In evidence to the Treasury select committee the IFA Association, a trade body representing advisers, said the the review's second phase could represent a crippling blow to many smaller firms.
Garry Heath, head of the trade body, said: "Unlike insurance companies, at the end of the day IFAs are going to have to pay from their own pockets. In phase one, IFAs really didn't have too many cases and there have been enough problems anyway. Now we are going to phase two, which is five or six times the size."
The second phase of the review will cover around 985,000 cases where younger people transferred their occupational pension rights to personal pensions. Estimates by the Financial Services Authority, the City watchdog, show IFAs will be responsible for reviewing 42 per cent of the total, costing pounds 2.5bn.
Shared between 3,500 firms of advisers, this works out at over pounds 300,000 per firm. According to the IFA Association, the average annual turnover of an IFA firm is around pounds 200,000.
IFAs say the cost of compensation has risen not because of poor advice but because of changed economic conditions.
Under the FSA's review, IFAs must determine whether customers have lost money by using long-term interest rates to work out the retirement income they can expect.
However, since the review began these rates have sunk from more than 12 per cent to less than 7 per cent. This brings many more customers into the category of having suffered a financial loss.
Mr Heath said IFAs accepted people had lost when they were entitled to an employer's scheme but opted for a personal pension. But most of the second phase is concerned with transfers where people were not eligible for a company scheme. Without the fall in annuity rates, many customers would have lost little, says the association.
"We do gag a bit on the second phase of the review because we think we gave pretty good advice," Mr Heath said.Reuse content