Commission staff working document - 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) 846}
Date: 2010-07-12
Institutions: European Commission
Subjects: banking, branch, credit guarantee, impact study, investment aid, investment loan, investment protection

EN 

EN 

   EN 

 
 
EUROPEAN COMMISSION 

Brussels, 12.7.2010 
SEC(2010) 845 

COMMISSION STAFF WORKING DOCUMENT 

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) 846} 

EN 

   EN 

 
 
 
  
 
 
 
 
 
 
 
 
 
TABLE OF CONTENTS 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

Introduction.................................................................................................................. 3 

Procedure ..................................................................................................................... 6 

Problem Definition....................................................................................................... 9 

The baseline scenario, subsidiarity and proportionality............................................. 24 

Objectives................................................................................................................... 26 

Policy options............................................................................................................. 29 

Comparing the options ............................................................................................... 32 

Analysis of impacts .................................................................................................... 57 

Monitoring and Evaluation ........................................................................................ 66 

Annex I – Outcome of the call for evidence ............................................................................ 68 

ANNEX II – questions sent to investor compensation schemes.............................................. 71 

ANNEX III – operation of compensation schemes.................................................................. 79 

Annex IV – Summary of the views expressed by industry and investor associations at the 

meeting held on 3rd September 2009........................................................................ 111 

annex V – the average amount held by investment firms on behalf of retail investors ......... 116 

ANNEX vi – Description of significant compensation cases ................................................ 118 

ANNEX VII – data on complaints about investment advice ................................................. 120 

Annex VIII – ICSD Problem tree........................................................................................... 121 

Annex IX – Summary of the meeting with national investor compensation schemes on 9th 

February 2010 .......................................................................................................... 122 

Annex X – Impact of the introduction of general funding principles upon investment firms 126 

Annex XI – Glossary of acronyms......................................................................................... 131 

Annex XII – Estimation of administrative burden ................................................................. 133 

EN 

2 

   EN 

 
1. 

INTRODUCTION  

The Directive 97/9/EC on Investor-Compensation Schemes (ICSD1) was adopted in 
1997  to  complement  the  Investment  Services  Directive2  (ISD).  The  ISD  has  since 
been  replaced  by  the  Markets  in  Financial  Instruments  Directive  (MiFID).  3  The 
ICSD  provides  for  clients  receiving  investment  services  from  investment  firms 
(including credit institutions) to be compensated in specific circumstances where the 
firm  is  unable  to  return  money  or  financial  instruments  that  it  holds  on  the  client's 
behalf. The Directive applies to intermediaries providing investment services. It does 
not apply to insurance undertakings, pension funds or other types of funds. 

1.1. 

Objective of the Directive  

The ICSD's main objective is to assist the proper functioning of a single market for 
investment services and encourage the use of investment services across the EU.  By 
providing for a minimum level of harmonisation of compensation schemes, it aims to 
eliminate competitive distortions that could arise and prejudice the operation of the 
internal  market  if  Member  States  were  to  impose  their  own  compensation  scheme 
requirements  on  passporting  firms4.  The  investor  protection  it  provides  also 
encourages  retail  clients  to  use  investment  services  across  the  EU  with  confidence 
that they will receive a certain minimum level of protection.5 

The  ICSD  only  contains  the  minimum  harmonisation  necessary  to  achieve  its 
objectives.  Many  topics,  such  as  the  legal  form,  the  organisation  and  scheme 
funding, are currently left to the discretion of the Member States. 

1.2. 

Situations in which the Directive provides for compensation 

The  ICSD  protects  clients  when  they  entrust  money  or  financial  instruments  to  an 
investment firm. Clients must be compensated by schemes in two limited situations 
derived from reasons directly related to the financial circumstances of the firm: 

1) 

2) 

if a firm is unable to repay money owed or belonging to a client and held on 
the client's behalf in connection with investment services; or 

if a firm is unable to return to a client a financial instrument belonging to the 
client and held, administered or managed on the client's behalf. 6 

1 

2 

3 
4 

5 
6 

Directive  97/9/EC  of  the  European  Parliament  and  of  the  Council  of  3  March  1997  on  investor-
compensation schemes, OJ L 084, 26/03/1997 P. 0022 - 0031 

Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field; OJ L 197, 
6.8.1993 

Directive 2004/39/EC,  OJ L 145, 30.4.2004 
Investment  firms  are  able  to  use  the  MiFID  passport  to  provide  services  to  customers  in  other  EU 
member states. These services are regulated by the home Member State.  
Recitals 4 and 5 of the ICSD. 

MiFID  investment  services  where  an  investment  firm  may  hold  client  money  or  financial 
instruments for a client include where it is executing client orders, receiving and transmitting orders for 

EN 

3 

   EN 

 
                                                 
  
Claims  under  the  Directive  will  typically  arise  due  to  fraud  or  other  administrative 
malpractice within the firm or due to firm default derived from errors, negligence or 
problems in the firms' systems and controls.  

1.3. 

The Directive does not compensate for losses due to investment risk 

The  ICSD  does  not  compensate  investors  for  "investment  risk"  (the  risk  that  an 
investment  will  result  in  a  loss)  e.g.  if  a  share  or  unit  declines  in  value  or  there  is 
default  in  payment  of  a  bond.  A  variety  of  potential  risks  are  inherent  in  any 
investment  decision.  An  investment  may  suffer  loss  due  to  the  underlying  assets 
falling  in  value,  the  market  falling,  a  counterparty  or  depositary  failure,  problems 
with  the  business  of  a  company  or  entity  that  issued  the  investment  or  for  any 
number of other reasons. 

Investing  in  financial  instruments  by  its  nature  involves  investment  risk.  It  is  not 
appropriate  for  investors  to  be  compensated  for  this  risk  or  to  try  to  legislate  to 
eliminate  the  risk.  Compensating  investors  for  losses  due  to  investment  risk  would 
create  moral  hazard  issues  and  involve  significant  cost.  Further,  it  is  difficult  to 
justify  compensating  for one type of investment or risk without setting a precedent 
that should be extended to all other types of investments or risks. 

While  it  is  not  appropriate  due  to  the  expense  and  for  moral  hazard  reasons  to 
compensate  investors  for  losses  due  to  investment  risk,  various  other  Directives 
include  protective  measures  designed  to  ensure  that  investors  understand  the  risks 
involved in an investment and receive advice or portfolio management services that 
match their individual risk appetite. For example: 

• 

• 

• 

the  prospectus  and  the  summary  in  the  prospectus  must  identify  and  warn 

investors of the risks associated with an investment;7 

when  providing  investment  advice  or  portfolio  management  services, 
investment  firms  are  required  under  MiFID  to  ensure  that  investments 
recommended are suitable for the client;8  

investment  firms  must  ensure  that  appropriate  information  is  provided  to 
clients so that they are reasonably able to understand the nature and risk of any 
investment being offered and can take an investment decision on an informed 
basis.9 

But  it  is  important  to  note  that  these  measures  are  not  designed  to  eliminate 
investment risk or compensate investors for this risk. 

a  client,  providing  discretionary  portfolio  management  services  or  in  connection  with  providing 
investment advice. 

7 
8 
9 

Article 5 of Directive 2003/71/EC 
Article 19.4 of Commission Directive 2004/39/EC 
Article 19.3 of Commission Directive 2004/39/EC 

EN 

4 

   EN 

 
                                                                                                                                                         
  
  
  
1.4. 

Safety net 

Compensation schemes only provide a last resort safety net for clients of investment 
firms  if  other  important  safeguards  fail.  Compensation  schemes  cannot  be  the 
principal means of protecting investors but a last resort measure that applies when all 
of the main protections fail.  

