Protecting investors when an investment firm fails

SUMMARY OF:

Directive 97/9/EC on investor-compensation schemes

WHAT IS THE AIM OF THE DIRECTIVE?

It aims to protect investors following the failure of an investment firm.

KEY POINTS

• The directive requires European Union (EU) countries 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 EU country 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 an EU minimum level of compensation per investor of € 20 000, while at the same time authorising EU countries to provide for a higher level of compensation if they so wish. However, certain categories of investors may be excluded by EU countries 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 EU countries.
• 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).
• Branches of investment firms may join compensation schemes in host countries 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 EU. 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 3 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 European Commission adopted a proposal to amend the directive in July 2010. This was in light of developments since the directive’s entry into force and the financial crisis which began in 2008. The proposed amendment was also informed by an evaluation conducted in 2009. The proposal would:
  • have raised the compensation limit to € 50 000;
  • shortened payout delays;
  • required schemes to be pre-funded by a common minimum amount and extended their coverage to specific third-party entities.
• The proposal was withdrawn in March 2015 due to a lack of progress in the negotiations between co-legislators (the European Parliament and the Council of the European Union).

FROM WHEN DOES THE DIRECTIVE APPLY?

It has applied since 26 March 1997. EU countries had to incorporate it into national law by 26 September 1998.

BACKGROUND

For more information, see:

• Investment services and regulated markets (MiFID I and MiFID II) on the European Commission’s website.

* KEY TERMS

MAIN DOCUMENT

Directive 97/9/EC of the European Parliament and of the Council of 3 March 1997 on investor-compensation schemes (OJ L 84, 26.3.1997, pp. 22-31)

last update 06.10.2016