The new embarrassment follows fresh calls for the resignation of Joe Palmer, the PIA's beleaguered chairman, who has already suffered a mauling from the Treasury Select Committee.
The organisation, which was set up as the sole retail regulator of the financial services industry, has been forced to return two-thirds of the membership applications it has received so far.
The blow is the latest of many on the PIA's long road to recognition, scheduled for next month but looking increasingly unlikely.
The PIA is due to replace Fimbra and Lautro, the regulators overseeing companies that sell life assurance, unit trusts, pensions and other financial advice to the public.
It has had 2,750 applications to date, which represents less than half the 6,000 insurers and independent financial advisers eligible to apply.
Mr Palmer admitted on Friday that about 1,800 of these applications have been incorrectly filled in, forcing staff to return them. Consequently, only 900 applications are available for processing.
Mr Palmer insisted that these mistakes would not derail the PIA. 'I don't believe the delay in submissions will affect our underlying recognition timetable. Market share and weight in the market are more important than the number of people who have applied,' he claimed.
However, the criteria laid down by the Securities and Investments Board - which has still to decide whether or not to recognise the PIA - are thought to include the number of applications received, the number processed and those in the pipeline. With valid applications from less than one-sixth of intended members and only a tiny percentage yet accepted, recognition of the PIA now looks increasingly remote.
Three weeks ago, Mr Palmer was savaged by the Treasury Select Committee during questioning on the regulatory failings of Legal & General, which he formerly headed. During some 40 minutes of interrogation, he denied having seen a three-page memorandum detailing widespread regulatory breaches. The following day he admitted he had unwittingly misled the committee.
Mr Palmer claimed that in the heat of the moment he mistook the memorandum for another document. ''I made a genuine mistake and as soon as I discovered it I wrote to put the record straight,' he said, adding that the atmosphere during questioning was 'highly charged and pressurised'.
Mr Palmer narrowly missed being recalled to explain the lapse of memory to which he attributes his failure to recognise the memorandum immediately. But he may still face a further grilling. Last Friday, Mr Brian Sedgemore, a Labour member of the committee, said he was looking at 'other aspects of L&G' during Mr Palmer's tenure. He also said that he would be calling for Mr Palmer's resignation and the closure of the PIA.
Sir Gordon Downey, Mr Palmer's predecessor, has added to the pressures on the PIA, arguing in the Independent that unless the PIA could establish credibility among consumers and among all parts of industry, the only solution would 'lie in fresh legislation rather than consent'.
On Friday, the Treasury sought to kill speculation about moving to a statutory approach, but the PIA has incurred widespread criticism from those who doubt the effectiveness of self- regulation.
'One of the main criticisms of self-regulation is that it's done by the trade,' said Alistair Darling, Labour MP for Edinburgh Central and an opposition spokesman on financial services. 'If you bring in someone who previously headed one of the biggest trade bodies, the public will say, so much for an impartial regulator.'
Mr Palmer's credibility was dented when Legal & General was recently fined pounds 180,000 for regulatory breaches which, in part at least, occurred during his regime.
Mr Palmer said the two years since he left L&G had been a sufficient 'quarantine' period. 'I'm very clear that my first accountability is to investors. It isn't to my old mates in the life assurance world.'
(Photograph omitted)Reuse content