A compensation scheme for victims of financial services fraud or bad advice faces a threat to its existence following a decision by one insurer to take legal action on whether it is liable to pay towards it.
Sun Life said that it was seeking a judicial review on whether it must pay compensation for firms that have gone bust before joining the Personal Investment Authority, the financial watchdog.
At stake in the first instance is Sun Life's share of up to £16m paid out to savers in 1993-94 by the Investors Compensation Scheme. If the case goes in favour of Sun Life, the compensation system could be thrown into jeopardy. Insurers are worried by the potential for a massive £3bn compensation bill from the current pension transfer scandal.
John Reeve, the company's managing director, said: "We have a duty to protect our policyholders and, in the face of professional advice that we are not legally liable to pay this amount, we must therefore seek clarification of the law."
The ICS is the financial services industry's safety net, paying investors where firms go bust. In the past seven years, more than £70m has been paid - raised through a levy operated by the industry's regulators.
Until recently, each regulator paid an agreed amount which it raised from its members. Because the main source of claims were independent financial advisers, the industry voluntarily rallied to bail them out.
Since last year, IFAs and insurers both belong to one regulator, the PIA. Sun Life's argument is that it should not be held responsible for claims coming from firms that went bust before they joined the PIA. An ICS spokesman said: "We would hope the matter can be resolved quickly. It is in the industry's interests that the public does not lose confidence."