I refer to the article (January 20) with the heading ‘Investor payback scheme is low on funding’ as well as to the editorial on the same subject.
I would like to clarify that part in the report relating to the scope of the Investor Compensation Scheme.
The Investor Compensation Scheme Regulations (Legal Notice 368 of 2003) transpose Directive 97/9/EC on investor compensation schemes. In terms of regulation 19 thereof, the scheme is required to provide for the payment of compensation for: “claims arising out of the licence holder’s inability to:
a) repay money owned to or belonging to investors and held on their behalf in connection with licensed business; or
b) return to investors any instruments belonging to them and held, administered or managed on their behalf in connection with licensed business or, where this is not possible, their monetary equivalent or value.”
In both scenarios, the law clearly sets out that compensation is due in situations where the investment firm cannot return monies or instruments held by itself on behalf of the investor.
Indeed, an assessment of the European Commission released in July 2010 confirms that “the [Investor Compensation Scheme Directive] currently only requires compensation to be paid for losses if an investment firm fails to repay money or return financial instruments held on a client’s behalf. Other losses, due for example to a decline in the value of the investment or negligent investment advice by the firm, are not compensated under the [directive].”
The trigger for the submission of such claims is an MFSA determination that an investment firm is insolvent, while still holding client’s monies/instruments.
As soon as this happens, the scheme has three months in which to pay out compensation in respect of loss of monies/instruments held by the investment firm on behalf of investors, subject to the maximum amount set out in the regulations (which stands at €20,000 per investor). The scheme is not required to compensate investors for damages suffered as a result of mis-selling, negligent investment advice or a decline in the value of investments or similar actions.
The scheme provides insolvency protection solely within the parameters establishedby a law which transposes a European directive.
Clearly the discussion should not stop here, and as the editorial shows, readers would be interested to learn what measures are currently being recommended by MFSA to enhance customer protection in the financial industry.
The MFSA proposals have been published for consultation, and readers and interested parties are invited to provide feedback on how best to improve the legislative framework for consumer protection in this area until March 14.