MiFID  is  the  principal  means  by  which  clients  receiving  investment  services  are 
protected  against  risks  arising  from  the  firm  holding  their  assets.  For  example,  it 
imposes  detailed  requirements  on  investment  firms  relating  to  their  systems  and 
controls and the holding of money and financial instruments for clients (segregation 
of assets, who may hold client funds, use of custodians etc)10. These are the principal 
regulatory protections intended to protect clients against the risk of their assets being 
lost or stolen or being claimed by creditors in the event of the firm's insolvency. In 
theory, if firms always complied with the detailed MiFID requirements then the need 
for  compensation  should  rarely  arise.  But  the  ICSD  (like  the  other  compensation 
directives)  recognises  that  in  practice  full  compliance  with  regulatory  requirements 
cannot always be guaranteed. 

1.5. 

Retail investor focus 

The ICSD focuses on compensating retail investors. There are references throughout 
the Directive to protecting "small investors"11 and also the amount of compensation 
(currently € 20,000) is targeted to their situations. This is consistent with principles 
underlying the MiFID12 (and before that the ISD) which provide the highest level of 
protection  to  retail  investors.  Professional  investors  are  presumed  to  have  greater 
knowledge and resources and therefore to be better able to understand the nature of 
the investment services they receive, to bargain to protect their own interests and if 
necessary to take action to enforce their rights. 13 

1.6. 

Different objectives of deposit and insurance compensation schemes 

Other types of compensation schemes (such as banking and insurance schemes) also 
provide a certain level of investor protection but have different underlying objectives 
to investor compensation schemes under the ICSD. 

The Deposit-guarantee schemes directive (DGSD)14, setting up the deposit-guarantee 
schemes, has an important banking stability objective. It provides for depositors to be 
compensated up to a specified limit if the bank is not in a position to pay back the 

10 

11 
12 
13 

14 

Article  18  of  Commission  Directive  2006/73/EC  of  10  August  2006  implementing  Directive 
2004/39/EC of the European Parliament and of the Council as regards organisational requirements and 
operating  conditions  for  investment  firms  and  defined  terms  for  the  purposes  of  that  Directive  (OJ  L 
241, 2.9.2006, p. 26) 
Recitals 4, 5 and 11 and Article 4 of Commission Directive 97/9/EC 
Article 19 of MiFID 
A review of MiFID is scheduled to take place in 2010. During that review if necessary issues relating to 
protection of non-retail investors will be considered, in particular at the level of distribution channels 
and conduct of business rules. 
Directive  94/19/EC  of  the  European  Parliament  and  of  the  Council  of  30  May  1994  on  deposit-
guarantee schemes, OJ L 135 , 31/05/1994 P. 0005 - 0014 

EN 

5 

   EN 

 
                                                 
money.  It  does  so  because  banks  are  susceptible  to  the  risk  of  a  run  if  depositors 
believe that their deposits are not safe and try to withdraw deposits at the same time. 
It aims to prevent bank runs and protect the stability of the financial system. 

Insurance  schemes  provide  last  resort  protection  to  consumers  when  insurers  are 
unable to fulfil their contractual commitment, offering protection against the risk that 
claims will not be met in the event of a failure of an insurer. Apart from protecting 
policy  holders  from  losses,  the  schemes  address  concerns  about  the  wider  market 
impacts (e.g. policyholders losing confidence in the insurance market as a whole). 

1.7. 

Reasons for the review 

Ten  years  after  the  ICSD  entered  into  force,  and  immediately  after  the  financial 
crisis, it is the right time to review the functioning of the ICSD. There is no evidence 
to  suggest  that  the  financial  crisis  contributed  to  more  compensation  claims  from 
schemes  under  the  ICSD.  However,  in  recent  years,  DG  MARKT  has  received 
investor complaints about the application of the ICSD in a number of important cases 
involving  large  investor  losses.15  The  complaints  are  principally  related  to  the 
coverage and funding of schemes and delays in obtaining compensation. The review 
of  the  ICSD  is  also  an  important  element,  together  with  the  review  of  the  DGSD16 
and the examination of protection for insurance policy holders, of the Commission's 
policy to strengthen the EU regulatory framework for financial services as set out in 
the  Communication  on  "Driving  European  recovery"17  in  response  to  the  recent 
financial  crisis.  It  also  considers  the  objective  set  at  G-20  level  of  addressing  any 
loopholes  in  the  regulatory  and  supervisory  system  and  the  objective  of  restoring 
investor confidence in the financial system. 

The Commission has reviewed the ICSD and is putting forward proposals aimed at 
improving its application, increasing its efficiency and enhancing investor protection. 
This document is the impact assessment accompanying the proposal for the review of 
the  ICSD;  it  does  not  pre-judge  the  final  form  of  any  decision  to  be  taken  by  the 
European Commission.   

2. 

PROCEDURE  

The ICSD review and its impact assessment have been prepared in accordance with 
the Commission's approach to applying the better regulation principles. The initiative 
is the result of an extensive and continuous dialogue and consultation with all major 
stakeholders,  including  securities  regulators,  market  participants,  national  investor 
compensation-schemes  and  consumers.  The  analysis  will  follow  the  principle  of 
proportionality  and  will  offer  an  in-depth  qualitative  and,  where  possible,  a 
quantitative assessment of the impacts. The impact assessment work will then draw 
on:  

15 

16 
17 

See for example Annex V and VI which set out details of the Amis case in Austria and the Phoenix case 
in Germany which involved claims totalling €145 million and €674 million respectively. 
http://ec.europa.eu/internal_market/bank/guarantee/index_en.htm 
Commission  Communication  for  the  Spring  European  Council  "Driving  European  recovery" 
COM(2009) 114 final of 4.3.2009 

EN 

6 

   EN 

 
                                                 
– 
analysis  of  contributions  submitted  during  a  call  for  evidence 
launched from 9th February to 8th April 200918  (a brief summary of the responses 
received is set out in Annex 1); 

– 
analysis  of  the  answers  to  the  questionnaire  sent  to  industry  and 
European Securities Markets Expert Group (ESME)19  and discussion at an ESME 
meeting;  

– 
Investor-Compensation Schemes;  

analysis of the answers to the questionnaires20 sent to the national 

internal 

– 
stakeholders, 
examination of other relevant EU directives, further analysis based on published 
studies, articles and relevant literature, close monitoring of market developments); 

(including  dialogues  with 

research 

– 
views  from  industry  and  investor  associations  expressed  at  a 
targeted hearing on 3rd September 2009 organised by the Commission services in 
order to allow a number of EU industry and investor associations to express their 
views on the review of the ICSD (see Annex IV for a summary of the discussion); 

– 
Securities Committee (ESC)21 and market participants; 

regular  or  ad  hoc  meetings  and  discussions  with  the  European 

– 
February 2010 (see Annex IX for a summary of the meeting); 

a  meeting  with  national  investor  compensation  schemes  on  9th 

– 
findings of a study by OXERA which was commissioned in order 
to  evaluate  the  application  of  the  Directive.  The  study,  titled  "Description  and 
assessment  of  the  national  investor  compensation  schemes  established  in 
accordance  with  Directive  1997/9/EC"  (February  2005)22  was  commissioned  by 
the European Commission. It examines the impact of certain aspects of the ICSD 
on EU financial markets.  

18 

19 

20 
21 

22 

The  Commission  services  received  70  contributions.  The  non-confidential  contributions  can  be 
consulted in the Commission website. 
 http://ec.europa.eu/internal_market/consultations/2009/investor_compensation_en.htm 
 ESME  is  an  advisory  body  to  the  Commission,  composed  of  securities  markets  practitioners  and 
experts.  It  was  established  by  the  Commission  in  April  2006  and  operates  on  the  basis  of  the 
Commission Decision 2006/288/EC of 30 March 2006 setting up a European Securities Markets Expert 
Group to provide legal and economic advice on the application of the EU Securities Directives (OJ L 
106, 19.4.2006, p14-17). 
 See Annex II. 
The  European  Securities  Committee  (ESC)  fulfils  both  comitology  and  advisory  functions  in  the 
securities field. It is composed of high level representatives from the Member States and is chaired by a 
representative  of  the  Commission.  Discussions  were  held  at  meetings  of  the  ESC  on  14  November 
2008, 11 February 2009 and 15 July 2009. 
The  study  is  available  at  http://ec.europa.eu/dgs/internal_market/docs/evaluation/national-investor-
rep2005.pdf . The opinions expressed in the Study by OXERA do not necessarily reflect the position of 
the European Commission. OXERA is a private firm that was contracted by the European Commission 
to undertake the study. The statements and opinions expressed in the study are the responsibility of the 
firm.  The  European  Commission  does  not  endorse  the  OXERA  report,  but  uses  it  as  a  source  of 
information for the review of the Investor-compensation schemes Directive.  

