Pension dispute shakes PIA Insurers' reaction to Ombudsman's plan leaves small investor's rights in the ba lance

Thousands of small investors hoping for justice from a new Ombudsman scheme may be denied their rights because of a row between insurance underwriters and a City regulator.

The underwriters are battling against the Securities and Investments Board (SIB), the financial watchdog, over its stance on the pension transfer scandal.

They are threatening not to meet awards made by the Ombudsman, Stephen Edell, against independent financial advisers (IFAs) even if they have nothing to do with the pensions issue.

The row between SIB and the underwriters undermines the credibility of the new regulator, the Personal Investment Authority, which set up the Ombudsman's scheme last year.

It is also likely to sow confusion among savers. Some underwriters are prepared to meet claims against IFAs while others are not. Investors may spend months making a claim only to find that they will receive nothing in the end.

If awards are unpaid by underwriters, the only recourse for savers is to wait until their IFA is declared bankrupt, triggering payment from the Investors Compensation Scheme.

Mr Edell, who joined the PIA scheme after seven years as Building Societies Ombudsman, said: "I am anxious that common sense should prevail on this issue. It would not be right to penalise investors in a dispute that is not connected with many cases thatare likely to come before us."

His comments come as the PIA Ombudsman's scheme moves to take on new powers, including that of considering complaints even if the event took place before April 1988, when compensation first became payable.

Complaints about term assurance and permanent health cover will be heard, while awards may be made for poor administration and not just bad selling.

The scheme is also planning to double to £100,000 the amount that can be awarded - if the company being complained against agrees.

The battle among insurers follows a report by SIB in November last year, suggesting that up to 1.5 million people have been wrongly advised to set up a personal pension.

The SIB's report said 350,000 people may be eligible for compensation, with the financial services industry facing a potential bill of £3bn or more.

About 35 per cent of personal pensions sold since 1988 have been sold by IFAs, which normally cover themselves against claims of bad advice by taking out indemnity insurance from underwriters.

In November, SIB decided that advisers should write to their potential transfer victims informing them of their right to claim compensation. But underwriters have threatened to void IFAs' cover if that happens.

Geoffrey Pointon, chairman of Pointon York, an insurance broking firm that arranges indemnity cover for a third of the country's 5,000 IFAs, said: "The attitude among underwriters we deal with is that they feel they understand where SIB is coming from.

"But they do not believe SIB understands their problems. They do not accept that their clients have a right to solicit claims against them, which is what SIB is asking them to do."

Mr Pointon defended the underwriters' extension of the dispute to the PIA Ombudsman's scheme: "If SIB changes the compensation rules on an issue like pensions, then they they can do it over other things. Underwriters do not see why they should have to pay for that."

Not all brokers will follow suit. Tony Howe, joint managing director of LIBM, another broking company, said last week : "We will continue to provide cover in respect of the PIA Ombudsman in spite of certain misgivings.

"This assumes that the PIA will not impose compensation over and above what would be awarded in a court of law."