EC on investor-compensation schemes - Main contents

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dossier	SEC(2010)846 - Summary of the impact assessment - Accompanying document to the Proposal for a Directive of the European Parliament and of ...
document	SEC(2010)846
date	July 12, 2010

Annex I should be amended in order to align the definition of retail investors in the ICSD with the definition in MiFID.

- A new provision should be included to clarify that firms are covered under the Directive if they in fact hold client funds irrespective of the type of investment service they provide or whether they are doing so in breach of a requirement on their authorisation.

- Article 3 should be amended to exclude claims for compensation by a person who has engaged in market abuse.

- Article 4(1) should be amended to increase the compensation level to €50 000.

- Article 4(4) should be amended to remove the co-insurance principle.

- Various articles should be amended to provide that compensation should be payable if a retail investor suffers loss due to the failure of a third party custodian appointed by the firm to hold financial instruments for the client.

- Various articles should be amended to provide that compensation should be payable to a unit holder of a UCITS scheme if the retail unit holder suffers loss due to the failure of a depositary or sub-custodian of the scheme.

In addition the Commission is currently analysing the possibility to:

- amend UCITS to strengthen safeguards that apply to depositaries and sub-custodians

- take action to strengthen requirements applying to Money Market funds.
6.Impacts of the preferred options

The impact of the changes comprising the preferred policy options in relation to the main stakeholders are the following:

a) Harmonise how schemes should be funded. Investor protection and confidence will be reinforced as these principles and rules will reduce the risk of a scheme having insufficient funding to meet its obligations. There will also lead to an increased harmonisation of the level of investor protection between Member States. Investment firms will be required to provide more contributions ex ante which would increase the funding costs; however, the increased harmonisation of the funding rules will improve the proper functioning of the single market by reducing discrepancies affecting the treatment of investment firms between Member States.

b) Introduce a solidarity principle in the context of the European system of national schemes. Investor protection and confidence will be reinforced through borrowing possibilities among national schemes.

c) Require provisional payout of partial compensation if payout delay exceeds a given time period. Investors will be confident that they will receive part of the compensation amount after a given time period.

d) Require firms to disclose to investors what is covered and what is not covered by ICSD schemes. It will increase investor awareness of the level and scope of coverage.

e) Compensate investors under the ICSD for claims relating to failure of a firm to return financial instruments due to failure of a third party custodian. It will increase protection for investors and increased funding will be required.

f) Extend compensation to UCITS unit holders where their investments have lost their initial value due to the loss of assets by a UCITS depositary or a sub-custodian. It will increase investor protection and confidence. New contributions will be required from UCITS.

g) Clarify that if firms do in fact hold client assets the clients should be entitled to compensation if the firm defaults. It will increase investor protection and confidence.

h) Exclude coverage of claims when market abuse was involved. It will improve investor confidence and market integrity.

i) Increase the level of compensation to a fixed amount of €50 000. It will increase harmonisation of the level of investor protection between Member States. Contributions required from investment firms will be increased. The higher compensation limit for investments will reduce the competition distortion between investing in deposits and investment products.

j) Remove the possibility of co-insurance. Investors will receive consistent treatment across Member States. Contributions required from investment firms will be slightly increased.
7.Monitoring and Evaluation

The Commission is the guardian of the Treaty and therefore will monitor how Member States have implemented the changes of the ICSD. Where needed, the Commission services will offer assistance to Member States for the implementation of the legislative changes in the form of transposition workshops with all the Member States or bilateral meetings at the request of any of them. When necessary, the Commission will pursue the procedure set out in Article 258 of the TFEU in case any Member State fails to respect its duties concerning the implementation and application of Community Law.

As the number of investment firm failures leading to their inability to return the securities and monies held on behalf of retail investors are unpredictable, the functioning of the ICSD cannot be regularly monitored on the basis of how investment firm failures are handled. Nevertheless an evaluation of the consequences of the application of the legislative measure could take place three years after the transposition deadline of the legislative measure. Such review could be performed jointly by the European Commission and by ESMA. This review should include an analysis of: (i) the possible complaints received by the European Commission, (ii) how concrete cases have been handled, and (iii) how national ICS do comply with the new requirements in terms of funding and disclosure of information. The review should be disclosed to the Council and the European Parliament.

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