Fraud victims' safety net swamped by claims rise

The Investors' Compensation Scheme, the safety net for victims of fraud and bad advice, saw a 33 per cent increase in the number of collapsed firms last year.

Figures released yesterday show that 52 financial advisers went bankrupt in the year to April, compared with 39 in the previous 12 months.

The news comes amid fears that the compensation scheme, which is funded by the financial-services industry, faces a legal challenge that could leave it without the money to pay any claims.

David Cresswell, the ICS's investor-relations manager, said yesterday that he expected the number of financial-advice firms going into default to increase in the next few years.

"What we are seeing is a sharp rise in the number of failed firms, many of them linked to home-income plans that were sold in the late Eighties and the early part of this decade.

"Although many of these seem to be coming to an end, it is likely that the increase we have seen in the past year will continue once we begin to deal with cases related to pension opt-outs and non-joiners.

"Another challenge we face is that there has been a rapid increase in the number of small firms declared in default, where compensation cases run to 10 or less.

"The problem for us is that the amount of investigation that takes place into the failure itself, together with the fact that negligence is much harder to investigate than fraud, means that administration costs are bound to rise substantially."

In the year to March 1995, compensation payments totalling pounds 16m were made, compared with some pounds 27m the previous year. But a further pounds 12m of compensation has been paid or offered in the past four months alone.

The ICS obtains most of its funds from several City regulators, based on the amount of compensation paid out on behalf of their former members.

Last month, however, the insurance company Sun Life obtained a judicial review over its liability to the compensation scheme. Sun Life argues that it should not be held responsible for failed firms that were not members of the Personal Investment Authority, the watchdog it now belongs to.

The legal challenge almost led the ICS to refuse compensation offers to members when it risked running out of money last month. Only a last- minute intervention by the Treasury, which guaranteed payments of up to pounds 17m, allowed the scheme to carry on. The review will be heard later this month.

In a separate legal move, the ICS has issued writs against a number of building societies, including Cheltenham & Gloucester and West Bromwich, claiming compensation for their involvement in the sale of controversial home-income plans to mostly elderly investors. The building societies are expected to fiercely contest the claim.