Payments from the Financial Services Compensation Scheme to compensate consumers that were recommended to invest in the failed CF Arch Cru funds by now-defunct advisers could be set to rise substantially, after the regulator’s consumer redress scheme kicked in earlier this week.
Prior to the scheme coming into effect, the FSCS was using an interim approach to compensation that was designed to “maximise the immediate pay-out to investors while minimising the risk of the scheme paying too much compensation if the funds realise more than expected”.
The FSCS scheme saw investors receive a payout equivalent to the current value of their holding in the fund plus a premium of 12 per cent. They would then be eligible for a top-up payment when the wind-down process for the funds is completed, expected in 2015.
However, under compensation rules set out by the regulator the scheme must now use the basis for payments set out by the Financial Services Authority in its Arch Cru consumer redress scheme, which came into effect on Monday (1 April).
This scheme requires existing advisers to contact clients within one month to give them the opportunity to ‘opt in’ and have their case reviewed.
If on the basis of the regulator’s criteria the investment was deemed to have been mis-sold, the client must be put back into the position they would have been had they received ‘suitable’ advice, less any payments they will receive from the £54m Capita redress package.
For the FSCS, which provides compensation in cases where the intermediary in question has gone bust, this means compensation will be based on “the value of a suitable alternative investment”, which is likely to mean a significant increase in payouts.
If there is a significant increase in payouts that is not already covered in levies to the FSCS, existing advisers could find themselves hit with further bills to cover the cost.
The consumer redress scheme, known as a ‘section 404’ scheme, was finalised in December when the FSA made a concession to make clients opt in for compensation.
At the same time the FSA revised upwards the total amount of losses the scheme covers to £141m, though it said that around 80 per cent of firms would likely meet its criteria, leaving a potential total payout of £112m.
However, the FSA estimated opt-in rates of less than 30 per cent, claiming therefore that total payments under the scheme would be between £20m and £40m.
