A law firm has told Arch Cru investors it is unlikely they will end up receiving the entire £110m redress the Financial Services Authority (FSA) is expecting advisers to pay out.
Earlier this week, the regulator set out plans for a redress scheme which, if approved, would see every adviser who sold Arch Cru conduct a past business review and pay compensation to clients identified as having been mis-sold the funds.
The regulator believes most advised sales of Arch Cru were faulty and it has provided a template advisers can use to determine whether the advice they gave was compliant.
It expects investors could be compensated to the tune of £110m as a result of this process.
However, law firm Regulatory Legal said the FSA may have overestimated the professional indemnity insurance (PII) coverage firms will have.
It adds the regulator may also not have taken into account the potentially crippling costs of PII excesses, meaning the number of failures could increase.
If any firms do fail, the payouts will then fall on the Financial Services Compensation Scheme - and levy payers - although investors would only get up to £50,000 because of existing caps.
"We feel that a global piece of work should be done by live IFA firms so the FSA understands the actual PII position of firms," it told its investors' action group.
"We believe that this will demonstrate that the £110m expectation is incredibly optimistic."
Gareth Fatchett, partner at Regulatory Legal, added the FSA's plans could raise false expectations among investors that they will get all their money back.
"The FSA's lack of asking that obvious question about PII means they can't make these claims."
The consultation on the redress scheme is open until the end of July, although no final policy is expected until November, while the rules will not become effective until January 2013.
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