EN    EN EN 
 
EN    EN  EUROPEAN COMMISSION 
Brussels, 12.7.2010 
SEC(2010) 846 
  
COMMISSION STAFF WORKING DOCUMENT 
SUMMARY OF THE IMPACT ASSESSMENT  
 
 
Accompanying document to the 
  
Proposal for a  
 
DIRECTIVE OF THE EUROPEAN PA RLIAMENT AND OF THE COUNCIL  
 
amending Directive 1997/9/EC on investor-compensation schemes 
  
{COM(2010) 371} 
{SEC(2010) 845}  
 
EN 2   EN 1. PROBLEM DEFINITION  
Recently there has been evidence of issues whic h if not addressed could be detrimental to 
investor compensation in the EU and to conf idence in the use of investment firms. The 
problems identified can broadly be divided in three groups:  
1.1. Problems experienced in the functioning of the Investor Compensation Schemes 
Directive (ICSD) 
1.1.1.  Funding of schemes: Funding of schemes is currently left to national law. Only 
recital 23 of the ICSD sets some basic prin ciples stating that the cost of financing 
schemes must be borne by investment firm s themselves. The financing capacities of 
such schemes must be in proportion to their liabilities, a lthough that must not 
jeopardize the stability of the financial system of the Member State concerned.  
1.1.2.  Payout delays: Article 9(2) of the ICSD esta blishes a strict deadline for 
reimbursement (as soon as possible and at th e latest within three months). But, this 
deadline only runs once the "eligibility and the amount of the claim" have been established.  
1.1.3.  Lack of investor awareness about the scope and coverage of schemes: Article 10 
of the ICSD requires Member States to ensu re that investment firms make available 
to actual and potential investors inform ation about the relevant investor 
compensation scheme including the amount an d scope of cover. However, there are 
concerns that investors are not adequately  informed about the potential coverage of 
the investor-compensation scheme.  
1.1.4.  Technical issues about firm coverage and exclusion of claims involving market 
abuse: Article 9(3) of the ICSD excludes cl aims where a criminal conviction has 
been obtained for money laundering but not cl aims by investors who have engaged in 
market abuse.   
1.2. Inadequacy of the ICSD due to subseque nt changes in the financial services 
industry and the EU regulatory landscape 
1.2.1.  Non-coverage of civil claims for breach  of conduct of business obligations: The 
ICSD currently only requires compensation to  be paid for losses if an investment 
firm fails to repay money or return financ ial instruments held on a client's behalf. 
Other losses, due for example to a decline in  the value of the investment or negligent 
investment advice by the firm, are not compensated under the ICSD.  
1.2.2.  No coverage for non-retail clients: The ICSD focuses on protecting "small 
investors". Non-retail clients can be ex cluded from coverage, unless the national 
scheme decides to cover losses of such clients.  
1.3. Gaps in the regulatory system 
1.3.1.  Failure of a third party custodian: Investors may be exposed to the failure of the 
firm, but also the potential failure of a custodian. In a case where a third party 
custodian is not able to return the financial instruments to its client , the client will not 
 