EN 

7 

   EN 

 
                                                 
2.1. 

Steering Group  

The Steering Group for this Impact Assessment was formed by representatives of a 
number  of  services  of  the  European  Commission,  namely  the  Directorate  General 
Internal  Market  and  Services,  the  Directorate  General  Economic  and  Financial 
Affairs, the Directorate General for Health and Consumers, the Legal Service and the 
Secretariat General.  This Group met four times, on 29 June, 29 July, 11 September 
and  21  January  2010.  The  members'  contributions  have  been  taken  into  account  in 
the content and shape of this impact assessment23.   

2.2. 

Impact Assessment Board  

DG  MARKT  services  met  the  Impact  Assessment  Board  on  10  March  2010.    The 
Board analysed this Impact Assessment and delivered its opinion on 12 March 2010.  
During  this  meeting  the  Board  members  provided  DG  MARKT  services  with 
comments  to  improve  the  content  of  the  Impact  Assessment  that  led  to  some 
modifications of this final draft.  These are the most relevant ones:  

- to better substantiate the various problems arising from insufficient harmonisation 
of  the  operation,  coverage  and  the  level  of  protection  offered  by  investor 
compensation  schemes  and  explaining  why  those  issues  cannot  be  sufficiently 
addressed at Member States level; 

- to provide more detailed assessment of the cost of the proposed measures, how they 
would  be  distributed  by  Member  States  and  firms  and  how  many  investors  would 
benefit from the changes; and 

-  to  provide  more  detailed  justification  as  to  why  the  proposed  measures  are 
proportionate  and  assess  whether  non-legislative  action  could  address  the  problems 
sufficiently. 

After  considering  the  improved  draft,  the  Impact  Assessment  Board  delivered  its 
final  opinion  on  3  June  2010.  This  Impact  Assessment  was  updated  to  take  into 
account the additional comments from the Board, notably: 

-  to  clarify  the  costs  of  the  proposed  measures,  and  how  many  investors  would 
benefit from the proposed changes; 

- to justify better why the proposed measures regarding the funding and  the cross-
border solidarity principle are considered to be proportionate and to present clearly 
the positions of Member States on each of the preferred options, and 

-  to  justify  better  the  durations  of  the  proposed  transition  periods  for  the  preferred 
options concerned. 

23 

In accordance with the rules for the elaboration of impact assessments the minutes of the last meeting of 
the  steering  group  have  been  submitted  to  the  Impact  Assessment  Board  together  with  this  impact 
assessment. 

EN 

8 

   EN 

 
 
                                                 
3. 

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.  

It  is  important  to  stress  that  the  number  of  firm  failures  that  have  triggered  the 
operation of investor compensation schemes has been relatively low. Of the EU-15 
Member States, 9 of them experienced firm failures between 1999 and 200424. The 
total  number  of  failures  excluding  the  UK25  over  that  period  amounted  to  37,  with 
most  of  the  cases  generating  a  small  number  of  claims  (See  Annex  III  for  further 
details  concerning  the  operation  of  compensation  schemes).  Of  the  EU-10  new 
Member States only the Czech Republic and Hungary had experienced compensation 
cases  over  this  period,  with  respectively  6  and  13  cases.  Since  2004,  there  are  ten 
schemes  which  have  dealt  with  compensation  cases,  the  most  important  case  being 
the "Phoenix case" in Germany and the "AMIS case" in Austria. 26 

There  is  no  evidence  to  suggest  that  the  financial  crisis  contributed  to  more 
compensation  cases  in  the  EU.  Investor  confidence  however  is  important  for  well 
functioning  markets.  Despite  the  low  number  of  compensation  cases,  investor 
compensation  schemes  and  their  effective  functioning  is  essential  in  order  to 
maintain investor confidence in the use of investment firms.  

First, the efficiency of the compensation schemes and the certainty of the conditions 
for compensation might need to be improved to match up to investors' expectations 
of  being  quickly  compensated  for  losses  arising  from  the  provision  of  investment 
services. Second, the current level of discretion given to Member States needs to be 
considered  from  the  perspective  of  the  objective  of  creating  a  single  market  and  a 
level  playing  field  for  investment  services  throughout  the  EU.  Third,  to  reduce 
potential gaps in the regulatory system it is necessary to consider whether custodians, 
funds  should  be  covered  by  a 
UCITS  depositaries  and  money  market 
compensation/guarantee  scheme  following  a  number  of  recent  events  that  have 
highlighted  investor  protection  concerns  in  these  areas.  Finally,  changes  in  the 
regulatory framework of the DGSD are to be assessed to take into account some of 
its elements in this review. 

Therefore,  the  impact  assessment  report  will  examine  different  options  aiming  at 
addressing the concerns expressed by investors and other stakeholders and improving 
effectiveness of the operation of the ICSD. The problems identified can broadly be 
divided in four groups: (i) problems experienced in the functioning of the ICSD, (ii) 
inadequacy  of  the  ICSD  due  to  changes  in  the  financial  services  industry  or 
regulatory  landscape  since  the  ICSD  is  applied  (this  includes  MiFID  replacing  the 
ISD  and  the  emergence  of  new  investment  services),  (iii)  reducing  gaps  in  the 
regulatory  system  and  (iv)  reducing  disparities  between  the  protection  of  clients  of 

24 
25 

26 

The period covered by the Oxera study. 
 The  high  number  of  cases  in  the  UK  can  be  attributed  to  the  significantly  broader  scope  of  the  UK 
scheme  which  covers  unpaid  claims  by  a  retail  investor  against  an  investment  firm  for  negligent 
investment advice and poor investment management.  
 For a summary of these cases see Annex VI. 

EN 

9 

   EN 

 
                                                 
investment firms and banking depositors (e.g. a deposit with a bank will be protected 
for an amount up to €100 000, but client monies held by an investment firm will only 
be protected for up to €20 000).  

These four groups of problems have been tackled in this impact assessment bearing 
in mind the importance of enhancing investor protection, particularly in the context 
of the current financial crisis. The problem tree is to be found in Annex VII.  

3.1. 

Problems experienced in the functioning of the ICSD 

There are situations where there is evidence that in practice the ICSD is not operating 
efficiently in fulfilling its objectives. 

3.1.1.  Funding of schemes 

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

Although compensation schemes are generally funded by way of contributions from 
participating firms, there are important differences regarding: 

−  the  moment  contributions  are  collected  (ex  ante  or  ex  post,  in  respect  of  the 
occurrence of any loss events),  

−  the  management  of  the  schemes  (including  the  existence  of  any  “prudential” 
criteria for the management of contributions collected ex ante),  

− the degree to which funds are pooled across participating firms,  

− the way contributions are calculated,  

− whether there are any limits on the amount that may be collected from firms in a 
given period, and 

−  the  existence  of  different  funding  arrangements  (such  as  borrowing  power,  any 
State contributions, the use of fines imposed on firms). 

