At least €100,000 compensation for defrauded private investors

Private investors should be better protected against fraudulent and defaulting investment firms, and be eligible for at least €100,000 in compensation (double what was initially proposed), said the Economic and Monetary Affairs Committee on Wednesday. As amended in committee, the new rules would also halve the time allowed for fully capitalising national compensation schemes, and enable local authorities and NGOs, as well as private individuals, to file compensation claims.

In proposed changes to the current EU rules on investor compensation schemes, the European Commission had set a minimum guaranteed compensation level of €50,000. The committee text, drafted by Olle Schmidt (ALDE, SE), doubles this to €100,000.  And whereas the Commission allowed ten years for compensation schemes to reach their required funding level, the committee text grants only five. 

On the other hand, whereas the Commission proposal required a target fund level of 0.5% of the assets held by a scheme’s participating investment firms, the committee text requires only 0.3%.  The committee also broke new ground by widening the permissible grounds for claiming compensation to include cases where it is proven in a court that an investment firm provided "bad advice".

The Schmidt report was approved in committee with 34 votes in favour, none against and 4 abstentions.

Risk-weighted dues

MEPs also added a risk-weighting mechanism, whereby investment firms taking the biggest risks would have to pay the biggest contributions into the compensation scheme to which they belong,  and empowered schemes to oblige their members to pay in their contributions.  Finally, borrowing from other, similar, schemes would only kick in after five years, so as to coincide with the time when all schemes would be sufficiently capitalised.  This would reduce the risk of free-riding by poorly-capitalised schemes, MEPs say.

Maximum harmonisation

MEPs parted company with the Commission even at the general level, by opting for details of the schemes’ structures and capacities to be designed at EU level rather than by each Member States, so as to reduce fragmentation of the schemes and make them more effective. For example, rules on paying into the scheme would be defined at EU level, as would those on intra-scheme borrowing, and powers for schemes to borrow from banks and institutions.

More transparency

The committee text would enhance transparency in three ways. First, it imposes new reporting requirements on Member States, so as to provide the Commission and the EU markets watchdog with more information on their national schemes and the nature of the risks being covered. Second, it requires investment firms to inform investors through their web sites about compensation coverage and how to apply for compensation. And third, it requires investment firms to state clearly the cost to each investor of the firms' participation in a compensation scheme.

The UCITS case

MEPs excluded undertakings for collective investment in transferable securities (UCITs) from the scope of this text, as they deem them sufficiently well-covered by other legislation. If UCITs need further regulation, then this should be considered in the upcoming review of the UCITS Directive, said the committee. The text does nonetheless ask the Commission for a cost/benefit study on the possibility of including UCITs later, and of replacing or complementing investor compensation schemes with insurance contracts. 

Next steps

The committee will now wait for Member States to agree a common position, after which negotiations between the two sides will begin in earnest.  They are likely to be fraught, given that today's text further strengthens a Commission proposal which, various Member States had intimated to Commission, already went too far. Parliament's plenary vote on the proposals is tentatively scheduled for June.

Background

Ten years after entering into force, the Investor Compensation Scheme Directive is being reviewed to address various complaints received by the Commission and to improve consumer confidence in financial markets.

The directive does not compensate investors for "investment risk" (the risk that an investment will result in a loss) and operates only as a last-resort safety net for clients of investment firms should other important safeguards fail.  Claims under the directive typically arise if there is fraud or other administrative malpractice within a firm or due to inability to meet obligations towards clients' assets as a result of a firm's errors, negligence or problems in its systems and controls.

In the chair: Sharon BOWLES (ALDE, UK)