Financial rescue scheme runs out of funds

An unprecedented surge in complaints about mortgage endowments yesterday forced officials running the industry's rescue scheme to make an urgent call for extra cash to bail out victims of mis-selling.

The financial services compensation scheme - the safety net for customers of financial firms that have gone bust - expects to ask the investment industry for an extra £15m to cover compensation on top of the £33m it sought three months ago.

In addition, the scheme warned that the higher than expected numbers of endowment claims meant that the bill for its own running costs this year would be £5m higher than it had predicted, with the industry also picking up the tab for this.

The compensation scheme is funded by contributions from financial services companies. Many people bought endowment policies - used to repay capital at the end of a housing mortgage - from independent financial advisers which have subsequently gone out of business, at which point the scheme becomes operative.

Ron Devlin, the scheme's interim chief executive, said it had allowed for a substantial increase in endowment claims when it did its budget planning but the number of claims coming to the scheme had "exceeded all expectations".

He said the resources for which it had budgeted for 2004-05 were "insufficient for the level of claims now in hand and in prospect".

Thousands of investors have received letters warning that their endowments are unlikely to produce the cash they need.

Yesterday's cash call also reflects an increase in the number of claims relating to high-risk bonds sold by now-defunct financial advice firms.

In late March, the scheme said it would be asking for £33m from about 7,000 investment companies to cover compensation payments to people who lost money after buying endowments and precipice bonds.

Yesterday, it said it was anticipating that the levy for compensation could increase by £15m, and that the Financial Services Authority would be consulting on increasing the scheme's "management expenses levy limit" for this year by £5m to £17.6m.

MPs have sharply criticised finance companies that have appeared to evade responsibility for compensating possible victims of investment and pensions mis-selling.

At a recent meeting of the Treasury select committee, Labour MP Nigel Beard said he was concerned by the trend which has seen some of Britain's best-known independent financial advisers collapse shortly after a welter of complaints about alleged mis-selling and then "dump" their liabilities on the compensation fund.

Berry Birch & Noble Financial Services recently ceased trading and its assets were transferred to the almost identically named Berry Birch & Noble Financial Planning. Its liabilities, including any compensation due to investors mis-sold products such as high risk income bonds, have been left behind with the defunct firm.

RJ Temple and the David Aaron Partnership, two other firms of financial advisers, collapsed recently with liabilities from the sale of bonds.

Last week it emerged that complaints to the financial ombudsman about endowment mortgages have almost quadrupled over a year, reflecting growing anger among homeowners who have been warned their policies may not produce enough cash to pay off their home loans.