In December 1993 the chief watchdog of the financial services industry, the Securities and Investments Board (SIB), revealed concern over possible mass mis-selling of personal pension plans during the late 1980s and early '90s.Few could have predicted that this revelation was the prelude to the uncovering o f a financial scandal which has had more serious consequences than the Maxwell affair.A large number of investors affected by the mis-selling were public sector employees, such as nurses, teachers and local government employees.Many were wrongly advised to opt out of, or not to join, beneficial superannuation schemes offering defined guaranteed benefits.

Instead they were persuaded to take out personal pension plans, where the extent of their retirement provision suddenly became dependent on the performance of market invested funds.Inferior personal pension plans were sold to such investors, in the main by the direct sales forces of life companies motivated by the prospect of high sales commissions.The regulator's responseIn October 1994 the SIB issued guidelines to all pension providers and financial advisers requiring them to review past sales of personal pensions and to offer compensation in accordance with a 'specification for redress'.

The Personal Investment Authority (PIA) followed suit in February 1995.The review was a genuine attempt by the regulators to put their industry in order and to ensure compensation was offered to investors who had suffered losses.Unfortunately, during the last three years, life companies have failed to implement the review so as to give it the priority it deserves.Resort to litigationGiven the problems with the review, some investors said enough was enough and decided to bring individual claims through the courts.

Since December 1995 several hundred High Court actions have been brought against the major pension providers and a number of independent financial advisers.What prompted the litigation to begin with was the inherent conflict of interest involved in the companies responsible for the original negligent advice deciding whether they had been guilty of inappropriate sales.The litigation has revealed a number of fundamental flaws which go right to the heart of the SIB/PIA review.Costs of an independent investigationTo the objective by-stander it may well appear a peculiar feature of the review that the company which negligently mis-sold its product should be charged with the task of assessing its own competence in making the initial sale.Not only does this infringe the basic legal principle of non iudex in sua causa but where the investigator has, as here, a financial interest in the outcome of the review, the law presumes bias against him (R v Gough 1993 AC 646 (HL)).The industry may well complain at the arbitrary and blanket criticism implied by this presumption, but its protest is not served by an almost universal refusal to meet the cost of any third party appraisal of any offer of redress made in an individual case.

While the specification requires a company to advise an investor of the wisdom of obtaining independent advice before accepting any offer of settlement made, the company concerned is not obliged to meet this cost.The appropriateness of independent advice cannot seriously be challenged and it is clear that unless an investor's claim is settled against the backdrop of litigation this cost will be borne by the victim rather than the perpetrator of the negligent advice.

That such costs and expenses are legally recoverable is clear (Cocking v Prudential 1996 CCH CLC 692).The pensions contribution issueThe pension salesperson who negligently persuaded an investor to opt out of a beneficial occupational pension scheme in favour of an unsuitable personal pension plan will usually have advised that his or her company's product offered a better deal for less cost.To many innocent investors the idea of paying less than they had been contributing to an occupational scheme with the prospect of a better private retirement package proved irresistible.

Where redress is offered through the SIB/PIA review however, the life company is entitled to insist that the investor give credit for any savings in contributions during the opt-out period.Although the redress offered by the review is meant to mirror compensation which would be ordered by the courts, the stance taken by the SIB/PIA guidance on this topic is at odds with the principles by reference to which a court would in these circumstances assess compensation.There is little doubt in the above scenario that common law principles of assessment would not require credit for such savings to be given.

(Ex parte Bowden 1995 1 AER 214 [The House of Lords reversed this decision on public law grounds but it did not overrule the Court of Appeal on this point]).Conversely, an investor may have found that the personal pension plan has ended up costing more than he or she had been contributing to the occupational scheme.

The specification in this instance directs that any such excess contributions should be paid into an AVC or FSAVC scheme.There is no doubt that if dealt with by litigation, this wasted expenditure will be returned as an award of damages with interest.

The SIB's approach represents another departure from common law principles for the assessment of compensation.Top-up and reinstatementWhere a disadvantaged investor can secure readmission at a price to an occupational pension scheme, the court would be likely, if satisfied liability for a mis-sale was established, to order the defendant company to pay as damages the price required for reinstatement (vide by analogy Ruxley Electronics v Forsyth 1996 1 AC 344).Under the specification for redress however, the company is not obliged to make such an offer if it believes that the ceding scheme trustees are demanding an unreasonably high price for readmission with full continuity of service.

In this event the company may offer to top up the existing personal pension plan by an amount which it assesses will make equivalent provision at retirement to that lost as a result of the opt-out.This is not satisfactory; first it ties the investor to the very company which mis-sold the pension.

Secondly, the ultimate value of the topped up pension will inevitably depend on market performance until retirement and carry with it inherent risks which would not have existed if the investor had remained entitled to full benefits in his employer's final salary scheme.Thirdly, the presumptions as to future performance allowed to be adopted by the specification are in no sense conservatively stacked in the investor's favour and depend on over-optimistic growth rates being achieved.Further, although an investor may be told that reinstatement is possible, it has emerged in a number of cases that this does not always involve the purchase of all lost years together with guaranteed continuity of service.This can result in significant losses of contingent benefits -- such as early retirement, ill-health provision and/or redundancy provision.

Issues of this kind require independent verification.Grounds for reduced compensation?When left to the company to decide whether and if so what compensation to offer, the specification allows for any offer to be reduced if the provider believes the investor may have been guilty of contributory negligence in opting out of the employer's scheme in favour of the recommended personal pension plan.The classic example is the investor who, having been taken in by the salesman's claims regarding the personal pension, does not later read through the literature containing product warnings and advice on the risks.It is thought that the courts would be reluctant to reduce damages on these grounds.

The investor has in reality done no more than act in accordance with the very advice he was given (vide by analogy Gran Gelato v Richcliff (Group) Ltd 1992 1 AER 865).A further area which the SIB/PIA specification does not adequately address is the problem of whether the first negligent life company responsible for opting an investor out of a company scheme continues to be liable for losses after the date when a second adviser takes over and sells a further inappropriate product.Does this sort of churning break the initial chain of causation? The writer's experience is that most life companies contend that it does and that the first company's liability is effectively capped by the involvement of a subsequent adviser.It is believed, however, that this argument would almost certainly not succeed in the industry's favour before the courts.GuaranteesFaced with the delays in completing the review and some pressure from the regulators, a number of life companies are now offering a form of guarantee to the investor by way of redress.

One may be forgiven for thinking that what is proposed is a type of indemnity against losses sustained by the investor as a result of acting on the negligent advice of the financial representative.

Nothing could in fact be further from the truth.

The writer's experience of such guarantees to date is that they simply commit the life company concerned to offering (later rather than sooner) the compensation directed to be offered by the specification.

Such guarantees are no more than a guarantee that the investor will get what the SIB/PIA has decided he or she should get rather than be assured of a complete indemnity in respect of all losses flowing from the original mis-sale.If, for example, reinstatement proves impossible, the life company will, on the investors retirement, top up the personal pension plan fund to the level of the benefit in the occupational pension scheme.

The investor will then need to use this fund to purchase an annuity, which will almost certainly not provide the same size of lump sum and other retirement benefits as would have been achieved under the occupational scheme.