Compensation For Investors When Investment Firms Fail

Author:Ms Claire Vaughan
Profession:Dillon Eustace
 
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The current crisis in the financial markets has brought the

Irish Deposit Protection Scheme, as administered by the Financial

Regulator, into the spotlight. This, however, is only one of the

two main compensation schemes that provide compensation to

individuals when regulated firms go out of business. The other

compensation scheme, the Investor Compensation Scheme (the

'Scheme'), provides compensation for clients of failed

investment firms. The Scheme's workings are also worthy of

analysis.

Background to the Scheme

Prior to the introduction of the Investor Compensation Directive

(Directive 97/9/EC) (the 'ICD') in March, 1997, the

implementation of investor compensation schemes in EU Member States

was, to a large extent, left to the discretion of the national

governments, the upshot being that varying levels of unprotected

exposure to investment losses existed for investors across the

EU.

The ICD sought to enhance investor protection by providing for a

harmonised minimum level of investor protection across the EU. The

ICD was transposed into Irish law on 1st August, 1998, by the

enactment of the Investor Compensation Act 1998 (the

'ICA'), the principal feature of which is the provision for

the incorporation of the Investor Compensation Company Limited (the

'ICCL').

The ICCL is now the specialist, independent body which is

charged by the ICA with establishing and maintaining funds out of

which compensation payments can be made to 'eligible

clients' (as the term is defined in the ICA) of certain

categories of failed investment firms.

Operation of the Scheme

Authorised investment firms (see below) are required to

contribute to the Scheme by making annual contribution payments to

the funds maintained by the ICCL. There are currently, in fact, two

funds - Fund A and Fund B - each designated to meet claims from

investors of different categories of authorised investment firm.

The question of which fund a firm contributes to depends on the

nature or category of the authorised investment firm. The amount

required to be contributed by each authorised investment firm

depends on criteria such as the number of 'eligible

clients' (as defined in the ICA) that are managed by the firm

or the amount of the firm's total income from investment and

insurance business in the previous financial year.

The Financial Regulator ('FR') is appointed as the

supervisory authority for the purpose of the ICA and is vested with

a significant amount of control over the operation of the ICCL

itself and over the compensation funds established by it...

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