The collapse of the stockbroking firm W&R Morrogh will be the third test of the Investor Compensation Company Limited's powers to compensate investors who have suffered losses as the result of a firm's closure.

The Investor Compensation Company Limited (ICCL) has issued claim forms to clients of the Cork-based W&R Morrogh stockbrokers.

The number of clients who are owed money by the firm and will apply to the Central Bank's compensation scheme could be in excess of 2,000, far outweighing the number of claimants in previous cases.

The ICCL was established under the Investor Compensation Act 1998 to protect private clients of investment companies.

Customers of failed authorised investment firms are entitled to payment of #20,000 (£15,751) or 90 per cent of their net loss, whichever figure is the lesser.

The W&R Morrogh case follows claims by clients of Money Markets International Stockbrokers and Andrew Casey Life and Pensions in 1999. Morrogh's losses were incurred when junior partner Mr Stephen Pearson used client funds for futures gambling.

The compensation scheme extends to all investment firms, stockbrokers and credit institutions that are authorised by the Central Bank.

Insurance brokers and agents, tied insurance agents, restricted activity investment product intermediaries and some accountants also fall within the scheme.

When the Central Bank advises the ICCL that an authorised firm has been the subject of a court ruling preventing it from returning money or investment, or the Bank determines that it is unable to do so, the ICCL writes to all known eligible clients of the failed firm and places advertisements in national newspapers seeking claims.

Investors will have a maximum of five months in which to make a claim. Clients of W&R Morrogh, which wound up in the High Court in May with a deficit of £5.5 million, have until December 20th to apply to the scheme.

Some investment shares may be returned to clients, satisfying claims before they reach the ICCL, but it is expected at least 2,000 of the firm's 9,300 clients will apply for compensation.

"I would imagine that most of those retail investors who are owed by the firm will be eligible for compensation, judging from the reaction we have received," says Mr Bernard Sheridan, chief operations officer of the ICCL.

The company is funded by annual contributions from member firms that are authorised to conduct investment services. In the case of Money Markets International, 300 clients applied for compensation, with £640,000 set aside in a payment provision fund for successful claimants.

The sharp increase in the number of clients in the W&R Morrogh case means that funding necessary for compensation will far exceed any previous payment by the company. The ICCL estimates that between £2 million and £4 million will be required to compensate eligible claimants. This would completely deplete its current fund.

"This is something we are looking at the moment," says Mr Sheridan, "and we have issued a consultation paper to contributing firms".

ICCL contributors are divided into two groups, Fund A and Fund B, with Fund A comprising investment firms, stockbrokers and credit institutions providing investment services. About 230 firms in this category are likely to be asked for a "significant additional contribution", according to Mr Sheridan. "If we are paying out in respect of Morrogh's, this will mean a big hit on these firms."

Annual contributions for all firms may also rise. "We are taking a prudent approach in trying to pre-fund the company," says Mr Paul Carty, chief executive of the Irish Brokers' Association and member of the ICCL's board of directors.

The ICCL is expected to seek £8 million from banks, stockbrokers and financial institutions over the next two years in order to build sufficient reserves to pay future claims.

For larger investors, however, any possible compensation is limited. A sizeable number of W&R Morrogh clients, including members of the Cork medical community, have reported losses of between £50,000 and £500,000, but will receive maximum compensation of £15,751 under the terms of the Act. The scale of their losses will depend on how much money the receiver, Mr Tom Grace, can retrieve from the firm's partners.

"The board has considered moving the maximum limit for compensation up. It may not be sufficiently high enough, perhaps because of inflation," says Mr Sheridan.

"But Ireland has adopted the EU rate and what happens in Europe will have to be taken into account."

Mr Dermott Jewell, chief executive of the Consumers' Association of Ireland, says the compensation company needs to move forward in order for it to be effective.

"The cost of director's fees has been £65,000. This comes to 10 per cent of the amount of compensation paid in the same year. This 10 per cent would make more funds available for compensation and could help boost the maximum limit."

Mr Jewell would be "more at ease" if there was a greater rate of contribution from member firms so that investors could receive greater protection.

Initial problems receiving annual contributions have now largely been resolved, according to Mr Carty. Non-contributing firms were reported by the ICCL to the Central Bank under the terms of the Investor Compensation Act.

Apart from these early funding hiccups, the ICCL has also been criticised for payment delays. Payment of claims must take place within three months of the validation of the claim by the administrator of the case.

However, this validation process can take more than a year. Some 300 MMI Stockbrokers clients waited in excess of a year for the administrator, Mr Tom Kavanagh, to begin certifying claims.

The ICCL annual report for the year ending July 2000 described the MMI Stockbrokers liquidation as "a costly experience" for the company. Mr Joe Maher, the ICCL's chairman, wrote that he was sorry that claimants had been required to be so patient, but that it could not make payments until the administrator had confirmed in each case that the client was eligible.

In 1999, nine clients of Andrew Casey Life & Pensions claimed for compensation under the Act, but six were ruled ineligible. This is because one condition for eligibility is that clients of some types of firms, including life insurance intermediaries, must have invested after August 1st, 1998 - the date the Investor Compensation Act was implemented. This condition represented a loophole in consumer protection for losses before the summer of 1998, as the Act simultaneously removed previous statutory bonding for investment firms.

Although most of the claims from MMI Stockbrokers have now been dealt with, a small number are outstanding due to legal issues concerning interpretation of the Act.

"Because this legislation is new, there is very little precedent," says Mr Sheridan, "but we're working to get these issues resolved without going back to the High Court". The ICCL says its service helps avoid the need for clients of liquidated firms to pursue expensive private legal actions.

"We have paid out compensation to most of the eligible MMI claimants. If they had to wait for the liquidation process to be finished, they would still be waiting," insists Mr Sheridan.

The W&R Morrogh claims will be processed "as expeditiously as possible" with possible extra resources recruited from the Central Bank, says Mr Carty, but "it is not something that is required to be done overnight".