The Investors Compensation Scheme, which helps victims of fraud and poor advice, is operating on a hand-to-mouth basis after a decision not to use its pounds 10m bank overdraft facility.
ICS directors have decided not to add to their existing pounds 1.5m overdraft with Royal Bank of Scotland until they hear whether a legal challenge by Sun Life Assurance will proceed. There is uncertainty about their inflow of funds, as the compensation scheme's largest single funding body, the Personal Investment Authority - which was to have issued a pounds 16m cash call on the companies it regulates - decided this week not to do so until the same legal challenge was resolved. As a result, the ICS is dependent on one-off inflows of money from other regulators and occasional indemnity refunds for payments already made.
Unless the application from Sun Life for a judicial review of its legal obligations towards the compensation scheme is refused by the courts, the ICS will become insolvent within a few months. The insurer's application centres on whether it should have to pay compensation on behalf of firms that went bust before they joined the PIA last year. It argues that it could be held liable by its policyholders for making illegal payments.
Both the compensation scheme and the Securities and Investments Board, the City's leading regulator, have written to the Treasury informing it of the looming crisis. They want the Treasury or the Bank of England to act as a guarantor on the ICS's behalf so that payments can continue if the judicial review goes ahead.
Senior Treasury officials have told them this is an issue that must be resolved between the various parties involved.
David Cresswell, investor relations manager at the ICS, said yesterday: "We have enough funds available to meet the existing offers we have made. We are awaiting the outcome of the judicial review application. If Sun Life's application is granted, the options we are faced with will crystallise quite rapidly."