Dáil Éireann - Volume 542 - 24 October, 2001

Written Answers. - Financial Services Regulation.

97. Mr. J. O'Keeffe asked the Minister for Finance the amount of compensation payable when there is a default on client funds or stocks, held by stockbrokers; and his views on whether a comprehensive scheme similar to the Law Society [1622] Compensation Fund should be introduced. [25279/01]

Minister for Finance (Mr. McCreevy): The Investor Compensation Company Limited, ICCL, was established in 1998 under the Investor Compensation Act, 1998. Its main function is the establishment and maintenance of compensation arrangements for making compensation payments to clients of investment and insurance intermediaries, including stock exchange member firms and banks providing investment business services. The 1998 Act transposed the EU Investor Compensation Directive into Irish law

Under the legislation, ICCL is required to establish or maintain a fund or funds out of which payments are made in accordance with the Act. The industry is responsible for funding the compensation scheme. The scheme provides that compensation paid to eligible investors is the lesser of 20,000 – £15,751 – or 90% of the net losses suffered through the default of the investment entity in question. This is the minimum level of compensation required by the directive.

The Law Society Compensation Fund to which the Deputy has referred was established in 1954 at the instigation of the profession and was put on a statutory basis under the Solicitors (Amendment) Act, 1994 and is intended to provide compensation for loss due to the dishonesty of a solicitor or the clerk or servant of a solicitor. The maximum amount of compensation available under the scheme is £350,000 or 444,408. The Law Society's scheme covers dishonesty only, and this would be narrower than the ICCL scheme, which would also cover negligence. However, the Law Society requires all its members, as a condition for obtaining their annual practising certificate, to also hold professional indemnity insurance.

While, as indicated above, there is a wide divergence between the maximum level of compensation available under the two – 20,000 vis-à-vis 44,408 – there are a number of important considerations underlying the ICCL scheme.

First, it is important to establish a level of compensation which is within the capacity of the investment sector and insurance intermediary sector in this country to finance. The scheme was only established in the latter part of 1998 and it was difficult to gauge at the outset what level of compensation might be required and what the scale of contributions might be. Schemes such as this need time to get established and to build up their reserves. In fact, there have already been a number of demands on the scheme where various investment entities failed and the impact on contributing firms over the next two years or so could be significant. In the circumstances, I would not be disposed to increasing the level of compensation provided under the ICCL scheme at this time.

Second, investor compensation is a form of insurance protection. The industry will inevitably seek, where possible, to pass this cost back to the [1623] investor. It is difficult to gauge what level of funding the investor or the industry can reasonably bear until the scheme has been up and running smoothly for a number of years.