The Personal Investment Management and Financial Advice Association is encouraging the regulator to look at its supervision work, warning 'regulatory deficiencies' were contributing to more claims from consumers.
In its response to the Financial Conduct Authority's consultation on the impact of the Retail Distribution Review and the Financial Advice Market Review, seen by FTAdviser, the trade body stated it is concerned about a rise in scams which was undermining consumer confidence and increasing the cost borne by the industry.
It stated "regulatory deficiencies" were as much to blame for the trend as poor behaviour from firms.
The trade body gave the London Capital and Finance scandal as an example, arguing it was unclear whether or not victims believed themselves to be receiving financial advice and were acting accordingly.
"We would welcome stronger regulatory oversight in this area in particular," it noted.
London Capital & Finance went into administration at the end of January, putting the funds of more than 14,000 bondholders at risk.
Shortly before the collapse the Financial Conduct Authority had ordered London Capital & Finance to stop marketing its fixed-rate investment bonds and Isa products and the provider had its assets frozen by the regulator.
But critics said the regulator did not act quickly enough and had failed in its supervision of the firm, leading to calls for Andrew Bailey, the FCA's chief executive, to resign.
As a provider of unregulated investments London Capital & Finance did not need to be authorised by the FCA to issue mini-bonds, but it was authorised to promote the mini-bonds which a group of MPs has claimed enabled the company to "raise money from bondholders by marketing themselves as FCA-regulated in their promotional literature."
An early day motion calling for Mr Bailey's resignation over the issue was signed by 16 MPs in May.
Pimfa encouraged the regulator to consider if its own supervision of firms is working as well as it could be.
The body stated: "It is unclear to us whether or not this is a function of ineffective supervision or resources being too thinly spread."
The trade body warned that the impact of this was a rise in the levy firms pay to the Financial Services Compensation Scheme.
The FSCS has not yet confirmed whether it will compensate LCF investors but it stated at the end of May that it believes there are "sufficient grounds" to continue exploring investor compensation.
Simon Harrington, senior policy adviser at Pimfa, said there was "significant merit in reviewing the way in which the FSCS levy is constructed".
He argued that there was "an obvious moral hazard" in its current construction in that "well intentioned, viable firms are tasked with funding and clearing the mistakes made by firms which are not".
He added: "Ultimately in the current construction the end user – the consumer – ends up paying twice.
"We would welcome further dialogue on how the FSCS – a welcome, well intentioned and vital pillar in our financial services landscape – can be funded in a manner which is proportionate to the risks that firms represent to it and is cognisant of the current supervisory processes in place to protect consumers."