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Investor compensation schemes

To protect investors following the failure of an investment firm.

ACT

European Parliament and Council Directive 97/9/EC of 3 March 1997 on investor-compensation schemes.

SUMMARY

The Directive requires Member States to set up one or more investor compensation schemes. All investment firms supplying investment services must belong to such a scheme (credit institutions may be exempted provided that they already belong to a scheme which guarantees protection at least equivalent to that provided under a compensation scheme and that they fulfil certain specific conditions).

The compensation scheme operates where:

  • the competent authorities have determined that in their view an investment firm appears, for the time being, to be unable to meet its obligations arising out of investors' claims and has no early prospect of being able to do so; or
  • a judicial authority has made a ruling which has the effect of suspending investors' ability to make claims against an investment firm.

Cover has to be provided for claims arising out of an investment firm's inability to:

  • repay money owed to or belonging to investors and held on their behalf in connection with investment business; or
  • return to investors any instruments belonging to them and held, administered or managed on their behalf in connection with investment business.

Where an investment firm is also a credit institution, the Member State of origin decides which Directive should apply to money claims: the above-mentioned Directive or that governing deposit-guarantee schemes. No claim in respect of a single amount is eligible for compensation under both Directives.

The Directive sets a Community minimum level of compensation per investor of Euro 20 000, while at the same time authorising Member States to provide for a higher level of compensation if they so wish. However, certain categories of investors may be excluded by Member States from the scheme's coverage or may be afforded a lower level of coverage. The arrangements for organising and financing schemes are left to the discretion of Member States.

There are procedures to be followed where an investment firm fails to comply with the obligations incumbent on it as a member of a scheme (penalties ranging up to exclusion).

Provision is made for branches of investment firms to join compensation schemes in host Member States if they so wish.

The coverage applies to the investor's aggregate claim, irrespective of the number of accounts, the currency and the location in the Community. In the case of joint investment business, claims are divided equally amongst investors.

The compensation scheme may fix a period during which investors must submit their claims. The fact that that period has expired may not, however, be invoked by the scheme to deny cover to an investor. An investor's claim must be met within a maximum of three months of the establishment of the eligibility and the amount of the claim.

Obligations are laid down regarding information that must be supplied to investors.

The Commission is required to present a report on the application of the Directive by 31 December 1999 at the latest.

REFERENCES

ActEntry into forceDeadline for transposition in the Member StatesOfficial Journal
Directive 97/9/EC26.3.199726.9.1998OJ L 84 of 26.3.1997

RELATED ACTS

Report - COM(2000)81 final
Commission report on the application of the export prohibition clause, Article 7(1) of the Directive on investor-compensation schemes (97/9/EC). The second subparagraph of Article 7(1) of Directive 97/9/EC of 3 March 1997 on investor-compensation schemes states that the Commission must draw up a report on the export prohibition clause and examine whether its validity should be extended beyond 1999. This is the aim of the report.
Investor-compensation schemes are designed to protect investors when investment firms are unable to meet their obligations. The "export prohibition clause" was introduced to avoid the disruption caused by a system which offers limited coverage for branches located in Member States where compensation schemes are less generous. The Commission's conclusion in the report is that compensation schemes have been harmonised and that there is no longer any valid reason to keep the export prohibition clause; it is therefore to end on 31 December 1999.
The Commission feels it is important to remain reasonably consistent with Directive 94/19/EC of the European Parliament and of the Council on deposit-guarantee schemes, which also contains an export prohibition clause.

Last updated: 06.07.2005
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