Will the roof fall in on bad home loan advice?

A High Court decision could force the government to backtrack on intentions to leave advice from home loan brokers outside the scope of the statutory mortgage regulation it plans to introduce in summer 2001.

The judgment may also give a legal remedy to endowment policy holders whose mortgage payments increased because they got poor advice from agents tied to insurance companies.

The case of Martin vs Britannia Life last month could move the line between advice which needs Financial Services Act authorisation such as that on investments including endowments and Isas, and on other recommendations such as home loans.

A court has held that associated transactions must be taken into account as well as those that are specifically regulated.

The decision in January to leave mortgage brokers outside the regulatory net surprised the Council of Mortgage Lenders, which was "disappointed that the government has decided not to rationalise the various different strands of regulation into a single system".

Lenders and brokers say that the absolute certainty over the lines previously drawn between regulated and unregulated advice has disappeared.

Michael Martin brought a claim against Britannia Life, which took over the Life Association of Scotland. In 1991 the LAS's agent, Ivan Sherman had advised Mr Martin to remortgage his family's home with the Bank of Scotland and to take out a new endowment policy with LAS. The mortgage involved was a "low start" one, where relatively low early repayments often led to a devastating accumulation of arrears which had to be repaid later.

When Mr Martin eventually complained, the Britannia was prepared to accept that neither the remortgage nor the endowments were in his best interests. Indeed after some pressure was brought to bear, the company accepted that it had to refund the losses, including interest, Mr Martin suffered as a direct consequence of the endowment.

On the mortgage, however, it did not admit liability. Britannia relied upon events in 1993 after the Insurance Ombudsman (whose role in this is now subsumed by the PIA Ombudsman) had started investigating a complaint against Legal and General about the mis-selling of an endowment policy and mortgage in a similar manner.

Legal and General, backed by most of the major life in surance companies, maintained the Ombudsman's powers did not allow him to investigate such complaints. An eminent QC was called upon to arbitrate and found that Legal and General's position was correct.

However, in hearing Mr Martin's claim, Mr Justice Parker took a different approach. He held that for the purposes of the Financial Services Act 1986 "investment advice" had to include "associated or ancillary transactions", even if they were not directly covered by the Act.

It was artificial, he held, to break down financial advice given in a single session into parts that were and were not "investment business".

The judge did not in fact find for Mr Martin, as the court claim had commenced more than six years after the loss.

This gave Britannia a defence under the Limitation Act, despite Mr Martin's argument that the loss had actually arisen later than that.

The judge, however, had no doubt that the salesman had misled Mr Martin and that the company was otherwise liable for it.

Solicitor and former assistant to the Insurance Ombudsman, Peter Tyldesley, says: "It is inevitable that many complaints to Ombudsmen will not have received the mortgage related compensation to which they are entitled."

Where the Ombudsman has already rejected a claim it is questionable whether he can reopen it.

It may, however, be that in that situation the threat of court proceedings would be enough to make insurance companies pay compensation to anyone who has taken out an over-priced mortgage on the basis of agents' advice.

And the Treasury, which has the final say on financial services regulation, has been left to ponder whether its decision to regulate mortgage information and the provider rather than the sales process complies with existing law.

• Richard Colbey is a barrister