A bill to compensate private investors whose money is lost as a result of the actions of an investment or insurance intermediary will result, if passed, in maximum compensation of up to 20,000 ecu (about £15,500) or 90 per cent of the sum lost, whichever is the greater. Under the terms of the just-published Investor Compensation Bill 1998, the 20,000 ecu the minimum amount required by the EU Investor Compensation Directive can be claimed by private investors and smaller companies only against: stockbrokers, banks providing investment services, investment intermediaries and insurance agents and brokers.
The directive does not require that insurance intermediaries be covered, but restricting the compensation to clients of investment intermediaries was found by the Government to be unfair, given that many investment intermediaries also act as insurance agents or brokers. For similar reasons, "it is not proposed to limit compensation simply to life insurance business," the Minister of State at the Department of Finance, Mr Cullen, told the Dail last week.
The Central Bank, which already acts as the supervisory authority for banks, building societies, stockbrokers and investment firms, will take over the supervision of the new Investor Compensation Company Limited. The board of the new company will have an equal number of directors representing both the financial services industry and consumer interests. The appointment of the Board will be the joint responsibility of the Ministers of Finance and Enterprise and Employment. The Central Bank will appoint the chairperson and deputy chairperson. All investment firms (from the largest banks to smaller investment companies) will be obliged to finance the compensation fund; accountants' practices are exempt because they operate their own compensation scheme which is subject to approval by the Central Bank. "This is appropriate," according to Mr Cullen, where investment advice is only incidental to the accountants' practice and they are not operating as fullyfledged investment intermediaries. (A similar arrangement exists with solicitors' practices.)
Aside from maintaining the compensation funds, the Compensation Company will also have to decide the number of funds to operate and the level of contributions the investment firms have to make.
Under the terms of the Bill, investors will have up to five months to make compensation and can expect a decision from the Compensation Company within three months of the claim. The Bill allows for investment intermediaries to act as activity investment product intermediaries
which means they must deal only with product producers and have a written appointment from the producer and must not handle cash other than as a deposit agent (they must not hold Section 48 cash accounts on behalf of clients). When a claim for compensation is made against such an intermediary and is successful, payment will be made by the product company concerned, which in turn will apply to the Compensation Company for a refund.
On summary conviction for offences under the Act, a person will be liable to a fine not exceeding £1,500, imprisonment (for an individual) of no more than 12 months, or both. On conviction on indictment, the fines will not exceed £1,000,000, imprisonment of not more than 10 years, or both. If this Bill is enacted, it will certainly go some way towards further protecting investors. The fact that product producers and their intermediaries will be held to account for a certain level of losses will help compensate small investors who up to now had virtually no recourse but to take a private action against an investment or insurance intermediary.
The Consumers' Association, which made a submission to the Department of Finance on the compensation issue, told Family Money, however, that it regretted the level of compensation was not higher, since prominent cases of intermediaries absconding with funds had, for the most part, involved sums greater than 20,000 ecu.