The firm's contributions can either be collected to build a reserve in anticipation of 
future  losses  (ex-ante  funding)  or  when  needed  to  cover  compensation  costs  of 
failures  that  have  occurred  (ex-post  funding).  Pre-funding  helps  to  smooth 
contributions over time and makes sure future insolvent firms would contribute to the 
funding  of  the  claims  they  would  generate.  It  also  contributes  to  rapid  and  smooth 
payment of compensation costs by building up a reserve of readily available funds to 
compensate  investors.  Although  ex-ante  funding  helps  to  smoothen  out  the 
contributions  over  time  and  enables  funds  to  compensate  investors  rapidly,  to 
determine  the  appropriate  level  of  ex-ante  funding  is  inherently  difficult  as  the 
potential  claims/losses  are  highly  volatile  and  difficult  to  predict  (practical 
difficulties in operating a system of pre-funding). As a result, the fund will always be 
in  a  situation  of  surplus  or  deficit.  This  also  means  a  lost  cost  of  opportunity  for 
investment firms as they have to lock funds in a fund for future compensation costs.  

EN 

10 

   EN 

 
As demonstrated in Annex III, even between schemes which are ex ante funded the 
coverage  ratio,  i.e.  the  ratio  between  the  ex  ante  funding  and  the  total  monies  and 
securities  held  by  investment  firms  on  behalf  of  retail  investors,  can  vary 
significantly. Based on the data provided by the schemes, we were able to assess the 
coverage ratio for six of them (see table page 83-84 "Funds available"). The coverage 
based on the total monies and securities ranged from 0.02% for Poland to 0.32% for 
Slovakia. The coverage ratio based on the total covered monies and securities27 could 
be  assessed  for  8  schemes  and  ranged  from  0.14%  for  Hungary  to  2.01%  for 
Slovakia. 

The ICSD thus  leaves  too much  flexibility to Member States concerning the actual 
level of funding of the schemes: there is no clear method to identify what should be 
the level of ex-ante funding. There are no provisions to adequately mitigate the risk 
of a scheme not being able to meet its obligations.  

Sound  funding  arrangements  are  critical  to  the  effectiveness  of  compensation 
schemes  in  achieving  the  ICSD's  objectives.  Funding  can  affect  the  ability  of 
schemes  to  meet  their  obligations  under  the  ICSD,  how  rapidly  clients  can  be 
compensated,  and  the  contributions  required  from  firms  in  the  event  of  losses.  As 
currently  only  few  schemes  are  funded  adequately  with  a  rigorous  methodology  to 
assess  the  funds  needed  to  compensate  for  a  given  amount  of  losses28,  investor 
confidence  in  a  scheme  or  in  investment  firms  in  a  Member  State  can  be 
compromised after firm failures. 

A  good  illustration  of  these  funding  difficulties  is  the  Irish  scheme  which 
experienced a large compensation case in 2001. The size of the compensation claims 
was such that it exceeded the scheme's available funds. The scheme managed to raise 
additional contributions spread over several years. If it had levied these contributions 
in a single year it might have been problematic for some of the participating firms. In 
the light of the substantial claims arising from this and other compensation cases, the 
Irish  scheme  ("ICCL"29)  reviewed  twice  (in  2004  and  in  2007)  its  funding 
arrangements. Both reviews were carried out because the scheme funding levels were 
assessed to be inadequate.  

There is more recent evidence that in some States, due to problems of funding, the 
national  investor-compensation  scheme  was  close  to  being  insolvent.  For  example, 
following the Phoenix case30 in Germany, which involved claims up to € 674 million, 

27 
28 

29 
30 

 Amount of securities and monies up to the maximum compensation limit. 

The OXERA study noted at pages 89 and 90 that: 

"….although  funding  difficulties  have  been  reported  in  some  instances,  to  date  no 
compensation  scheme  has  experienced  a  significant  shortfall  of  funds  that  would  have  prevented  it 
from making payments to investors. However, this does not necessarily imply that scheme funding can 
be considered adequate going forward. Few EU compensation schemes have undertaken a rigorous 
assessment of the adequacy of their funding arrangements in light of potential loss exposures. … For 
example,  schemes  that  operate  an  ex  ante  funding  system  indicated  that  they  had  either  set  ex  ante 
premia  on  an  ad  hoc  basis  or  had  used  simple  rules  of  thumb  to  determine  a  target  size  for  their 
standing  funds.  Similarly  most  ex  post  schemes  had  not  analysed  their  potential  exposures  to  firm 
defaults or the implications of these exposures for required firm contributions."(cid:31) (cid:31) 

 Investor Compensation Company Limited, http://www.investorcompensation.ie/index.php  
 See Annex VI for a summary of the case. 

EN 

11 

   EN 

 
                                                 
 
an  urgent  measure  of  last  resort  giving  public  funds  to  the  national  investor-
compensation  scheme  was  introduced  in  order  to  avoid  the  fund  being  unable  to 
payout partial compensation payments after the affiliated firms contested the legality 
of  special  contributions  and  refused  payments31.  The  Phoenix  case  was  an  extreme 
case relating to the failure of a large investment firm but similar extreme cases could 
again occur in the future. Another example is Austria where the scheme funds would 
be  insufficient  to  cover  the  claims  arising  from  the  AMIS  case  (around  €  145 
million).32  The  AMIS  case  was  not  an  extreme  one-off  case.  It  was  caused  by  the 
failure  of  a  mid-sized  investment  firm.  In  light  of  these  events  the  Austrian 
legislation was recently amended to improve the funding of the scheme. The ex-post 
funding  mechanism  was  replaced  by  ex  ante  funding  supplemented  by  surplus 
contributions  if  necessary.  In  addition  the  fund  can  call  upon  a  State  guarantee  if 
needed.   

The broad discretion under the ICSD about how to fund schemes and differences in 
the  way  funding  is  organised  by  individual  Member  States  creates  a  number  of 
potential problems. It can undermine investor protection and investor confidence in 
the use of investment firms (if investors are not confident that there will be adequate 
funding in place to pay their claims if there is a default). It can also affect the proper 
functioning  of  the  internal  market  if  the  likelihood  of  investor  protection,  and  the 
contributions  required  from  firms,  vary  significantly  across  Member  States 
depending on the adequacy of individual funding arrangements. It also increases the 
risk  of  regulatory  arbitrage.  Investors  might  decide  to  invest  via  investment  firms 
located in Member States where compensation schemes have the highest level of ex 
ante  funding.  Annex  III  describes  the  current  position  regarding  funding  of  the 
different schemes in Member States. 

Moreover, if investor confidence is to be nurtured and financial markets are to thrive 
to offer citizens alternative ways to invest their savings to be used in the future, it is 
necessary  to  create  a  robust  legal  and  regulatory  framework,  including  a  healthy 
system of investor compensation schemes.  

3.1.2.  Payout delays 

The trigger for the payment of compensation under the Directive is where either: 

1) 

2) 

the  relevant  competent  authority  determines  that  an  investment  firm  appears, 
for the time being, for reasons directly related to its financial circumstances, 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 makes a ruling, for reasons directly related to an investment 
firm's  financial  circumstances,  which  has  the  effect  of  suspending  investors' 
ability to make claims against it. 33 

31 
32 
33 

EN 

 Press release to be found in: http://www.e-d-w.de/en/Phoenix-Stand.html  

 See Annex VI for a summary of the case  

 Article 2(2) of the ICSD 

12 

   EN 

 
                                                 
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.  That  is,  it  is  not 
linked to the date of the trigger events set out above. 

The  deadlines  for  establishing  the  "eligibility  and  the  amount  of  the  claim"  are 
determined by national law. In practice, responsibility for checking the eligibility of 
each claim and its amount usually lies with either the liquidator of the insolvent firm 
or the insolvency Court or the scheme itself. 

The Oxera study noted that processing claims can take considerably longer than the 
limits  set.  Payouts  can  potentially  take  several  years,  especially  if  insolvency  is 
prolonged  through  court  proceedings  in  which  the  conclusions  of  the  insolvency 
administrator  are  contested.34  For  example,  in  Germany,  the  compensation  scheme 
determined in March 2005 that the Phoenix  investment  firm  was  unable  to  pay  out 
investor's  claims.  Four  years  later  the  scheme  was  not  yet  able  to  establish  the 
amount and eligibility of the individual claims because of various court proceedings. 
To start compensating investors, the scheme initiated partial compensation payments 
in February 2009 (4 years after the occurrence of the failure). The disbursement of 
these partial compensation payments is expected to be completed in two and a half 
years. 

