LONDON Financial advisors must contact thousands of people who bought into two Guernsey funds to see if they are eligible for compensation after Britain's markets watchdog wielded new powers for the first time in its crackdown on mis-selling.
The Financial Services Authority (FSA) said on Monday up to 800 advisors who recommended the two CF Arch cru funds would have to ask customers if they want their cases reviewed for possible mis-selling, after the funds lost an estimated 140.5 million pounds ($227 million) for investors.
Although the sums are not huge compared with other mis-selling scandals, the FSA's tactics signal a tougher approach.
"This is the first time that the FSA has used its statutory consumer redress power to implement a scheme of this type," the watchdog said in a statement.
Britain is trying to end two decades of mis-selling scandals from home loans to pensions and loan insurance. Banks face a bill of 12 billion pounds or more on mis-sold loan insurance alone.
The FSA was given powers in 2010 to speed up consumer redress as the previous power it had was never used because the process was burdensome.
"The FSA has concluded that there was widespread mis-selling by firms who failed to assess the funds as high risk despite the fact that the funds were typically invested in non-mainstream assets such as private equity, private finance and commodities," it said.
Advisors will have until the end of April to contact clients sold the funds, with two reminder letters if there is no reply.
The FSA estimates it will cost advisors 600,000 pounds to 2.7 million pounds in total. A firm offering redress must pay the money within 28 days of receiving a claim from a consumer that is determined as being payable.
"If there is no evidence to suggest that the adviser mis-sold the funds, the adviser will not be liable to pay redress under the consumer redress scheme," the FSA said.
Compensation will reflect the current value of the funds and deduct the amount an investor is eligible to claim from a separate 54-million-pound voluntary scheme set up by three administrators of the Arch cru funds, Capita Group, Bank of New York Mellon and HSBC.
The aim of the FSA's mandatory scheme, which it is enforcing despite opposition in a consultation launched in April, is to put investors back where they were had they not received unsuitable advice.
Sales totaled 470 million pounds to the two Arch cru funds before they were suspended in March 2009.
The FSA said 90 percent of the sales were "unsuitable" and that compensation would likely end up being around 20 to 40 million pounds from the scheme as not all customers will reply.
(Reporting by Huw Jones; Editing by Mark Potter)