Payouts to fraud victims soar

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Compensation payments to victims of fraud or bad advice are set to rocket by 75 per cent, up from pounds 16m last year to pounds 28m for the tax year ending in March.

The Investors' Compensation Scheme, the financial industry's safety net, is being forced to pay more and more compensation by the collapse of growing numbers of independent financial advice firms.

Some pounds 20m has already been paid out in the first nine months of this financial year, with payments averaging up to pounds 3m a month. ICS officials privately predict future years' payouts are likely to rise even further.

The scale of this year's payouts, after several years of steady falls, increases pressure on the Personal Investment Authority, the industry watchdog, to reorganise its contributions to the beleaguered scheme once and for all.

Unless it is, experts believe the scheme will be unable to meet claims lodged against it by thousands of victims of the pension transfer scandal.

Once it begins to compensate thousands of people wrongly urged to leave their occupational pensions and switch their funds into private ones, payouts by the scheme may explode.

Nearly all the compensation will have to be met by members of the PIA, which is liable for a levy of up to pounds 100m. Some estimates of the compensation needed are several times that amount.

Gareth Marr, a member of the PIA pensions working party, and also managing director of Moors Marr Bradley, a leading firm of advisers, said: "I have total sympathy for the idea of rigorous regulation on behalf of consumers.

"But the worst possible scenario is that a decent adviser is pushed out of business because of heavy financial demands, that he is not responsible for, from the scheme." The PIA is expected to issue a discussion paper on investor compensation shortly.

About three or four firms are declared in default each month by the ICS. Its staff are now examining more than 200 financial advisers that have gone bust in recent months to check whether their clients are entitled to compensation. David Cresswell, customer services manager at the compensation scheme said: "We are hoping that this is a short-term bulge rather than a long-term trend.

"What we are seeing is the final gasp from former members of Fimbra [the financial watchdog replaced by the PIA]. Once they are declared in default by us, then payments are made in relation to past years' negligent advice. We then expect the scale of claims to fall again."

Mr Cresswell admitted this did not take pension compensation into account: "They are the big unknown. But it is not for us to have a view on how the scheme is set up.

"Our only concern is to pay compensation to investors entitled to it, as effectively as possible."