Warning that advisers could go bankrupt: Failure to secure insurance cover may drive finance firms out of business

SCORES of financial advice firms face being driven out of business because they cannot get full indemnity insurance cover in the wake of the pension transfer scandal, their trade organisation warned yesterday.

As a gesture of support, regulatory authorities have relaxed rules insisting on cover, but it is a purely temporary measure and the advisers will soon have to find an alternative. A spokeswoman for the Securities and Investments Board said: 'There are a number of requirements we can insist on, but there are also a number of things a regulator can do on its own. In this instance, indemnity cover is something Fimbra itself has insisted on.

'It is desirable that independent financial advisers should have it because it lessens the burden on the industry's own compensation scheme. Fimbra's actions may not be desirable in the short term but it is difficult to see what the alternatives could be.'

Problems in getting cover follow a SIB report last month that up to 90 per cent of 500,000 transfers from occupational into personal pension schemes might have been poorly advised. Independent financial advisers are believed to have been responsible for about 90,000.

Garry Heath, chief executive of the National Federation of Independent Financial Advisers, said: 'We are concerned about what is happening. Many IFAs have carried out pension transfer business.

'We believe the advice they gave was perfectly acceptable, even if they did not always fully record the information.'

Good advisers could be driven out of the industry by just a few claims, Mr Heath said. While his own organisation had been able to negotiate cover for its members, including for transfers, the brokers concerned wanted to know what exposure each of them had to the transfer market.

Indemnity cover became a formal requirement for IFAs in mid-1991, although many had it already. It is supposed to protect them against claims of negligence, error or omission, as well as fraud by employees of the business itself.

Under Fimbra rules, insurers who want part of the indemnity market must cover all areas of business, including transfers. The market's refusal to accept transfers as part of normal business has led to Fimbra allowing some IFAs to trade without cover.

Emergency talks are taking place this week between the regulator and insurers to overcome the impasse. Failure to get cover could leave advisers unable to meet compensation claims from investors.

They would be forced into bankruptcy so that savers could instead claim their money from the industry's own Investors Compensation Scheme, which has an upper ceiling of pounds 100m a year.

One problem for the compensation scheme is that the industry had until now agreed to fund it up to pounds 50m and obtain additional insurance cover for the second half of the amount.

The current uncertainty over potential compensation levels on pension transfers has so far led the market to pour cold water on this idea.