Personal Finance with Nic Cicutti

YEARS AGO, long before the phrase "pensions mis-selling scandal" became a favourite stock-in-trade for personal finance journalists (and victims of the mis-selling itself, of course), someone had the bright idea of setting up an Investors' Compensation Scheme

Anyone who had been sold a wrong product, or was the victim of fraud, would be able to appy for compensation from the ICS.

Almost immediately, however, a snag revealed itself. If you were an aggrieved punter who had suffered at the hands of a big insurer, and the firm refused to admit its responsibilities, the option available to you was to go to the Insurance Ombudsman.

If the Ombudsman found in your favour, he could award compensation of up to pounds 100,000. Clearly, given the scale of the insurance firms involved, they could easily afford to pay out.

On the other hand if, clients of independent financial advisers (IFAs) succeeded in proving the IFA guilty of negligent or fraudulent advice and his professional indemnity insurer refused to pay up on his behalf, the only course of action for him was to shut up shop. At which point the ICS would step in. But its compensation limit was 100 per cent of the first pounds 30,000 and 90 per cent of the next pounds 20,000, or a maximum of pounds 48,000 in all.

Earlier this week, the new super-regulator, the Financial Services Authority, which has taken over from several other smaller City watchdogs, issued a consultation document on a single financial services compensation scheme.

The concept is laudable. There are at present five separate schemes which provide compensation if a firm collapses while owing money to investors, depositors and policyholders. Providing a one-stop point of access to consumers simplifies matters enormously.

Instead of having to chase round between differenb schemes, victims would be able to go to a single source for redress.

So far so good. Except that nowhere in the FSA consultation document is there any suggestion that the varying compensation limits be adjusted to match each other.

This means that if a bank or building society go bust, the maximum compensation limit is a maximum of pounds 18,000 (90 per cent of pounds 20,000). The ICS limit is higher, but highest is that for compulsory insurance: there is no maximum.

The FSA admits that if differing compensation limits were inflation proofed, the depositors' schemes would now pay out up to pounds 32,000, while the maximum ICS award would rise to pounds 70,000. But it claims that only 4 per cent of claims are over the current pounds 48,000 limit, while 73 per cent are under pounds 15,000.

Of course, the opposite conclusion might be drawn, that the current limit has unfairly prevented a minority of wronged customers from achieving rightful compensation. Moreover, this denial leads to a bizarre lottery: a insurance salesman's client, will probably be OK. But an independent adviser's client might get a smaller payout.

If, as the FSA claims, it wants to promote "market confidence" while protecting consumers at the same time, this is an area it must address forthwith.

Meanwhile, for readers of this newspaper, the search for a decent independent financial adviser is itself a fraught issue. That is why The Independent has published a free 20-page Guide to Independent Financial Advice, which tells you the areas in which an IFA can help and how to go about finding one. It comes with a list of names and telephone numbers to whom you can go for help. Call 0117 9712932.

Apologies, by the way, to all those readers who have tried unsuccessfully to obtain free copies of the Guide to With-Profits Bonds and the Guide to High Risk/High Reward Investments.

I know your patience is sorely tested. However, if you call 01777 839205, the nice people at that number will send you a copy of the with-profits one. Calling 0800 374413 will net you the high-risk guide. By the way, there's still space for willing volunteers to take part in our free investment makeover by Whitechurch Securities, a firm of investment specialists. Write to: Nic Cicutti, Investment Masterclass, The Independent, One Canada Square, Canary Wharf, London, E14 5DL.

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