Commission staff working document - Summary of the impact assessment - Accompanying document to the Proposal for a Directive of the European Parliament and of the Council amending Directive 1997/9/EC on investor-compensation schemes {COM(2010) 371} {SEC(2010) 845}
Date: 2010-07-12
Institutions: European Commission
Subjects: banking, branch, credit guarantee, impact study, investment aid, investment loan, investment protection

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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 PARLIAMENT AND OF THE COUNCIL  

amending Directive 1997/9/EC on investor-compensation schemes 

{COM(2010) 371} 
{SEC(2010) 845} 

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1. 

PROBLEM DEFINITION 

Recently  there  has  been  evidence  of  issues  which  if  not  addressed  could  be  detrimental  to 
investor  compensation  in  the  EU  and  to  confidence  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. 

1.1.2. 

1.1.3. 

Funding  of  schemes:  Funding  of  schemes  is  currently  left  to  national  law.  Only 
recital  23  of  the  ICSD  sets  some  basic  principles  stating  that  the  cost  of  financing 
schemes must be borne by investment firms themselves. The financing capacities of 
such  schemes  must  be  in  proportion  to  their  liabilities,  although  that  must  not 
jeopardize the stability of the financial system of the Member State concerned.  

Payout  delays:  Article  9(2)  of  the  ICSD  establishes  a  strict  deadline  for 
reimbursement (as soon as possible and at the latest within three months). But, this 
deadline  only  runs  once  the  "eligibility  and  the  amount  of  the  claim"  have  been 
established.  

Lack of investor awareness about the scope and coverage of schemes: Article 10 
of the ICSD requires Member States to ensure that investment firms make available 
to  actual  and  potential 
investor 
compensation scheme including the amount and scope of cover. However, there are 
concerns that investors are not adequately informed about the potential coverage of 
the investor-compensation scheme.  

information  about 

the  relevant 

investors 

1.1.4. 

Technical  issues  about  firm  coverage  and  exclusion  of  claims  involving  market 
abuse:  Article  9(3)  of  the  ICSD  excludes  claims  where  a  criminal  conviction  has 
been obtained for money laundering but not claims by investors who have engaged in 
market abuse.  

1.2. 

Inadequacy  of  the  ICSD  due  to  subsequent  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  financial  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  excluded  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 

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be  able  to  benefit  from  any  compensation  payment  by  the  compensation  scheme 
established under the ICSD.  

1.3.2. 

1.3.3. 

Non  coverage  of  UCITS  investors  for  the  loss  of  the  assets  of  a  UCITS  fund  in 
case of bankruptcy of the UCITS depositary (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 its depositary, loses its assets.  

Money market funds: During the financial crisis, some money market funds in the 
EU and the US experienced difficulties leading to concerns about the risks associated 
with them and a rapid increase in investor redemption requests. The ICSD does not 
cover investment losses arising from financial instruments, including money market 
funds.  

1.4. 

Reducing  disparities  between  the  protection  of  clients  of  investment  firms  and 
banking depositors 

1.4.1. 

Minimum level of compensation: Article 4 of the ICSD harmonizes the minimum 
investor.  The  compensation  limit  of  €20 
level  of  compensation  (€20  000)  for  each 
000  was  never  adjusted  to  reflect  inflation  or  the  increased  exposure  of  European 
investors  to  financial  instruments  since  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, increasing to a fixed level of €100 
000. 

1.4.2. 

Co-insurance:  Article  4(4)  of  the  ICSD  allows  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)  aiming  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 addressed at Member States level as 
they  stem  from  existing  EU  legislation  and  can  only  be  addressed  through  changes  in  EU 
legislation.  The  European  Commission  considers  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  clients  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 landscape; (iii) reducing 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 investors using investment firms.  

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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 the functioning of the ICSD.  

4.1.1. 

4.1.2. 

4.1.3. 

4.1.4. 

4.1.5. 

Policy  options  relating  to  funding  of  investor-compensation  schemes:  (i)  No 
action at EU level on this issue; (ii) Harmonise how schemes should be funded;(iii) 
Introduce  a  solidarity  principle  between  the  national  schemes;  (v)  Create  a  pan-
European scheme.  

Policy options relating to reducing payout delays: (i) No action at EU level; (ii) 
Link the deadline for payouts to the trigger events; (iii) Introduce an obligation for 
schemes  to  provisionally  pay  partial  compensation  if  the  payout  delay  exceeds  a 
given time period.  

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). 

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 (irrespective of restrictions on their permission or 
the nature of their investment service) then clients should be entitled to compensation 
under the ICSD if the firm defaults. 

Policy options relating to excluding claims involving market abuse: (i) No action 
at EU level; (ii) Amend the ICSD to expressly exclude claims for compensation by 
persons who have engaged in market abuse; (iii) Leave it to Member States to decide 
whether  transactions  where  market  abuse  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 compensation to cover unpaid claims for a limited set 
of breach of conduct of business requirements.  

4.2.2. 

Policy  options  relating  to  coverage  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  classification  of  clients  with  the  MiFID 
definitions:  (i)  No  action  at  EU  level;  (ii)  Introduce  a  new  classification  of  clients 

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under  the  ICSD  based  on  pure  quantitative  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. 

4.3.2. 

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  they  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.  

Policy  options  relating  for  the  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 compensation within ICSD to UCITS funds for assets 
that have been lost by a depositary (or sub-custodian); (iii) Amend UCITS directive 
to  strengthen  safeguards  that  apply  to  depositaries  and  sub-custodians;  (iv)  Extend 
compensation to UCITS holders where their investments 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-coverage 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 alignment between the ICSD and the DGSD.  

4.4.1. 

Policy options relating to the minimum level 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  the  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  grandfathering  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. 

ASSESSMENT AND COMPARISON OF THE OPTIONS  

The  different  policy  options  are  tested  against  the  criteria  of  investor  protection  and 
confidence, level playing field and cost-effectiveness. In view of the conclusions reached in 
the impact assessment, the European Commission considers appropriate to present a proposal 
amending  the  Investor  Compensation  Schemes  Directive  in  order  to  address  the  following 
issues:  

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Modify the Directive to provide for more detailed harmonisation of funding and for a 
borrowing mechanism between national compensation schemes.  

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- 

- 

- 

- 

- 

- 

- 

- 

- 

Article  9  should  be  amended  to  provide  for  a  provisional  payout  of  partial 
compensation  to  investors  within  a  specified  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 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: 

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- 

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. 

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b) 

c) 

d) 

e) 

f) 

g) 

h) 

i) 

j) 

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. 

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. 

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. 

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.  

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. 

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. 

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

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. 

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 

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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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