THE difficulties surrounding Taylor Asset Managers may yet lead to some political embarrassment, when investors become aware that they may have been denied a key protection by the unwillingness of the Minister for Finance and the Government to bring into operation a vital subsection of the 1995 Investment Intermediaries Act.

The provision, section 28(4) was designed to protect investors, where an intermediary becomes insolvent, or takes off with investors' money. The investor would be protected under this section because the body with whom funds were to have been placed by the intermediary is deemed to have received the money, when they were received by the intermediary from the investor. Accordingly, should the intermediary take off with the money, the loss falls on the investment house.

The act itself, passed by the Oireachtas in 1995, introduced for the first time a comprehensive regime for the regulation of investment firms.

It requires "investment business firms" to be authorised by an appropriate authority. Investment business firms are those which provide various professional services in relation to shares, bonds and the like. The act sets out standards in relation to authorisation and supervision of these firms.

Its powers were used to appoint an authorised officer to investigate Taylor Asset Managers. The act creates many criminal offences, with offenders being punishable by fines up to £1 million and/or imprisonment for up to ten years.

Of particular interest is part IV of the act, which provides for a special regime of a certain type of firm called an "investment product intermediaries". These are firms which receive and transmit investment orders to mutual funds, banks, stockbrokers and the like. In this context, the fund manager or stockbroker is called a "product provider".

This is one of the areas in the act in which self regulation by the industry is most prominent; the Minister of State to the Department of Finance, Mr Hugh Coveney, described the system as the "appointments regime".

In order to receive and transmit investment orders, an intermediary must first be appointed in writing by a particular product producer. The product producer may not make such an appointment unless, after making reasonable enquiries, it concludes that the intermediary complies with the act.

Industry pressure at the time of the passage of the act led to a compromise in relation to section 28(4) that is difficult to justify. It was only at committee stage in the Dail that industry disquiet with the measure was fully voiced. A provision similar to section 28(4) applies in relation to insurance intermediaries, but life assurance companies can avoid responsibility for their intermediaries by giving investors adequate notice.

Product producers such as big fund managers would have no such escape route under the section. Industry complaints focused on the inequality of treatment in the market for savings. Nevertheless, the Minister for State insisted on retaining section 28(4) in the act in its original form. However, he ultimately told the Seanad that the section would not be commenced by the Minister for Finance until there had been extensive consultations with industry groupings.

A year after the adoption of this important act, one of its most important provisions lies in limbo. For once we cannot blame the Oireachtas: it has legislated, only for its will to be frustrated by Government.

This provision gives rise to no practical difficulties as regards implementation; it seems merely that it has been stalled by what seems on the part of the industry to be distaste for the measure itself.

The act was meant to promote investor protection and the proper and orderly regulation of investment firms. The failure to introduce section 28(4) considerably hinders the achievement of either objective.