan, secured by a mortgage, and invest the capital in an equity- linked single premium investment bond. The balance, after deduction of fees and costs of the mortgage, was available to the investor. Such plans were attractive to elderly people who had already paid off earlier mortgage loans.

But there was an inevitable risk that if the return from the investment, or the property's value fell, and mortgage rates increased, the income from the bond would not service the mortgage loan. The capital invested would then diminish at an increasing rate. This fate befell many home income plans after 1989. Many investors either lost their homes or were living on much reduced net incomes.

The present claims were among 1,100 involving these two brokers. The applicants' case was that the brokers, in advising them to enter into particular plans, carrying out the necessary transactions and acting thereafter as discretionary fund managers, acted negligently and in breach of contract and of Fimbra rules.

The ICS accepted that the brokers were liable and could not satisfy the investors' claims. But it refused to compensate Mrs Weyell and Mr and Mrs Veniard, because they had entered into their plans before the brokers' 'participation date', 28 August 1988, when the ICS came into being. Therefore the relevant breach of the rules, namely the bad advice to enter the plan, occurred before the compensation scheme took effect, so the claims were not 'scheme business claims' within rule 2.02(2)(b) of the 1990 Rules.

But their Lordships agreed with the applicants' submission that the brokers' liability arose not only when the original bad advice was given but also when, thereafter, the brokers failed to correct that bad advice, to manage the plans according to Fimbra rules or to warn investors of the inherent risks.

The ICS also refused to admit the claims of Mr Last and Mrs Rowden as personal representatives of their respective spouses, now deceased, with whom they had each jointly entered into home income plans, because the deaths occurred before the brokers were declared in default.

But in their Lordships' judgment, rule 2.02 did not preclude an investor's right to claim being transmitted to his personal representative before the broker was declared in default.