More than half of Britain's 3,500 independent financial advisers are refusing to carry out the first stage of a review laid down by their watchdog, the Personal Investment Authority. They now face the prospect of up to pounds 1m in fines overall, or even a ban on their right to give financial advice unless special forms they were meant to fill in two months ago are returned.
A PIA spokesman said: "The firms that are not sending in the forms are breaching our rules. This review is extremely important for investors. If we find that someone is not carrying it out simply because they do not want to then we can take disciplinary action. The exact nature of any action will be for a board meeting to decide on in two weeks' time."
Gareth Marr, managing director of Moors Marr Bradley, who is also a member of the regulator's pensions committee, said: "If we are seen by the public as standing in the way of giving people the compensation they are entitled to, then it will lead to a massive loss of confidence in our sector."
The PIA's new get-tough policy towards its smaller members follows growing concern over the watchdog's ability to enforce its compensation mechanism.
The policy follows an inquiry by the City's most senior regulator, the Securities and Investments Board, which showed that up to 1.5 million people may have wrongly been advised to take out a personal pension. Compensating them could cost up to pounds 3bn.
In April, the PIA promised that 350,000 of the most urgent reviews, including many who had already retired or were close to pensionable age, would be completed by Christmas. It now privately admits this timetable is no longer possible.
Last week, the contract for a software programme to review all pension transfer cases for the PIA was handed to Pensions and Actuarial Services, a computer firm. In so doing, the PIA snubbed another company, Marlborough Stirling, doing the same job for the insurance industry. Some experts believe integrating the two systems will cause months of further delays.
The review has also been mired in a bitter dispute between regulators and professional indemnity insurers, who provide cover for financial advisers. PI insurers would be expected to meet the vast bulk of advisers' compensation bills, runnning to hundreds of millions of pounds.
Insurers have told advisers that if they carry out the pensions review their cover will be voided because they are encouraging their clients to claim compensation against them.
In June, a legal battle on this issue was resolved in the regulators' favour. But advisers were told they could consider any risk to their indemnity cover when reviewing cases. Despite most insurers now telling them that they can fill in the special form, many are still refusing.