The FSA says up to 30 per cent of firms that recommended clients to invest in Arch cru could default as a result of the regulator’s proposed consumer redress scheme, with a Financial Services Compensation Scheme bill of over £30m.
The regulator published plans this morning to introduce a consumer redress scheme for investors who have lost out as a result of advice to invest the Arch cru fund range, which was suspended in March 2009.
The FSA has identified 795 firms they believe sold Arch cru funds.
If implemented, firms who made a personal recommendation to clients to invest in Arch cru will have to assess whether that recommendation was suitable and pay redress where advice was unsuitable.
The FSA estimates the scheme will mean £110m is paid in redress to between 15,000 and 20,000 Arch cru investors, in addition to the £54m payment scheme agreed by the FSA between Capita Financial Managers, BNY Mellon and HSBC Bank last June.
The regulator says out of the £110m redress, up to £33m will be paid by the Financial Services Compensation Scheme.
The FSA says: “We expect a significant proportion of the firms affected by the section 404 consumer redress scheme to have already cancelled their permissions, and/or to default as a result of the scheme.
“An analysis of currently authorised known sellers indicates around 30 per cent of these firms may potentially breach their regulatory capital requirements as a result of the scheme. The costs associated with this have been factored into our analysis.”
FSA director of conduct supervision Clive Adamson says the 30 per cent figure represents a “worse case estimate” of the proportion of firms that will default as a result of the scheme.
The FSA says it has not taken account that some firms may be able to claim on their professional indemnity insurance. It also argues some firms may not fail simply because the redress payable exceeds the amount of capital they hold, as they may be able to raise additional capital.