IFAs who help clients invested in Keydata complete compensation scheme forms could leave themselves without professional indemnity insurance (PII) if future claims arise, lawyers warn.
In September, the Financial Services Compensation Scheme (FSCS) confirmed investors with Keydata products backed by Lifemark are "eligible" for compensation. However, they will not know how much they will receive until the end of October and must still apply for the funds.
Many investors have turned to their IFA for help filling in the forms, in which claimants must convince the FSCS they relied solely on flawed promotional material issued by Keydata advertising its Secure Income Bonds and Secure Income Plans.
But guidance from law firm Mills & Reeve warns IFAs giving advice on filling in the FSCS forms risk their PI cover since it affects investors' legal rights.
"If they do and future claims arise, these may not be insured," the lawyers warn advisers.
IFAs will "undoubtedly" face increased claims through the Financial Ombudsman Service (FOS) and the courts with any failure by the FSCS to compensate, they add.
"The risks of creating a presumption that the IFA did not comply with the FSA's rules needs to be carefully considered, since this could make it more difficult to defend future claims."
IFAs which receive several mis-selling allegations will be further hit by a "reciprocal arrangement" between the FSA, the FSCS and the FOS, warns the law firm.
Claims sent incorrectly to one body will be automatically passed to one of the others, says Mills & Reeve. If the FSCS or the FOS receive numerous allegations of mis-selling by the same IFA it could trigger an FSA finding that the IFA breached its regulatory obligations.
If that happens "it may prove difficult to defend future claims even if the IFA complied with FSA's requirements in placing those other investments", the lawyers say.
Likewise, where the FSCS sees numerous complaints about the same IFA, the compensation scheme may handle future claims involving that IFA with "a degree of scepticism, making it more difficult to successfully recover compensation", says Mills & Reeve.
In turn, this could trigger more claims against the IFA as investors seek to recover their investments, the lawyers say.
More than 100 clients of AWD Chase de Vere are understood to be re-assessing the advice they received on investments made in Keydata.
It follows a recent FOS recommendation that AWD compensate one client who claimed he had been over-exposed to the failed provider. AWD is currently challenging that ruling.
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First mentioned in Cridland Report