COMPENSATION for investors promised in the Investment intermediaries Bill is not yet in place because financial institutions would not accept unlimited liability for client losses when intermediaries collapse.
The Investment Intermediaries Act came into effect in 1995 except for the section dealing with investor compensation. Section 28 (4) of the Bill was aimed at ensuring that investors would not lose out if intermediates collapsed.
It provided that funds given to an intermediary for investment would be taken to have been invested with the appropriate financial institution if the investor had a receipt for the funds involved and the intermediary had been appointed in writing to sell the products of the financial institution.
The section meant the funds given to intermediaries would be deemed to have been invested as the client had instructed. It meant that in many cases insurance companies or banks would become liable for losses suffered by clients when intermediaries collapsed and it was found that the funds had not been invested as the client had instructed.
After intense lobbying by financial institutions against the provision, section 28 (4) was held over for further consideration. Financial institutions argued that this section would "encourage fraud and collusion", because clients would be fully reimbursed for losses, fraud by intermediaries would be encouraged as would collusion between intermediaries and clients to defraud financial institutions.
In addition, they argued that where there was unlimited liability clients would be less inclined to question intermediaries selling exceptionally high return products.
Instead of the section 28 (4) provisions, the financial institutions argued for a formal compensation scheme for investors who were defrauded to which both the institutions and intermediaries would contribute. They wanted a scheme based on the EU Investor Compensation Directive which was adopted some months ago. They sought to include foreign financial institutions whose products are sold to Irish investors in the scheme.
The institutions argued there was an inherent contradiction between the proposed unlimited liability under section 28 (4) of the Act and section 50 which requires investment business firms to inform clients about whether there was a compensation or protection fund and "the nature and level of protection, if any, available from any such fund".
Against a background of opposition from the industry, the future of section 28 (4) is now uncertain. Some sources said it might be put forward in an amended form or that it could be replaced entirely. New provisions to safeguard client funds when intermediaries collapse may be included in the draft
Investor Compensation Bill which is expected later this year.
After the adoption of the EU directive on investor compensation in Brussels Ireland has about 12 months in which to put compensation provisions in place. The EU directive provides for compensation of 20,000 Ecu (about £16,000) or 90 per cent of the sum involved or whichever is the greater amount.