So  in  practice  there  can  be  a  considerable  delay  before  an  investor  receives  any 
compensation.  This  undermines  investor  protection  and  investor  confidence.  It  also 
might  discourage  investors  to  place  money  in  investments  which  would  have  a 
negative impact on the efficient flow of capital in the financial system.  

3.1.3.  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  investors  information  about  the  relevant  investor 
compensation scheme including the amount and scope of cover. Information must be 
made  available  in  a  readily  comprehensible  manner.  It  also  provides  that  Member 
States should lay down rules limiting the use of such information in advertising. In 
addition, the Directive Implementing MiFID also requires investment firms holding 
clients'  assets  to  provide  clients  with  summary  details  of  any  relevant  investor 
compensation or deposit guarantee scheme which applies to the firm35. 

Responses to the call for evidence and comments received during the public hearing 
indicate  concerns  that  investors  are  not  adequately  informed  about  the  potential 
coverage  of  the  investor-compensation  scheme.  For  example,  investors  are  not 
necessarily  aware  that  the  ICSD  does  not  compensate  losses  if  an  investment 
declines in value or becomes worthless due to the failure of a fund or issuer, or due 
to  a  decline  in  the  stock  market  or  the  value  of  underlying  investments  or  other 
investment  risks.  Also,  concerns  were  raised  about  lack  of  awareness  by  investors 
about how the ICSD applies in cross border situations. Moreover, a specific case in 

34 
35 

Oxera study pages 47 to 62 
Article 30(1)(g) of directive 2006/73/EC. 

EN 

13 

   EN 

 
                                                 
Portugal36 made evident that investors are not always aware of the level of protection 
they could receive when investing in a specific product (i.e. whether it is covered by 
the DGS or the ICS).   

The Austrian AMIS case highlighted the problem of lack of investor awareness about 
the scope and coverage of schemes. Following the AMIS case, Austrian legislation37 
was amended to include additional disclosure obligations. Austrian investment firms 
must  now  expressly  inform  investors  that  they  are  prohibited  from  holding  client 
assets. 

3.1.4.  Technical issues about firm coverage and exclusion of claims involving market abuse 

A  number  of  technical  issues  have  arisen  about  whether  firms  that  have  limited 
authorisations are covered under the ICSD. The first is the case of a firm being only 
authorised  to  provide  the  MiFID  investment  service  of  operating  a  multilateral 
trading facility (MTF)38. The second situation is the case of an authorisation which 
prohibits a firm from holding client assets or dealing with retail clients.   

The  AMIS  case  in  Austria  clearly  illustrates  the  latter  case.  The  firms  in  that  case 
were not allowed to hold clients assets and/or money and were not members of the 
investor compensation scheme. Following their insolvency the Austrian ICS denied 
compensation to investors. The scheme position was challenged before an Austrian 
Court which obliged the scheme to compensate investors. The Austrian scheme has 
appealed against this judgment.  

Concerning  the  first  case,  MTFs  rarely  hold  client  assets  and  their  clients  (i.e.  the 
users  of  the  market)  would  rarely  be  retail  clients,  so  this  problem  is  rather 
theoretical. But the review provides a chance to clarify the application of the ICSD to 
MTFs and other investment services under MiFID. This review is also an opportunity 
to clarify the position of an investor dealing with a firm whose activities are limited 
by the detailed terms of its authorisation.  

A further technical issue is whether the ICSD should explicitly exclude any claim for 
compensation  where  the  investor  has  engaged  in  market  abuse.  Article  9(3)  of  the 
ICSD  excludes  claims  where  a  criminal  conviction  has  been  obtained  for  money 
laundering39but not claims by investors who have engaged in market abuse.  

3.2. 

Inadequacy  of  the  ICSD  due  to  subsequent  changes  in  the  financial  services 
industry and the EU regulatory landscape 

Changes  in  financial  markets  (e.g.  investment  advice  becoming  a  more  important 
investment  service,  greater  use  of  custodians,  the  emergence  of  multilateral  trading 
facilities) and changes in the EU regulatory landscape (e.g. MiFID replacing the ISD, 

36 
37 

38 

39 

Case concerning the distribution of some investment products by the Banco Privado Portugues 
Bundesgesetz  über  die  Beaufsichtigung  von  Wertpapierdienstleistungen  (Wertpapieraufsichtsgesetz 
2007 – WAG 2007), §75-78 
An MTF is a trading platform that brings together multiple buying and selling interests. Operating an 
MTF is an investment service under Annex I of MiFID. 
Money  laundering  is  defined  in  Article  1  of  Council  Directive  91/308/EEC  of  10  June  1991  on 
prevention of the use of the financial system for the purpose of money laundering.(cid:31) 

EN 

14 

   EN 

 
                                                 
problems that arose during the financial crisis concerning the treatment of custodians 
and  money  market  funds)  have  raised  issues  about  whether  the  ICSD's  coverage  is 
too narrow and whether greater clarity is required in certain areas.  

3.2.1.  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.40 
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. 

Investors may have a civil claim against a firm for damages that arise from a breach 
of  statutory  or  fiduciary  duties.  For  example,  if  an  investment  firm  gives  poor 
investment  advice  or  is  involved  in  misselling  an  investment  to  a  client,  the  client 
may be able to bring a civil claim against the firm for a breach of MiFID conduct of 
business  requirements.41  But,  even  if  the  investor  has  established  such  a  claim  for 
damages,  the  investor  may  still  suffer  loss  if  the  investment  firm  fails  before  the 
claim is paid and does not have adequate assets to pay the claim. The ICSD does not 
cover such an outstanding investor claim in the event of the firm's insolvency. 

The UK has extended its scheme to cover outstanding investor claims for breach of 
conduct  of  business  requirements  against  a  firm  that  becomes  insolvent.  As  a 
consequence the UK scheme has a significantly higher number of claims than other 
schemes. Most of those claims relate to a failure by an investment firm that has given 
unsuitable investment advice42.  

Since  the  ICSD  commenced,  investment  advice  has  become  an  investment  service 
under  MiFID43.  MiFID  sets  out  detailed  new  requirements  designed  to  prevent 
inappropriate  investment  advice.  As  investment  advice  becomes  a  more  important 
and widespread investment service in the EU there is an increased risk of civil claims 
investments  or  poor  advice. 
by 
Compensating investors for such claims is only an issue if the firm defaults and it is 
unable to pay the claims. Annex VII sets out figures on complaints about investment 
advice in certain Member States. 

investors  against  firms  for  misselling  of 

The  ICSD  is  a  minimum  harmonisation  Directive  so  Member  States  can  choose  to 
cover  cases  other  than  those  required  under  the  Directive.44  The  issue  is  whether 
coverage for claims relating to investment advice should remain optional in order to 

40 
41 
42 

43 
44 

Recital 8 and Article 2(2) of the ICSD. 
Article 19 of MiFID 
For example the Oxera study at page 94 sets out a table showing that between 1999 and January 2005 
there had been just over 1600 failures covered by the UK scheme (almost all arising from claims for 
negligent advice) while there had only been 36 in total in the remainder of the EU schemes (from fraud, 
mismanagement or third party default) 
Annex I.A of MiFID 
The Stock Exchange Guarantee Scheme in Portugal covers losses beyond what is required in the ICSD. 
The  relevant  Scheme  covers  any  losses  suffered  by  a  non-qualified  investor  that  arise  from  the  non-
compliance  by  the  members  of  the  regulated  market  operated  by  Euronext  Lisbon  of  its  duties  as  a 
financial  intermediary  with  capacity  to  trade  in  said  market.  It  also  covers  losses  suffered  by  non 
qualified  investors  as  a  result  of  the  breach  of  the  duties  of  the  participants  of  the  settlement  system 
operated by Interbolsa. No compensation has been paid as of today. 

