In the FSCS’s half-year report, which largely meets expectations – noticeably with a continued deluge of mortgage endowment complaints – the increase in pension review claims stands out like a sore thumb.
Compensation claims are more than double FSCS forecasts, with over 400 claims in the first half of 2006/07 financial year compared with 350 predicted for the whole year in January. It now expects to receive 860 by the end of the year.
Although the numbers seem fairly paltry, when compared with the 26,000 mortgage endowment claims expected by the end of the year, the impact on the levy for advisers is considerable.
Pension review claims are notoriously expensive, with each payout worth on average 24,600. This means the levy for levy block A16 – the ringfenced group created by the PIA for the pension review – is predicted to double from 25m in 2006/07 to 45m-50m in the next two years. Eighty-five per cent of the liability will be taken on by providers and 15 per cent by advisers.
The FSCS says claims have rocketed as the weight of endowment and pension review complaints have pushed many firms into default. This means claims which were rejected have had to be reopened.
The FSCS stresses these are just predictions and that fast movements in this group, in relation to volumes, uphold rates and average payments, mean this figure could go up or down. It says that another levy will not be raised this year but these assurances will provide little cheer to those in block A16.
The news has come as a major jolt for the industry, with the FSCS predicting that it would be sweeping up the last pension review claims this year and consigning this dark chapter of financial services to history.
It has also prompted Aifa to consult with its lawyers, which have written to FSCS asking it to prove it is lawfully paying compensation for old claims. If the FSCS fails to provide a convincing argument, the trade body has pledged to mount a legal challenge.
Aifa is concerned that many new claims are coming out of the woodwork so long after the end of the Pension Review, which started in 1994. If a firm dealt with the pension review when solvent, sending out all the appropriate literature to clients warning them of the possibility that they had been the victim of misselling, and the client failed to respond, then Aifa says the claim should not be met.
But if the same firm moves into default, the same claim can be reopened, meaning, says Aifa, that claimants are getting two bites at the compensation cherry. Aifa wants the FSCS to prove how this, which does not sit well with most people’s notion of common justice, can be carried out legitimately.
Aifa director general Chris Cummings says: “The FSCS needs to prove it is not acting beyond its jurisdiction or we will mount a legal challenge. This news has a potentially devastating impact on many IFAs who can never shake off their liability.”
Scottish Life head of communications Alasdair Buchanan finds it bizarre that a claim can be reopened because a firm goes into default.
He says: “It is completely perverse that a claim that was closed can be reopened as a result of something that is unrelated to the claim – the firm going into default.”
Like Aifa, Buchanan believes the FSCS’s argument that endowment complaints and pensions misselling complaints have suddenly tipped people into default does not really stack up.
The second strand to Aifa’s argument is that it believes many of these pension review complaints are beyond the jurisdiction of the FSCS because the 1981 Limitation Act, under general law, renders complaints invalid 15 years after the advice was given and three years after the customer receives reasonable notice that they may have suffered a loss.
But Compliance Consultant Adam Samuel says that many small IFAs did not send the mailings out correctly which meant that customers were not put on notice.
“Even if they did, the documents did not warn customers that if they did not respond, they would not be able to bring cases later. Equally, they did not tell them that they had suffered a loss,” he says.
“About 10 per cent of reviewed transfers showed gains. This means that these cases cannot and should not be time-barred. As a matter of law, claims are generally time-barred 15 years after the event.”
Despite this, Samuel agrees with Aifa that the FSCS should be more careful about its budgeting and resourcing.
IFAs are dismayed at the news of yet more levy rises, with some pointing the finger at the activities of claim-chasers.
Facts & Figures Financial Planning managing director Simon Webster says: “My abiding feeling is one of complete sadness. The regulator, FSCS and Government all seem determined to bring the financial services industry down, and at the time that it is most needed.”
He says the increase in pension review claims can partly be explained by the activities of claim-chasers and a growing compensation culture in the UK.
Informed Choice managing director Nick Bamford says he is resigned to receiving a hefty levy hike in the post next year. Far from being surprised by the increase in claims, he says, it is linked to the influence wielded by claim management firms and the media.
Of course, the FSCS, like the Financial Ombudsman Service and the FSA, operates under rules laid out in the Financial Services and Markets Act.
If the scheme proves it is acting in accordance with these rules, it will be interesting to see if Aifa is prepared to fight an expensive legal case if it is convinced that the FSCS is breaching the Limitation Act.