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Claim jumpers

Nicola York finds that IFAs believe the endowment compensation saga still has a long way to go as the ambulance-chasers sound the alarm bells

Endowment misselling claims may not have peaked yet and the industry may be hit hard by further compensation claims, according to IFAs who think that the lengthy debacle is far from over.

Cartel director of compliance John Rattigan says the Financial Services Compensation Scheme is facing one of its biggest hurdles yet on endowment misselling.

He says: “I think the probability is that the number of complaints have not peaked yet because people are not currently being affected by the consequences of being missold the endowment.”

He says it will have a direct impact on IFAs because the FSCS will increase their levy to cover the costs of payouts for endowment complaints. He thinks there is an argument that life companies should have to make a bigger contribution to the FSCS to help cover any potential shortfall in FSCS budget. He says: “Current IFAs are having to pay for issues and problems that are historical.”

Mortgage Force chief executive Rob Clifford says it is impossible to tell whether claims have peaked although he does not think the industry is at the tail-end of the problem. He says: “It is unclear whether the worst is yet to come or not. Are we at the beginning, middle or end of the problem? I do not know how you could estimate it.”

Financial Ombudsman Service policy adviser Alison Hoyland says it is too early to say whether claims have peaked or not. She says: “They are coming in at a steady rate and we have not yet seen a decline. The number is not increasing but this steady stream will have an impact on the industry.”

The FSCS has not as yet published a figure for the amount of funds it has set aside for compensation on endowments. Clifford thinks it is undeterminable and there is no way that the FSCS could be expected to estimate the funds needed.

The FSCS says although there is a three-year period for any complaint to be made, starting from the time a red letter is sent out to a client, this rule is flexible. If the IFA or provider did not warn the client in the letter that they had three years in which to complain, then they are still liable for compensation claims. In this case, the maximum time period a client would have to make a complaint is 15 years since they were initially given the advice.

Highclere Financial Services partner Alan Lakey says that if he wants to retire he would have to pay 15 years of professional indemnity cover and estimates it could easily be as much as 50,000. “My business is my pension and if I sell it for 60,000 but have to pay nearly as much in PI cover, then I will have no pension so I am left thinking that I will not be able to retire.”

Until four years ago, Lakey had not had any complaints but has had 29 complaints since then He blames this on the “ambulance-chasers.” Lakey says there are disparities between FOS and FSA advice. For example, he says the FSA advises IFAs to keep records for seven years but the FOS says a client can come back to an adviser in 15 years’ time and lodge a complaint.

He says: “I cannot remember what I said to my clients 15 years ago. They say they can recall exactly what I said. If I had destroyed my records after seven years, I would have no way of proving I had not said what they say I had.”

Rattigan thinks the shortfalls could be even greater than they are at the moment in future. He says: “We have come across people whose advisers have allayed their fears for the moment by saying the market will improve in the future. But if the market continues in the way it has been then they will find out on the day they are due to pay it back that there is still a shortfall, or even a shortfall greater than the originally predicted one, then advisers could face claims of up to thousands of pounds.”

Anand Associates managing director Bhupinder Anand has two angles on the issue. On the one hand, he has little sympathy for IFAs that deliberately missold endowment policies and are now being chased for compensation by the FSCS. But he can see that the public are being encouraged to claim and that is where it is “grossly unfair to the industry”.

One effect which KS Barrett & Associates proprietor Kim Barrett foresees is that sole traders will be hit hardest by compensation claims because they are person- ally liable. He says: “If you are a limited company, you can wind up your company and refer the client to the Financial Services Compensation Scheme for compensation but, as a sole trader, your personal assets are at risk if you cannot afford to pay the fine from your business assets.”

He thinks that a large number of sole traders could potentially face bankruptcy and the close of their business as a result of not being able to pay compensation claims.

“I am personally liable forever and a day for every policy I arrange and anyone at any stage could come out of the woodwork to claim,” he says.

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