U.K.'s FSA seeks compensation for mis-sold investors in Guernsey funds

LONDON (Reuters)—Britain's financial watchdog sought a further £100 million ($162.6 million) compensation on Monday for badly advised investors in two Guernsey-based funds, marking a new phase in how it will punish mis-selling in the future.

The Financial Services Authority said it has used a power obtained under a 2010 law for the first time to introduce a consumer redress plan that will force advisers who mis-sold a product to pay compensation.

The FSA launched a three-month consultation on setting up a redress plan for an estimated 15,000 investors who were mis-sold the CF Arch cru Investment and Diversified funds by several hundred financial advisors.

The FSA said investors had wanted a low-risk product but the Guernsey-domiciled Arch cru funds comprised high-risk assets such as shipping and venture capital.

"These sorts of assets are hard to price, and there is not an immediate market for them. It's not good enough for an advisor to rely on a marketing pamphlet to say it's low risk," an FSA spokesman said.

The consultation proposes that firms would have to contact their customers within four weeks of the scheme coming into force.

The firms would have to work out, using an FSA calculator, how much money each investor should receive within a few months, taking into account any money already awarded under a separate scheme agreed in 2011.

Last June, three groups involved in administering the funds—Capita Group, Bank of New York Mellon and HSBC—agreed voluntarily to contribute £54 million ($87.8 million) to recompense investors in the Arch cru funds.

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"The two schemes will be operating independently, but we advise applying to both," the FSA said.

Requiring firms to proactively review mis-sales rather than, as in the past, wait for complaints or require customers to ask for a review, will be the new face of investor protection in Britain, said Simon Morris, a lawyer at CMS Cameron McKenna.

"This announcement shows that the future has arrived. It presages what the new Financial Conduct Authority will do on a business-as-usual basis," Morris said.

The aim of the redress plan is to put investors back into the position they would have been in had they received suitable advice.

Britain is trying to end two decades of mis-selling scandals, which have cost about £15 billion ($24.40 billion) in compensation and shredded investor confidence in financial products.

The FSA had the power under the previous financial law to introduce consumer redress, but it was never used as the process was burdensome, requiring government and parliamentary endorsement.

"It's going to be an important part of our consumer protection toolkit going forward," the FSA said.

The power will be available to the new Financial Conduct Authority which will take over the FSA's consumer protection role from next year when the current watchdog is scrapped.