The Association of Independent Financial Advisers (AIFA) is urging members to challenge the Financial Services Authority (FSA) over proposals to force advisers to compensate clients invested in Arch Cru.
The regulator launched a three-month consultation on establishing a £100m compensation fund last month, saying it already has evidence of "widespread mis-selling".
Under the scheme, advisers who recommended the Arch Cru funds would be forced to carry out a past business review using an FSA template and, where mis-selling is found, compensate their customers.
It is the first time the regulator has proposed using its power to develop redress schemes, but AIFA said it is not using the power correctly.
Policy director Chris Hannant said the organisation was "deeply concerned" about the implications of the redress plan, particularly as it may put a number of IFAs out of business.
"The FSA must explain why a redress scheme is necessary and why it has dismissed the other options for consumer redress," Hannant said.
"Consumers have not been left in the lurch - they have the power to seek redress now. The FSA's power to develop redress schemes was granted in order to tackle issues of industry wide systemic risk, such as PPI.
"It was not intended to be used for a single regulated entity such as Arch Cru. A redress scheme, in this instance, is therefore inappropriate and threatens to damage the long-term sustainability of the profession."
>>Read more on the implications of the FSA's Arch Cru proposals HERE<<
Redress schemes as a whole were damaging the IFA profession, Hannant said, with compensation payments for 2012 running to almost three times what the FSA itself considers affordable.
"We are urging advisers to consider how this scheme will affect them, directly and indirectly, and to submit their thoughts to the FSA's consultation," he said.
"Advisers should consider the cost of reviewing files, as well as the impact the scheme will have on their insurance.
"The FSA must focus on regulatory responses that are fair and proportionate. This is neither, and we urge advisers to make sure their voice is heard by regulators."
Advisers can respond to the consultation by emailing [email protected]
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Reporting to Steve Hill
Appointed on 19 September