EN 3   EN be able to benefit from any compensa tion payment by the compensation scheme 
established under the ICSD.   
1.3.2.  Non coverage of UCITS inves tors for the loss of the as sets of a UCITS fund in 
case of bankruptcy of the UCITS deposita ry (or bankruptcy of a sub-custodian): The 
management of a UCITS is not a service under the Markets in Financial Instruments 
Directive (MiFID). As a result, the ICSD  does not cover UCITS and their units' 
holders in case a UCITS, via it s depositary, loses its assets.  
1.3.3.  Money market funds: During the financial crisis, some money market funds in the 
EU and the US experienced di fficulties leading to concerns  about the risks associated 
with them and a rapid increase in invest or redemption requests. The ICSD does not 
cover investment losses arising from fina ncial instruments, including money market 
funds.  
1.4. Reducing disparities between the protectio n of clients of investment firms and 
banking depositors 
1.4.1.  Minimum level of compensation : Article 4 of the ICSD harmonizes the minimum 
level of compensation (€20 000) for each investor. The compensation limit of €20 
000 was never adjusted to reflect inflati on or the increased exposure of European 
investors to financial instruments sin ce the ICSD commenced. Furthermore, the 
Deposit Guarantee Schemes Directive (DGSD) was recently amended to provide for 
at least €50 000 per investor per investment firm, increas ing to a fixed level of €100 
000. 
1.4.2.  Co-insurance: Article 4(4) of the ICSD allo ws Member States to limit the 
coverage of the compensation to a specified  percentage (equal to or exceeding 90%) 
of an investor's claim. This means that a client can be required to bear a proportion of 
the loss (within the compensation limit) ai ming at encouraging investors to take 
some care in choosing investment firms.  
2. THE BASELINE SCENARIO , SUBSIDIARITY AND PROPORTIONALITY  
The problems detected in section 1 cannot be efficiently addresse d at Member States level as 
they stem from existing EU legislation an d can only be addressed through changes in EU 
legislation. The European Commission consider s that the solutions proposed respect the 
principles of subsidiarity and proportionality.  
3. OBJECTIVES  
The review of the ICSD aims at (i) improving the functioning of  the ICSD to ensure that it 
provides sufficient investor protection for clie nts of firms and confidence in the use of 
investment services; (ii) updating the ICSD in areas where it has become inadequate due to 
changes in the financial services industry and in the regulatory landsca pe; (iii) re ducing gaps 
in the regulatory system and (iv) ensuring that recent amendments to the DGSD (upon which the ICSD was initially modelled) do not result  in unjustified differences in the protection 
provided to depositors and invest ors using investment firms.  
 
EN 4   EN 4. POLICY OPTIONS  
With the intention to meet the objectives set out in the previous section, the Commission 
services have analysed different policy options:  
4.1. Policy options for improving th e functioning of the ICSD.  
4.1.1.  Policy options relating to funding of  investor-compensation schemes: (i) No 
action at EU level on this issue; (ii) Ha rmonise how schemes should be funded;(iii) 
Introduce a solidarity principle between the national schemes; (v) Create a pan-
European scheme.   
4.1.2.  Policy options relating to  reducing payout delays: (i) No action at EU level; (ii) 
Link the deadline for payouts to the trigger events; (iii) Introduc e an obligation for 
schemes to provisionally pay partial co mpensation if the payout delay exceeds a 
given time period.   
4.1.3.  Policy options relating to lack of awareness by investors about the scope of the 
ICSD: (i) No action at EU level;(ii) Amend the ICSD to require firms to disclose to 
investors in clear and simple terms what  is covered and what is not covered by 
schemes (e.g. investment risk  is not usually covered).  
4.1.4.  Policy options relating to coverage of firms operating MTFs and firms acting 
outside their permission: (i) No action at EU level; (ii) Clarify that firms which are 
not authorised to hold clients assets are not covered under the ICSD ; (iii) Clarify that 
if firms do in fact hold client assets (irresp ective of restrictions on their permission or 
the nature of thei r investment service) then client s should be entitled to compensation 
under the ICSD if the firm defaults.  
4.1.5.  Policy options relating to excluding claims involving market abuse: (i) No action 
at EU level; (ii) Amend the ICSD to e xpressly exclude claims for compensation by 
persons who have engaged in market abuse; (iii) Leave it to Member States to decide 
whether transactions where market abus e was involved are to be excluded from 
compensation.   
4.2. Policy options in areas where the ICSD is no longer adequate due to changes in 
the financial services industry or in the regulatory landscape 
4.2.1.  Policy options relating to coverage for claims where there has been a breach of 
conduct of business obligations: (i) No action at EU level; (ii) Extend compensation 
to cover unpaid claims for any breach of conduct of business requirements against a 
firm that defaults; (iii) Extend compensati on to cover unpaid claims for a limited set 
of breach of conduct of business requirements.   
4.2.2.  Policy options relating to co verage for non-retail clients: (i) No action at EU 
level; (ii) Extend compensation to claims relating to non-retail clients; (iii) Extend compensation to certain non-retail clients (e .g. local authorities or large corporates).   
4.2.3.  Policy options relating to aligning the cl assification of clients with the MiFID 
definitions: (i) No action at EU level; (ii) Intr oduce a new classification of clients 
 
