AIFA said the FSA’s assessment that just 5% of all directly authorised firms had missold the product meant the test of "widespread and regular" was not met, as set out under the Financial Services and Markets Act 2000.
The trade body is therefore calling on the regulator to reconsider other options for consumer redress, as set out in the consultation document.
The consultation paper CP12/9 "Consumer redress scheme in respect of unsuitable advice to invest in Arch cru funds" was published in April and the deadline for comments from firms, consumers and trade bodies was yesterday.
Its proposed scheme extends to all cases where a firm made a personal recommendation to a consumer in relation to Arch cru funds.
Chris Hannant, policy director at AIFA, said: "We believe that a consumer redress scheme is a bureaucratic and costly way of delivering redress and the FSA has not given proper consideration to other options. It is not justified by the FSA’s own data. The FSA needs to demonstrate that the consumer detriment was widespread. The figures in the consultation fail to support its preference for a redress scheme.
"We are concerned at the way the whole Arch Cru process has been handled. The real cause of investor loss was the mismanagement of funds and it is wrong that FSA has done private deals over compensation where details are still unknown."
As well as submitting a formal response AIFA has recently met with the soon to be CEO of the Financial Conduct Authority, Martin Wheatley, to raise its objections to the proposed scheme.
Hannant concluded: "We hope the FSA will reconsider the options it rejected, which would be a more cost effective way of securing redress for customers."
A further potential impact of the redress scheme suggested by AIFA is higher Personal Indemnity insurance premiums and access, affecting the ability of the whole sector to meet requirements for PI cover.
