Fraud protection under threat
Wednesday 24 May 1995
A compensation scheme for victims of financial services fraud or bad advice risks running out of money within six months because of a potential boycott by insurers.
The threat to the Investors Compensation Scheme follows a legal challenge from Sun Life, a large Bristol-based firm.
Sun Life is seeking a judicial review on whether it must pay compensation for firms which failed before joining the Personal Investment Authority.
Other companies are now believed ready to withhold their share of a pounds 16m levy on them until the case is heard.
The PIA is expected to issue a cash call to members on behalf of the compensation scheme in the next few days. But it is believed to be ready to shelve the levy temporarily if the review challenges its right to collect the money.
If Sun Life is granted a judicial review, the case may not be heard until December, by which time the compensation scheme may have run out of funds.
David Cresswell, a member of the scheme, said yesterday: "From what I can gather some life companies are questioning why they should be paying while the case has not been heard.
"In the short term it is not a problem. We have got enough money for about six months. Our major concern is the integrity of our funding and the public's perception that if things go wrong they will be speedily compensated."
The ICS is the financial services industry's safety net, paying investors where firms go bust. In the past seven years, more than pounds 70m has been paid. The money is levied by each regulatory body from its members.
At stake in the legal challenge is Sun Life's share of up to pounds 16m which is to be paid out by the Investors Compensation Scheme on behalf of firms that went bust prior to April 1995.
Insurers are also worried by the potential for a massive pounds 3bn compensation bill from the current pension transfer scandal, much of it likely to come from small financial advisers that went under before the PIA was formed.
In the year to April, 53 firms, 49 of them non-PIA members, were declared in default and their clients allowed to claim compensation.
A senior executive at one company, who refused to be named, said: "If we receive a levy, we will almost certainly pay. But I have heard some others say that they want to wait until the case is settled."
Sun Life said: "We have a legal liability to our policyholders not to make payments that are themselves illegal. If we did not do that we could find ourselves in a position where we could face a challenge for making a voluntary payment. If the court rules that this is a legal payment our policyholders can no longer take action against us."
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