The Divisional Court granted a declaration that the Financial Services (Compensation of Investors) Rules 1990 enable, first, an application for compensation to be made by the personal representatives of a deceased eligible investor when no application was made by the investor during his lifetime and, second, an application by a deceased eligible investor to be pursued by his personal representatives. The court dismissed the application for judicial review based on other grounds.
The Financial Services 1986 Act regulates investment business by limiting its conduct to defined authorised persons. Under the Act a scheme was established and administered by the board of ICS under the 1990 rules to compensate investors where authorised persons are unable to satisfy claims for civil liability.
Nine authorised persons, acting as brokers, advertised a home income plan under which an investor, who usually would be elderly and living in mortgage free accommodation, raised money on a mortgage of his house. In a rising market the scheme was attractive but if the market value of the house fell while investment performance declined when interest rates rose, the investor's house became exposed to repossession.
The applicants were investors who entered into such home income plans and suffered losses. They were persuaded to enter into such schemes in contravention of the rules governing the conduct of financial advisers and exposed the brokers to actions for damages under the 1986 Act. The brokers were worthless and in default. The applicants applied for compensation under the scheme.
The applicants applied for judicial review of the board's decision relating to the quantification of compensation under the rules, its refusal to admit certain items, its decision relating to the terms of an assignment of rights and its decision not to entertain claims made by the personal representatives of a deceased investor.
Nicholas Strauss QC and Neil Kitchener (Barrett Sampson) for the applicants; Michael Beloff QC and Presiley Baxendale QC (Wilde Sapte) for the ICS.
LORD JUSTICE MANN, giving the judgment, said that the first issue was whether ICS was bound by the rules to assess the amount of compensation as being equal to the amount of the defaulting firm's civil liability and to pay that compensation subject only to expressed qualifications in the rules. ICS maintained the position that it could meet a claim at a level below that which would be recoverable in a civil action because it was only bound to meet the claim to the extent that it considered it 'essential in order to provide fair compensation', the concluding words of rule 2.04 1.
The concludings words were a limiting provision to the effect that ICS might decide how much it would meet of an application in respect of a claim which was not a basic compensatable claim where ICS considered that a meeting was not essential in order to provide fair compensation. The consideration was a matter for a judgment which could be impugned if it were irrational, but not otherwise.
The issue regarding ICS's refusal to admit certain items, such as professional fees and costs, was whether its decision was either irrational or reached without regard to a relevant consideration. ICS' decision to impose a ceiling on professional fees and costs was neither indefensible nor absurd.
ICS, relying on Watts v Morrow (1991) 4 All ER 937, refused to compensate for illness, distress and anxiety. Unless the very object of the contract was to provide pleasure, relaxation, peace of mind, then a contract breaker was not liable to compensate for mental and physical distress consequent on his breach of contract.
The object of the contracts with the brokers was to release capital so as to generate income. Income was enjoyable. However, the enjoyment was consequent upon the achievement of the contract and was not the object of the contract. The object was that of releasing capital. Any contract relating to personal investment had an inherent capacity to result either in happiness or distress. There was no mistaken appreciation of the law in ICS's decision.
The board decided that it was premature to agree, on the assignment of rights which the investor was required to agree as a condition of compensation, to indemnify against all costs if the applicants were joined as parties to any action which the board decided to take. Since any subsequent payment or agreement to pay an investor's costs would not be ultra vires the scheme. The board's decision was not illegal or irrational.
The scheme was for the compensation of small investors and ordinarily they would have regarded their savings as a benefit for their family. They would be surprised if the moment of death was to injuriously affect the inheritance. The law did not require so unjust a conclusion.
An eligible investor was vested by the rules on default of an authorised person both with the right or power to apply for compensation and with an expectation that his application would be determined. On an investor's death his right or power and his expectation were a right and an expectation which were transmissible to his personal representatives. The layman would have regarded his right and expectation as assets and there was no reason why the law should not accord with his view. A declaration to that effect would be granted.
Ying Hui Tan, Barrister