EN 

15 

   EN 

 
                                                 
take  into  account  specificities  in  market  structures  or  whether  the  ICSD  should  be 
amended to make it mandatory.  

3.2.2.  No coverage for non-retail clients 

The  ICSD  focuses  on  protecting  "small  investors"45.  Non-retail  clients46  can  be 
excluded from coverage, unless the national scheme decides to cover losses of such 
clients47.  Several  schemes  have  elected  to  cover  some  non-retail  clients.48  In  a  few 
recent  high  profile  cases,  local  authorities,  charities  and  high  net  worth  individuals 
have  suffered  losses  related  to  deposits  in  failed  banks  or  investments  in  failed 
funds.49 50 While the facts of these cases would not in any case have come within the 
scope of the ICSD, they do raise the broader issue of whether it is appropriate from 
an investor protection and confidence perspective to limit the scope of the ICSD to 
compensating small investors. As mentioned in section 1.5, under the MiFID review 
we will assess whether any further protection is  necessary for institutional investors 
under conduct of business requirements.   

A related issue is whether for the purposes of consistency with other Directives the 
definition  of  "retail  client"  in  the  ICSD  should  be  aligned  with  the  current  MiFID 
definition  of  "retail  client".51  The  MiFID  definition  also  covers  a  broader  range  of 
SMEs than the current ICSD definition.52 

3.3. 

Gaps in the regulatory system 

3.3.1.  Failure of a third party custodian 

Under MiFID, financial instruments can be held in two different ways:  

(cid:131)  By the investment firm itself holding financial instruments for a client53. In that 
situation,  if  the  financial  instruments  are  kept  "in  connection  with  investment 
business"  provided  by  the  investment  firm  and  cannot  be  returned  by  the 
investment firm to its client, then the client is protected under the ICSD and can 
recover his loss through the compensation scheme. 

45 
46 
47 

48 

49 

50 

51 
52 

53 

See for example the reference to small investors in recital 4 of the ICSD. 
A list of such investors is set out in Annex 1 of the ICSD. 
Recital 17, Article 4 (2) and Annex I of the ICSD. The list of non-retail clients who can be excluded 
includes professional and institutional investors, regional authorities and large companies. 
For  example,  Austria,  the  Czech  Republic,  Denmark,  Finland,  France,  Germany,  Hungary,  Italy, 
Lithuania, Poland, Portugal, Spain, Sweden and the UK extend coverage to some degree to certain non-
retail  investors,  although  the  extent  of  this  extra  coverage  and  who  is  covered  varies  significantly 
between Member States. 
For  example,  in  the  UK  it  is  estimated  that  123  local  authorities  had  deposited  an  estimated  £919.6 
million  in  Icelandic  Banks  and  48  charities  lost  a  combined  total  of  £86.6  million  in  deposits  with 
Icelandic  Banks.    See  Part  4  of  the  fifth  report  of  the  UK  Treasury  Select  Committee  prepared  on  4 
April 2009.  
A  number  of  high  net  worth  individuals  and  charities  suffered  losses  directly  or  indirectly  through 
exposure to investments in funds controlled by Bernard Madoff. 
The term "retail client" is defined in Article 4.1(12) of MiFID. 
Annex  II  paragraph  1.2  of  MiFID  is  the  relevant  provision  that  defines  which  SME's  may  be 
professional or retail clients for the purposes of MiFID. 
Ancillary services pursuant to Annex I of MiFID 

EN 

16 

   EN 

 
                                                 
(cid:131)  By the financial instruments being held by a custodian (a "third party custodian") 
usually selected by the firm54. The third party custodian used by the investment 
firm  may  either  be  another  entity  in  the  same  group55  or  a  third  party  service 
provider56. Alternatively, the client in certain Member States may himself select a 
third party custodian to keep his financial instruments57. 

Investors may  therefore not  only be  exposed to the failure of the firm,  but also the 
potential failure of a custodian58. In a case where a third party custodian59 is not able 
to return the financial instruments to its client, the client will not be able to benefit 
from any compensation payment by the compensation scheme established under the 
ICSD. This is because under the current scope of the ICSD, compensation schemes 
are  only  available  to  investors  whose  financial  instruments  have  been  lost  by  (the) 
investment  firm  "for  reasons  directly  related  to  an  investment  firm's  financial 
circumstances"60.  

MiFID addresses this risk in part by providing that where financial instruments are to 
be held for a retail investor by a third party, the firm  must inform the client of the 
responsibility of the firm under applicable laws for the acts or omissions of the third 
party  and  of  the  consequences  for  the  client  if  the  third  party  becomes  insolvent. 
Further,  the  firm  must  provide  the  retail  client  with  a  prominent  warning  of  the 
risks.61 Still, there is under the ICSD a difference in the level of protection provided 
for investors who have purchased a financial instrument, depending on whether the 
firm itself or a third party custodian holds their assets.  

The  use  of  third  party  custodians  is  relatively  common  (for  example,  as  investors 
increasingly  look  to  take  advantage  of  investment  opportunities  outside  the  EU). 
Also,  sometimes  investment  services  groups  are  organised  in  a  way  where 
investment  services,  such  as  brokerage  and  custody  services  are  handled  by  two 
separate entities.   

54 
55 

56 

57 

58 

59 

60 
61 

Article 17 MiFID implementing Directive places conditions upon which such custodian may be selected 
This  is  more  typically  the  case  in  continental  Europe  where  often  the  group  member  is  a  credit 
institution. 
The third party may or may not be an authorised investment firm. Typically if it is based in Europe it 
will be regulated, but in certain overseas jurisdictions when holding assets in that jurisdiction, the third 
party may be unregulated. 
This  is  the  case  when  the  client  himself  deposits  his  assets  with  a  third  party  and  authorises  the 
investment firm to operate on his behalf the account held with such third party (e.g. the commonly used 
model for portfolio management in Germany, “proxy” model vs. “trust” model). 
The Oxera study at page 98 noted that, in research carried out for the UK FSA in 2001/2 that financial 
risks  associated  with  defaults  can  lead  to  potentially  large  client  money  losses  but  these  occur 
infrequently. It then went on to state that the default of a third party is therefore the risk with the largest 
potential impact – larger than the default of the investment firm itself. Most client money balances are 
held  with  UK  banks,  and  the  risk  of  these  banks  defaulting  is  small.  The  risk  of  default  of  non-bank 
third parties, in particular those based overseas, was evaluated as being more likely to occur. 
It should be noted that third party custodians do not necessarily need to be authorised under MiFID and 
even if they are MiFID investment firms this would not usually affect the position under the ICSD as 
there is not a direct client relationship between the custodian and the investor. 
Article 2(2) of the ICSD 
Article 32 of Commission Directive 2006/73/EC 

EN 

17 

   EN 

 
                                                 
The situation is even more complex as different civil law regimes apply in different 
Member  States.  In  some  Member  States  investment  firms  are  responsible  for  the 
assets  entrusted  to  them,  irrespective  of  their  diligence  in  selecting  custodians.  In 
other Member States, investment firms are not responsible towards clients if they can 
demonstrate they adopted due care in selecting custodians.  

3.3.2.  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 UCITS Directive specifies requirements relating to collective investment funds 
(UCITS)  and  their  management  companies62.  Specifically,  it  requires  the  fund's 
assets to be safe kept by a custodian separate from the fund manager (the so-called 
'depositary').63 

The management of a UCITS is not a MiFID service. As result, the ICSD does not 
cover  UCITS  and  their  units'  holders  in  case  a  UCITS,  via  its  depositary,  loses  its 
assets. This is due to the following reasons:  

•  The ICSD was originally intended to complement the ISD and enhance the single 
market for investment services only. These do not include UCITS management.  

