The Financial Services Authority's (FSA) Arch Cru scheme is likely to have a much higher ‘opt in' rate than the regulator has estimated, putting more strain on advisers and their professional indemnity insurers than some expect.
Firms who advised on investments in the CF Arch Cru Investment and Diversified Funds must contact all their clients asking if they want their case reviewed to determine whether they were mis-sold the funds and may be eligible for redress.
The FSA said if clients who invested in Arch Cru opt for a case review and receive redress, it will put them back into the position they would have been in had they received suitable advice.
It added it expects between 15% and 30% of consumers to opt in to the scheme and that, based on this assumption, it believes the redress scheme could deliver £20m to £40m in redress.
Why the FSA's Arch Cru scheme will have a 90% take up
But, on reflection, these figures are likely to be much higher.
The FSA scheme is by its nature very similar to the process under the Financial Services Compensation Scheme (FSCS).
If a client chooses not to opt in to the FSA scheme because they don't believe they have received poor advice, then they are likely to prejudice themselves against making a ‘victimless' claim at a later date with the Financial Services Compensation Scheme (FSCS).
And the likelihood is that many claims will end up at the FSCS, as professional indemnity insurers (PII) balk at paying out over Arch Cru, sending many advisers to the wall.
Even those PI insurers who do pay out will be demanding crippling excesses, which still may end up putting advisers out of business, and sending consumers to the FSCS.
Surely it makes sense, therefore, for investors to opt in to the FSA scheme, if only to give themselves a stronger case for compensation should their claim reach the FSCS.
It is my understanding that solicitors are advising investors to take this route.
The FSA initially estimated that its proposed scheme could deliver £110m in redress to between 15,000 and 20,000 consumers.
This higher figure is much more likely to be the true cost of the scheme.
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