Investors mis-sold Arch Cru funds could soon be paid out in excess of £100 million in compensation.
The plans laid out by the Financial Services Authority (FSA) would see firms who mis-sold the funds having to review their sales practices, identifying customers who were given unsuitable advice and paying back money.
The redress would be in addition to the £54 million payments scheme that was rubber-stamped last year.
The consultation comes after FSA evidence found 'widespread mis-selling' of Arch Cru funds, with the products sold as low to medium risk when, in fact, they were high-risk funds.
The FSA said that its redress scheme is designed to put investors back into the position they would have been in had they received suitable advice. It is the first time that the FSA has used this power to implement a consumer redress scheme.
The watchdog said that the powers will form an important part of its 'consumer protection tool kit'.
"Investing money can be one of the most important decisions that anyone has to make and investors need to be able to trust the advice they are given," said Clive Adamson, director of conduct supervision at the FSA.
"The Arch Cru funds were high risk and they should only have been recommended to investors who fully understood and were willing and able to accept the risks.
"We have found significant evidence that investors looking for lower risk investments have invested thousands in these funds. It is right that these consumers are put back in the position they expected to be in when they took the advice.
"We believe the proposed scheme is the best way to get the most money back to the greatest number of investors."
The consultation will close in three months, after which the FSA will outline details of the compensation scheme.
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