•  The ICSD only protects investors against the custody risk, where a firm is not able 
to return the financial instruments to its client. If UCITS assets are lost, the value 
of the shares or units of the UCITS will become worthless or diminish but will not 
be lost.  The investors will lose the value of their investment in the UCITS but the 
shares  and  units  will  still  exist.    The  ICSD  does  not  intend  to  cover  investors' 
losses  due  to  investment  risk  which  results  in  the  value  of  shares  or  units 
becoming worthless.  

Issues related to the loss of UCITS assets (partially due to a sub custodian default) 
have recently arisen in the Madoff fraud.64 Apart from investing funds in the Madoff 
scheme,  some  UCITS  had  also  transferred  all  their  assets  on  sub  custody  through 
Madoff  entities.  When  these  sub-custodian  entities  defaulted,  the  UCITS  were  not 
able to recover their assets. As a result, the UCITS units and shares lost their value.  
UCITS  investors  suffered  because  the  value  of  their  units  and  shares  had  become 
worthless, not because these shares and units had been lost65.  

However,  it  may  be  argued  that  the  issue  is  of  a  similar  nature  to  the  problem 
presented under point 3.2.3 and that any solution adopted for failure of a third party 
custodian  in  the  case  of  investment  firms  providing  investment  services  (e.g. 
individual  portfolio  management)  should  also  be  extended  to  cover  a  UCITS  unit 

62 

63 
64 

65 

Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to 
undertakings for collective investment in transferable securities 
Articles 7 to 10 of Directive 85/611/EEC.  
A  UCITS  fund  must  have  a  depositary  to  hold  fund  assets.  The  depositary  can  either  hold  the  assets 
itself or use a sub-custodian. 
 The Madoff case has revealed an important gap between the protection offered to UCITs compared to 
MiFID investors, because the ICSD does not cover losses suffered by a UCITs unit holder caused by a 
loss of UCITs assets subsequent to the default of a depositor or its sub custodians. 

EN 

18 

   EN 

 
                                                 
holder in the case of loss of assets subsequent to the default of a depositary or its sub-
custodian.  

This situation can be highly detrimental to UCITS investors and the confidence they 
may  place  in  the  UCIT  label,  in  particular  if  they  feel  that  a  direct  investment  in 
financial  instruments  provides  a  higher  degree  of  protection  than  an  indirect 
investment in the same financial instruments through a UCITS fund66. 

According  to  EFAMA67,  total  assets  under  management  by  European  investment 
funds amounted to €7 trillion as of end 2009. The UCITS funds accounted for 75% 
of  the  European  fund  market  with  €5  trillion  assets  under  management.  In  2008 
EFAMA  assessed  the  proportion  of  retail  participation  in  all  investment  funds, 
including  UCITS  funds,  to  37%.  This  means  that  circa  €2  trillion  of  UCITS  assets 
are in the hands of retail investors.  

This is in line with the study commissioned by the Commission on "the EU market 
for  consumer  long-term  retail  savings  vehicle"68.  This  study  pinpointed  investment 
funds, both UCITS and non-UCITS, as the third long term saving vehicle in order of 
importance for European households after life and pension funds, and other deposits.  
Investment  funds  represented  16%  of  the  total  savings  of  Europeans  in  1999  (€1.8 
trillion) and 13% in 2005 (€1.9 trillion). 

Based  on  EFAMA  data  as  of  end  2008,  there  are  around  35  500  UCITS  funds  in 
Europe. Based on the assumptions that there are 2 000 unit holders per UCITS fund69 
and that 37% of these unit holders are retail investors, the estimated amount invested 
per retail unit holder is circa €72 00070. 

66 

67 

68 

69  

70  

and 

Asset 

Management 

To address the vulnerabilities that have emerged from the depositary sector, the Commission recently 
consulted on issues relating to role of the UCITS depositaries, also in the light of the Madoff fraud. It is 
likely that this will result in specific amendments to the UCITS framework to strengthen the existing 
legislation in order to clarify what their duties and liability are. The public consultation, closed on 15 
September  2009,  is  part  of  a  comprehensive  review  of  the  existing  European  regulatory  principles 
which are applicable to UCITS depositaries.  
Fund 
European 
http://www.efama.org/images/stories/efama_quarterly_statistical_release_q4_20091.pdf  
BME  Consulting,  the  EU  market  for  consumer  long-term  retail  savings  vehicle,  15  November  2007: 
http://ec.europa.eu/internal_market/finances/docs/cross-sector/study_en.pdf 
Based on EFAMA statistics, some Member States (DK, DE, ES and SLO) report the number of unit-
holders in all investment funds domiciled in their countries. Estimated number of UCITS unit-holders in 
these  countries  was  calculated  taking  into  account  the  proportion  of  UCITS  funds  to  all  investment 
funds in these countries. Based on these estimates, it was possible to calculate potential average number 
of  unit-holders  per  UCITS  fund  in  these  countries.  Taken  together,  the  average  number  of  UCITS 
investors per UCITS fund is approximately 2.000 investors. It needs to be highlighted however that this 
figure  is  most  likely  an  upper  estimate  since  it  could  be  reasonably  expected  that  UCITS  funds  will 
have a much higher number of investors on average than 2.000.  
It  needs  to  be  highlighted  however  that  €72.000  is  most  likely  an  upper  estimate  since  it  could  be 
reasonably  expected  that UCITS  funds will  have  a  much  higher number of  investors on  average  than 
2.000. If we were to double the average number of unit-holders per UCITS to 4.000, then the estimated 
average amount held by a unit-holder would be around €40.000. 

Association: 

EN 

19 

   EN 

 
                                                 
There  are  560  UCITS  depositaries  in  Europe  based  on  data  collected  by  the 
Commission in 200471. 

3.3.3. 

 Money market funds 

A "money market fund" is a fund that markets itself as highly liquid and invests in 
short term debt instruments.72  

Information from industry associations suggests that a large majority of investors in 
money market funds are institutional investors (e.g. 90% in France) and most of the 
remainder  are  high  net  worth  individuals.  So  retail  investors  are  not  significant  in 
terms of being the overall holders of units in these funds.73 Money market funds are 
popular  with  institutional  and  some  retail  investors  who  view  them  as  being 
relatively low risk investments and almost as safe as bank deposits.74 This perception 
is  reinforced  to  some  extent  by  Article  18  of  implementing  Directive  2006/73/EC 
which allows investment firms to place clients'  funds  into an account  opened,  inter 
alia, with a "qualifying money market fund" as defined in the MIFID implementing 
Directive.75 

During  the  financial  crisis,  some  money  market  funds  in  the  EU  and  the  US76  
experienced difficulties leading to concerns about the risks associated with them and 
a rapid increase in investor redemption requests.77 It became clear that some of these 
funds  may  have  involved  higher  risk  than  the  "money  market"  label  might  have 
suggested, for example, by investing in instruments with longer term maturity, due to 
a lack of harmonised approach and definition of what a money market fund is across 
the  EU.78  As  a  consequence,  many  money  market  funds  were  faced  with  a  sharp 
decrease in their portfolio value, and were not able to  reimburse investors  with  the 
initial value of their investment. 

