Compensation For Investors When Investment Firms Fail

Author:Ms Claire Vaughan
Profession:Dillon Eustace

The current crisis in the financial markets has brought theIrish Deposit Protection Scheme, as administered by the FinancialRegulator, into the spotlight. This, however, is only one of thetwo main compensation schemes that provide compensation toindividuals when regulated firms go out of business. The othercompensation scheme, the Investor Compensation Scheme (the'Scheme'), provides compensation for clients of failedinvestment firms. The Scheme's workings are also worthy ofanalysis.Background to the SchemePrior to the introduction of the Investor Compensation Directive(Directive 97/9/EC) (the 'ICD') in March, 1997, theimplementation of investor compensation schemes in EU Member Stateswas, to a large extent, left to the discretion of the nationalgovernments, the upshot being that varying levels of unprotectedexposure to investment losses existed for investors across theEU.The ICD sought to enhance investor protection by providing for aharmonised minimum level of investor protection across the EU. TheICD was transposed into Irish law on 1st August, 1998, by theenactment of the Investor Compensation Act 1998 (the'ICA'), the principal feature of which is the provision forthe incorporation of the Investor Compensation Company Limited (the'ICCL').The ICCL is now the specialist, independent body which ischarged by the ICA with establishing and maintaining funds out ofwhich compensation payments can be made to 'eligibleclients' (as the term is defined in the ICA) of certaincategories of failed investment firms.Operation of the SchemeAuthorised investment firms (see below) are required tocontribute to the Scheme by making annual contribution payments tothe funds maintained by the ICCL. There are currently, in fact, twofunds - Fund A and Fund B - each designated to meet claims frominvestors of different categories of authorised investment firm.The question of which fund a firm contributes to depends on thenature or category of the authorised investment firm. The amountrequired to be contributed by each authorised investment firmdepends on criteria such as the number of 'eligibleclients' (as defined in the ICA) that are managed by the firmor the amount of the firm's total income from investment andinsurance business in the previous financial year.The Financial Regulator ('FR') is appointed as thesupervisory authority for the purpose of the ICA and is vested witha significant amount of control over the operation of the ICCLitself and over the compensation funds...

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