Navigating the Investment Business Compensation Scheme

It is well established that the primary avenue of claim if you suffer financial loss because of poor advice received from a professional is one of professional negligence. 

It is possible to bring a claim against someone you have paid to provide an expert service, such as a solicitor, barrister, surveyor, architect, accountant, financial advisor or tax advisor.

What is less well known is that there are other actions that you can bring against a professional in circumstances where the prospects of recovery in a claim of professional negligence are limited.

As our Financial Services experts will go on to explain, one such action is in respect of accountants, and is called the Investment Business Compensation Scheme (the Compensation Scheme). 

The ICAEW defines the Scheme as "a fund of last resort". This means that example circumstances in which a victim of poor investment advice might look to rely on the Compensation Scheme are:

• If a negligence claim has previously been pursued, but it is discovered that the Defendant has become insolvent and therefore has no professional indemnity insurance in place at the time the claim is notified or 
• There is no other way of recovering compensation.

A claim is only successful if the Committee is satisfied that the following requirements have been met: 

• The Claimant has incurred a Civil Liability. This means that you will not be able to recover any losses that you would not ordinarily be able to recover in a civil action. For example, if investment advice has been provided to maximise tax efficiency and you are later required to pay a large tax bill, you may not rely on the Compensation Scheme. 
• The accountancy firm that provided the advice must be insolvent. 
• The Civil Liability must have been accepted by the liquidator (or trustee/assignee in bankruptcy) of the insolvent accountancy firm. The Committee does have the discretion to determine whether a Civil Liability has occurred without this. 
• The Committee is satisfied with the amount of the Civil Liability.
• That the Civil Liability has not been satisfied, in whole or in part. 
• The accountancy firm is likely to be unable to satisfy that Civil Liability. 
• The claim has been made in accordance with the Compensation Scheme Regulations.

The amount you can recover under the Compensation Scheme is capped at £50,000, exclusive of any interest payable.

There are specific rules relating to interest under the Compensation Scheme.

It is important to note that a claimant is not usually entitled to recover any costs related to making a claim under the Compensation Scheme.