The number of default investigations has increased over the last year because of endowment policies being sold through small intermediaries, says the Financial Services Compensation Scheme.
According to FSCS figures, 376 firms were declared in default during the financial year 2005/06 compared to 286 in 2004/05.
The FSCS states: “This is not because many firms have suddenly been going out of business, but is largely because of the way many endowment policies were sold – through small intermediaries such as independent financial advisers.”
It says there are potentially thousands of firms which each sold a handful of endowment policies many years ago and are now no longer in business and may not have sufficient assets to meet claims made against them.
This means such claims now potentially fall within the FSCS’s remit, but before it can consider claims for compensation it must investigate the firm’s ability to pay claims.
If it is satisfied a firm is unable, or likely to be unable, to pay claims made against it, the FSCS will declare it in default.
The FSCS says it has recently increased resources in its default team and in teams dealing with the eligibility of ‘sample’ claims, which it uses to determine whether or not it can declare a firm in default.
It states: “This has led to increased productivity and efficiency and means that we are likely to be declaring higher numbers of firms in default over the next few months than is usual.”
Since the FSCS took over responsibility for compensation on 1 December 2001 it declared 1,028 firms in default up until 31 March 2006.
Since 1 April 2006 it has declared around 220 firms in default.
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