EN 5   EN under the ICSD based on pure qua ntitative criteria; (iii)  Align the ICSD with the 
MiFID as to the classification of clients.  
4.3. Policy options for reducing gaps in the regulatory system 
4.3.1.  Policy options relating to non-coverage for failure of a third party custodian: (i) 
No action at EU level; (ii) Provide in MiFID that firms should be strictly liable to a 
client for any failure of a custodian th ey appoint; (iii) Extend compensation to 
investors for claims relating to the failure of a firm to return financial instruments due to failure of a third party custodian.   
4.3.2.  Policy options relating for th e loss of the assets of a UCITS fund in case of 
bankruptcy of the UCITS depositary (or bankruptcy of a sub-custodian): (i) No 
action at EU level; (ii) Extend compensati on within ICSD to UCITS funds for assets 
that have been lost by a depositary (or s ub-custodian); (iii) Amend UCITS directive 
to strengthen safeguards that apply to de positaries and sub-custodians; (iv) Extend 
compensation to UCITS holders where their i nvestments have lost their initial value 
as a result of the loss of assets by a UCITS depositary or its sub-custodian.  
4.3.3.  Policy options relating to non-co verage of money market funds: (i) No action at 
EU level; (ii) Introduce new requirements in  the UCITS directive to define "money 
market funds" and strengthen requirements for such funds; (iii) Extend compensation 
under the ICSD to loss of value of units of "MiFID qualifying money market funds".   
4.4. Policy options for maintain some alignm ent between the ICSD and the DGSD.  
4.4.1.  Policy options relating to the minimum l evel of compensation under the directive: 
(i) No action at EU level; (ii) Amend the ICSD and replicate the coverage adopted 
under the DGSD; (iii) Amend the ICSD to increase the minimum level of 
compensation to €50 000, but allow individu al Member States to specify a higher 
limit; (iv) Amend the ICSD to increase th e level of compensation to €50 000 and 
require all Member States to apply this fixed level of compensation (maximum harmonisation of the coverage  level with a grandfatheri ng clause for the Member 
States with a higher limit).   
4.4.2.  Policy options relating to the co-insurance principle: (i) No action at EU level; 
(ii) Modify the co-insurance principle; ( iii) Remove the possibility of co-insurance .  
5. A
SSESSMENT AND COMPARISON OF THE OPTIONS  
The different policy options ar e tested against the criteria of investor protection and 
confidence, level playing field and cost-effectiven ess. In view of the conclusions reached in 
the impact assessment, the European Commissi on considers appropriate to present a proposal 
amending the Investor Compensation Schemes Di rective in order to address the following 
issues:  
- Modify the Directive to provide for more  detailed harmonisation of funding and for a 
borrowing mechanism between national compensation schemes.  
 
EN 6   EN - Article 9 should be amended to provide for a provisional payout of partial 
compensation to investors within a specifi ed period if final payment has not been 
made within that period. 
- Article 10 should be amended to require firms to provide clear information about 
what is covered and what is  not covered under the scheme (e.g. that investment risk 
is not covered). 
- Article 4(2) and Annex I s hould 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 in crease the compensation level to €50 000. 
- Article 4(4) should be amended to remove the co-insurance principle. 
- Various articles should be amended to pr ovide 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 pr ovide 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 s ub-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 requireme nts applying to Money Market funds. 
6. I
MPACTS OF THE PREFERRED OPTIONS  
The impact of the changes comprising the pref erred 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 rule s 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 prot ection between Member States. Investment 
firms will be required to provide more c ontributions ex ante which would increase 
the funding costs; however, the increased harmonisation of the funding rules will 
improve the proper functioning of the si ngle market by reducing discrepancies 
affecting the treatment of investment firms between Member States. 
 
EN 7   EN b) Introduce a solidarity principle in the cont ext 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 co mpensation 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 incr eased funding will be required.  
f) Extend compensation to UCITS unit holders wh ere 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 s hould 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 an d investment products. 
j) Remove the possibility of co-insurance. Investors will receive consistent treatment 
across Member States. Contributions require d from investment firms will be slightly 
increased. 
7. M
ONITORING 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 impl ementation of the legislative changes in the 
form of transposition workshops with all the Member States or bila teral 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 St ate 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 ar e unpredictable, the f unctioning 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 
 
EN 8   EN could take place three years after the transposition deadline of the legislative measure. Such 
review could be performed jointly by the Eu ropean Commission and by ESMA. This review 
should include an analysis of: (i) the possi ble 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.