The art of investigating the past

The Financial Services Compensation Fund, in its role as the UK's statutory financial fund of last resort, generally receives a handful of endowment claims made against a large number of small firms, rather than lots of claims made against a single large firm.

This means that we need to undertake significantly more individual default investigations into the ability of small investment advice firms to meet claims made against them. It is likely that, as a result of this rise in claims, we will see more and more default declarations over the coming months.

This does not mean that firms operating in the sector are suddenly going out of business. Most endowment policies were sold many years ago and many of the firms that sold them have since ceased trading, for example, because the principals have long since retired. We are therefore investigating a large number of complaints relating to historic financial advice given by large numbers of small independent financial advice firms.

In order to decide whether a claim is eligible for compensation from the FSCS, we must consider the investor's circumstances at the time of the advice and the reasons why the investor is now making a complaint. For example, we would assess the investor's financial circumstances, investment experience, objectives and risk profile. We look for evidence of what advice they were seeking, and we would assess whether the firm's recommendations matched those requirements and objectives. Also, did the firm explain the product adequately, including the associated risks, and did it properly discuss alternative investments? We will try to obtain as much evidence to support a claim as possible: the firm's files, documents provided by the investor and records obtained from another third party such as the product provider.

If we agree that the investor has an eligible claim, we also need to establish a financial loss as result of the advice. In essence, for claims relating to the unsuitability of an investment product, compensation aims to put an investor back in the position in which it would have been had it not invested - although for endowment mis-selling claims we compare the position under a capital repayment mortgage.