Next week the Securities and Investments Board, the leading City watchdog, is to announce its plans for compensating up to 500,000 people who may have been wrongly advised to transfer from company schemes.
More than 90,000 people were persuaded to do so by IFAs.
The refusal to pay up leaves many IFA firms, of which there are now about 5,000 throughout the UK, either with a huge compensation bill or going out of business. Their clients face the prospect of many months of confusion before the issue is settled.
Insurance companies are expected to have to pay out hundreds of millions of pounds to restore their customers to where they were before the poor advice was given. Some experts have predicted a total bill of up to pounds 1.5bn.
But they say they are not responsible for clients of independent advisers, who were regulated by a different watchdog at the time. Leading companies, including Norwich Union and Prudential, are believed to be opposed to meeting the IFA compensation bill, arguing that they are not responsible for any advice given.
A Norwich Union spokesman said: 'There is a moral issue here on whether other policyholders' funds should be used to compensate people for whom this company is not liable.'
John Ellis, external affairs director at the Life Insurance Association, a trade group representing advisers, said: 'I find the position is potentially disastrous. Not only does it look as if thousands of advisers may be driven out of business. It also seems as if the mechanism under which their clients should be compensated is not in place on the eve of the SIB report. The danger is that pension policyholders who were wrongly advised will have to wait until the enire matter is sorted out.'
SIB's guidelines are thought to call on companies to pay compensation if they cannot conclusively prove from their records that a client was properly advised of all the consequences of transferring into a personal pension.
They are also likely to state that the test of the quality of advice given will be rules set by regulators at the time, not those arrived at with hindsight.
Yet the question of who will pick up the compensation tab has not been resolved. When there is a claim against them, advisers can ask their professional indemnity insurers to meet the bill.
If indemnity insurers refuse to pay, many IFAs have no choice but to go bust. The bill is then picked up by the Investors Compensation Scheme, to which the Personal Investment Authority, the industry's new regulator, should contribute pounds 100m.
But insurance companies have also been baulking at the prospect of paying compensation through the ICS, leading to a further stalemate within the industry.
A spokesman for the PIA said yesterday: 'There have been extensive talks and the matter is under active consideration. We hope to arrive at a conclusion soon.'
A SIB spokeswoman said: 'Every issue will have been considered by the report with reference to any implications, legal or otherwise. People will receive compensation as long as they have been mis-sold a personal pension.'