Fraud victim redress at stake in Sun Life case

NIC CICUTTI

Thousands of victims of fraud and poor financial advice could be denied redress if an insurer's legal battle against a levy designed to help them is given the go-ahead in the High Court.

Sun Life, a Bristol-based insurer, is applying for a judicial review into whether it should pay its share of a pounds 15.8m levy towards the Investors Compensation Scheme.

If the application is granted tomorrow, the ICS said it would immediately halt offers of payment to some 1,200 investors in respect of firms that have already been declared in default.

For every month before the judicial review is heard, hundreds more savers whose cases have yet to be determined by the ICS could be barred from receiving compensation.

Should Sun Life actually win its case, the crisis may compel the Treasury to take emergency measures, which it has so far resisted, to provide a lifeline to the stricken scheme. If so, its enforced intervention would deal a further blow to the already beleaguered mechanism for regulating the financial services industry.

The ICS's decision to stop payments to victims comes at the end of weeks of uncertainty over whether it has enough money to fund claims from investors. The scheme has been unable to negotiate a pounds 50m loan from a consortium of banks to tide over its activities.

It also agreed two weeks ago not to make further use of a pounds 10m overdraft facility already available from the Royal Bank of Scotland. ICS board members believe it would not be prudent of them to use this money unless they were certain that more funds would come in soon.

Central to the Sun Life application for a judicial review is its lawyers' interpretation of insurers' liability to a levy raised annually by their regulator, the Personal Investment Authority.

The PIA was formed last year out of the remains of two other watchdogs, Fimbra and Lautro, and took immediate responsibility for its share of the industry-wide levy. Sun Life, however, believes that it cannot be held liable for compensation on behalf of firms that were not PIA members when they went under.

The insurer has argued that it is not opposed to paying the money and simply wants a clarification of the law. Not to do so would leave Sun Life at the mercy of court action from its other policyholders. They could claim their funds were being illegally raided to meet the bill.

Sun Life's claim has already meant a last-minute decision by the PIA not to send out bills to its members last month. Although the sums involved in this year's levy are not large, the industry is anxiously awaiting the fall-out from the expected pounds 3bn compensation bill for bad pension transfer advice. Hundreds of small independent advisers may be driven out of business, leaving the ICS to foot the enormous cost of compensating their clients.

Despite pressure on it to resolve the crisis immediately, the Treasury said that it was the responsibility of the industry and its regulators to find a way out. A PIA spokesman said talks would continue to take place between all parties involved with the aim of reaching a solution.