Pay-off is better if lawyers at fault: Ian Hunter discovers that legal clients are better compensated for fraud losses than investors

ANYBODY who loses money because their solicitor goes bankrupt or acts fraudulently will find the compensation arrangements far more generous than those covering loss in similar circumstances involving financial advisers.

This disparity will be highlighted over the next few months, as thousands of people seek compensation because they were wrongly sold a personal pension.

The Securities and Investments Board, the chief City regulator, announced last week plans for compensating up to 1.5 million people who may have been wrongly advised to leave or not to join their occupational pension schemes.

The bill will be borne by the companies that supplied the pensions and the independent financial advisers that provided the advice. Some compensation will also be provided by SIB's compensation fund for private investors.

It covers transactions entered into by authorised investment firms that are unable to pay out investors' claims.

The firms covered include all members of the various self-regulating bodies -Lautro, Fimbra, the Personal Investment Authority, the Security and Futures Authority and Imro.

However, investments made with firms prior to 18 December 1986 are not covered. The claims paid by the SIB fund will involve only cases where the investor has lost money through fraud or failure of the investment firm.

SIB's Compensation for Investors booklet points out: 'No one will pay you compensation if your investment falls in value, for example due to a fall in the market, or inflation erodes the real value of the return on your investment.' SIB advises anyone preparing a claim to keep all paperwork relating to investments.

All investors should receive at least a yearly report setting out the state and value of investment. Claims on the fund should be made as soon as possible, and certainly within six months of the firm's default.

There is a pounds 50,000 ceiling. Any successful claimant receives the first pounds 30,000 of the claim in full and 90 per cent of the next pounds 20,000. This limits the maximum that can be recovered to pounds 48,000.

The figure compares favourably with the compensation funds established by banks and building societies to cover situations of default. The banks' ceiling on claims is fixed at pounds 20,000, of which 75 per cent will be honoured. The building societies' ceiling is pounds 20,000, of which 90 per cent will be honoured. By contrast, the insurance companies will provide unlimited compensation in respect of claims resulting from insurance company defaults.

Elizabeth Mayer, a partner and financial services' specialist with the City law firm Fox Williams, said: 'Although the level of compensation provided by the banks and building societies is comparatively modest, the reality is that most banks and building societies, with the unhappy exception of BCCI, have a good reputation and a sound financial basis, making claims in respect of default unlikely.'

Anyone who loses money because of the fraudulent action of their solicitor may be better protected. Solicitors have been in the news a little too much recently.

Figures from KPMG Peat Marwick, the accountants, showed that the value of serious fraud committed by solicitors in the first six months of this year reached pounds 20m.

Two funds have been established to compensate clients who suffer at the hands of dishonest solicitors. The first is the Law Society's Compensation Fund, which came into effect in 1942. This is administered in accordance with the Solicitors Act 1974. Awards made under it are discretionary.

A spokeswoman at the Solicitors Complaints Bureau said: 'The purpose of the fund is to ensure that no client loses out at the hands of a dishonest solicitor. The objective is to protect the public and the image of the legal profession.'

The Compensation Fund is a fund of last resort. Claims will be considered only where the solicitor has insufficient funds to compensate the client or where the loss is not covered by insurance and is not recoverable by any other method. There is no limit on the compensation that this fund can award a client.

According to the SCB spokeswoman: 'The fund handles claims resulting from the dishonesty of sole practitioners or in cases where all the partners have been dishonest.'

Cases of dishonesty where at least one partner is innocent, are handled by the Solicitors Indemnity Fund. The normal route is for the client to sue the firm of solicitors for the loss suffered. The innocent partners can then claim an indemnity of up to pounds 1m from the SIF.

(Photograph omitted)

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