Adviser firms without insurance or legal representation could be selected as lead case defendants in the Financial Services Compensation Scheme’s legal battle against advisers under radical proposals being drawn up by the FSCS’s lawyers.
Legal experts warn this could see firms racking up legal bills worth hundreds of thousands of pounds which could force them into administration.
The FSCS has settled with five of the six original lead defendants selected in its long-running battle to recoup up to £75m out of around £400m paid out in Keydata compensation.
In March FSCS lawyers Herbert Smith Freehills delayed a case management conference at which the selection of new lead defendants was to be discussed.
The conference has now been rescheduled for 16 May.
In a letter to advice firms, seen by Money Marketing, HSF says it will invite the court to make the following orders at the conference: that each defendant with claims worth over £150,000 be a potential lead defendant, and to remove the requirement that lead defendants have insurance and legal representation.
The letter says: “It is the FSCS’s view that the use of lead defendants represents the most appropriate way to advance the proceedings and that, given the significant number of settlements, a larger pool of potential lead defendants will be necessary.”
Money Marketing understands there are 74 firms in the pool with claims worth more than £150,000.
DWF Fishburns partner Harriet Quiney says the proposals show the FSCS “is getting desperate”.
She says: “This could capture small firms which have sold just one or two products.
“The concern is that without insurance, a firm will have to fund their own legal representation – which is likely to cost around £200,000 or more – or represent themselves. In a case of this complexity, a firm representing itself would be a nightmare.
“The legal bill could easily cost more than the claim against the firm, and could force firms into bankruptcy.”
4 Pump Court barrister Peter Hamilton says: “Firms cannot be expected to represent themselves in complex cases. It would be inappropriate for such a firm to be a lead defendant and this could lead to injustices.
“Paying for legal costs without insurance could also push firms over the edge financially, which would force the FSCS to look for yet another lead defendant. There is an argument to say the FSCS has come to the end of the road with this litigation.”
A spokeswoman for the FSCS says: “The FSCS is committed to pursuing recoveries where it is reasonably possible and cost effective to do so.
“This delivers significant benefits for levy payers and helps to offset the costs of compensation. We are committed to pursuing defendants in the Keydata proceedings.
“At the case management conference on 16 May, the FSCS will be inviting the court to expand the criteria for the selection of potential lead case defendants, and to list as potential LCDs defendants who have total claims against them exceeding £150,000.
“To determine whether a defendant should be an LCD, the court is likely to consider whether the defendant has sufficient means to fund the defence costs of the proceedings.”
HSF declined to comment.