Changes to Investor Compensation Scheme in the pipeline

Updated July 2010

In working towards creating a safer financial market and increasing consumer confidence, the European Commission (EC) is introducing a package of proposals to reform the current EU legislation on compensation schemes. As part of this package, the Investor Compensation Schemes Directive (the Directive), adopted in 1997, is due to be amended.

Key proposals

On 12 July 2010, the EC made the following key proposals which aim to improve the Investor Compensation Scheme (ICS) in areas in which it has become 'inadequate':

• As there are huge discrepancies in the compensation limits set by different EU Member States, the EC has suggested that limits should be at a fixed rather than a minimum level. Compensation will be increased from the current minimum per investor of €20,000 to a fixed level of €50,000 per investor.
• Investors are expected to receive quicker payouts under the ICS and at the latest, partial compensation should be paid 9 months after the investment firm's failure. Currently, it can take several years to receive any compensation.
• The proposals clarify that all investment activities and services falling under the Markets in Financial Instruments Directive (MiFID) should be subject to the Directive.
• Investors should receive clearer information about whether or not they could benefit from the ICS and the extent to which their assets are covered.
• To ensure the ICS has adequate funding, a pre-funded minimum target fund level will be set. 'Mutual borrowing' will be introduced, by which the ICS will be able to borrow a limited amount from other schemes and funding arrangements, if need be.
• Protection offered to investors will be extended to cases where a third party custodian or a depository or sub-custodian of an investment fund fails.

How may this affect you?

As the ICS will soon be required to hold a minimum target fund, it is a clear possibility that the annual Financial Services Compensation Scheme (FSCS) levy paid by firms will increase.

Firms may wish to amend their product offerings to bring them in line with the new fixed level for compensation. This is in order to both attract investors and increase the value of investment deposits received from customers.

Although the minimum level of compensation has been scrapped, the new fixed level of €50,000 is unlikely to affect the amount paid to investors in the UK, as the FSCS already offers a maximum of £50,000 to investors bringing ICS claims. 

The proposals are expected to take effect by the end of 2012.

If you would like any further information on these proposed changes, please contact Suzanne MacDonald, partner and head of TLT's Financial Services Regulatory team.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2010. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.