71 

72 

73 

74 
75 

76 

77 

78 

COM(2004) 207 final – Regulation of UCITS depositaries in the Member States: review and possible 
developments 
Short  term  debt  instruments  include,  for  example,  certificates  of  deposits,  time  deposits,  commercial 
paper, asset-backed securities, repos and floating rate securities. 
Based  on  information  provided  by  the  European  Fund  and  Asset  Management  Association  in  a  letter 
dated 15 July 2009. 
At the end of 2008, European money market funds had €1,350 Billion under management.  
Article 18(2) of Directive 2006/73/EC mentions the conditions to be fulfilled to be a "qualifying money 
market fund". 
The Reserve Primary Fund was the first money-market fund to expose investors to losses in 14 years. 
The fund had to write down its exposure to Lehman commercial paper which forced the net value of its 
assets below $1 a share. Money market fund shares traditionally trade at $ 1 a share (stable share price). 
This  led  to  a  run  on  other  money  market  funds  with  investors  asking  for  early  redemptions  of  their 
holdings. As a result the US government via the US Treasury had to guarantee the shares of investors in 
money market funds. 
During the week of September 15, 2008, investors withdrew approximately $300 billion from US prime 
(taxable) money market funds, or 14 percent of the assets held in those funds. In Europe €70 billion of 
the funds under management were redeemed in a few weeks following the bankruptcy of Lehman 
Brothers (EFAMA Annual Report 2008-2009 pg 9; 
http://www.efama.org/index.php?option=com_docman&task=cat_view&gid=86&Itemid=-99 ). In the 
fall of 2008, 4 funds were closed and 12 temporarily suspended redemptions for a short period. 
The  risks  associated  with  money  market  funds  can  vary  significantly  from  fund  to  fund.  "Enhanced" 
money market funds seek higher yields than the more "conservative" money market funds and invest in 
longer-dated instruments and more volatile instruments such as asset-backed securities and derivatives. 

EN 

20 

   EN 

 
                                                 
Various initiatives have been undertaken to address the problem. For instance, in the 
US, federal authorities created a temporary guarantee program to support the value of 
the  U.S.  money  market  funds  units79  and  ensure  those  funds  could  access  enough 
liquidity to reimburse their unit holders at par.80 This program closed in September 
2009  without  having  to  compensate  for  any  losses.  More  recently,  the  SEC  has 
launched a consultation to strengthen its rules and define the instruments which are 
eligible in a US money market funds portfolio. 81  

Similar  initiatives  have  been  undertaken  in  the  EU.  In  October  2008,  the  ECB 
broadened  the  scope  of  eligible  collateral  in  liquidity  lending  transactions  to  ease 
liquidity tensions on the short term money markets. In July 2009, the EFAMA and 
IMMFA  came  forward  with  a  new  proposal  for  a  European  classification  and 
definition for money market funds. 82 CESR is consulting on a common definition of 
a money market fund in Europe.83It is possible that this may result in a strengthening 
of the requirements under the UCITS Directive that apply to money market funds. 

Consistently with the overarching principle that investment risk has to be borne by 
investors,  the  ICSD  does  not  cover  investment  losses  arising  from  financial 
instruments, including money market funds. However, it has been suggested that, in 
the light of the specificities of these funds, in addition to the described initiatives, it 
may  also  be  appropriate  to  widen  the  scope  of  the  ICSD  to  compensate  retail 
investors in money market funds for any investment losses they may incur. 

3.4. 

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

3.4.1.  Minimum level of compensation 

Article 4 of the ICSD harmonizes the minimum level of compensation (€20 000) for 
each investor.84When the ICSD was introduced, it was considered sufficient to align 
this level with the one set under the Deposit Guarantee Scheme Directive (€20 000 at 
the time).  

There are now concerns that the level might be too low. The compensation limit of 
€20 000 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 

79 

80 

81 
82 

83 

84 

they 

pressure 

liquidity 

Press release to be found in: http://www.treasury.gov/offices/domestic-finance/key-initiatives/money-
market-fund.shtml  
In  September  2008  the  US  Federal  Reserve  set  up  a  liquidity  facility  to  help  restore  liquidity  to  the 
ABCP  markets  and  thereby  to  allow  money  market  funds  to  sell  their  illiquid  assets  to  release  them 
from 
requests.  See 
http://www.frbdiscountwindow.org/mmmf.cfm?hdrID=14#f1  
Press release to be found in: http://www.sec.gov/rules/proposed/2009/ic-28807.pdf  
Proposal 
http://www.efama.org/images/stories/09-4056_european_mmf_definition_paper_version_9_july.pdf  
CESR  Consultation  Paper  –  A  common  definition  of  European  Money  Market  Funds  (20th    October 
2009) 
Although  Member  States  can  opt  to  restrict  the  compensation  amount  to  90%  of  the  claim,  on  the 
principle that the investor should bear a proportion of the loss (the "co-insurance" principle). 

for  a  definition  of  money  market 

funds  by  EFAMA 

redemption 

holder's 

to  be 

found 

faced 

from 

unit 

in: 

EN 

21 

   EN 

 
                                                 
000.85  These  measures  were  taken  because  the  different  level  of  coverage  of  the 
schemes  in  the  Member  States  led  to  distortion  of  competition  and  to  regulatory 
arbitrage  by  investors,  who  were  in  some  cases  moving  their  deposits  from  one 
Member  State  to  another.  The  same  could  happen  for  Investor  Compensation 
Schemes.  However  it  should  be  mentioned  that  the  level  of  regulatory  arbitrage  by 
investors in securities may be less likely than for depositors as the risks addressed by 
the ICSD (i.e. failure by a firm due to fraud or systems problems to return assets to a 
client) are quite difficult to anticipate. Also it is possible that investment firms could 
consider it more reasonable to establish themselves in Member States where the level 
of protection is higher, as they could provide better confidence to potential investors 
who are subject to such a regime. 

Although the ICSD and the DGSD address different risks, the discrepancy between 
them may create a number of problems. Firstly, where cash is held by a bank, it can 
in some cases be difficult to distinguish between cash held for investment purposes 
and  cash  held  as  deposits.  The  ICSD86allows  Member  States  to  determine  whether 
such  claims  should  be  regarded  as  investment  claims  (and  therefore  fall  under  the 
ICSD with a €20 000 limit) or as deposits (and fall under the DGSD with a €100 000 
limit). 

A  significant  discrepancy  between  the  thresholds  could  create  a  competitive 
distortion by encouraging investors to invest in deposits (with the higher protection 
under the DGSD) rather than in investments using an investment firm. This was one 
of  the  reasons  why  in  Spain  the  compensation  levels  both  under  the  ICSD  and  the 
DGSD were aligned. 

The  low  minimum  level  of  compensation  under  the  ICSD  also  creates  the  risk  of 
cross border discrepancies. For example, some Member States have introduced much 
higher limits (e.g. Spain €100 000, the UK £50,000 and France €70 000) while many 
others still maintain the minimum level of €20 000. The differences may encourage 
clients  to  seek  out  firms  operating  cross  border  from  Member  States  with  a  higher 
level of protection. As an example investors might move their securities within their 
home  country  from  a  national  investment  firm  to  the  branch  of  an  investment  firm 
from another Member State where the compensation limit is higher. Investors might 
also  move  their  securities  from  one  Member  State  to  another  Member  State  where 
higher  compensation  limits  are  in  place.  Although  such  behaviour  was  not 
experienced during the crisis, this situation potentially undermines the purpose of the 
ICSD which was to ensure the proper functioning of a single market for investment 
services and to eliminate competitive distortions.  

Finally,  if  evidence  shows  that  investors  typically  hold  in  excess  of  €20  000  in 
investment accounts, then the current limit may compromise investor protection and 
undermine investor confidence in the use of investment services under MiFID. 

There  is  very  limited  data  available  at  the  national  investor  compensation  schemes 
about the average amount held by investment firms on behalf of retail clients. Most 

85 

86 

See Directive 2009/14/EC of the European Parliament and of the Council of 11 March 2009 amending 
Directive 94/19/EC on deposit-guarantee schemes as regards the coverage level and the payout delay. 
Article 2.3 of the ICSD 

EN 

22 

   EN 

 
                                                 
of the schemes do not have any information about the number of securities accounts 
held by retail clients or the number of retail clients as highlighted in table "Estimate 
of securities and monies held by investment firms" of Annex III. Average securities 
and monies held per retail securities account were available for 6 Member States, 5 
of  them  being  new  EU-12  Member  States  and  Portugal.  Among  the  5  new  EU-12 
Member States, Poland had the highest average with an amount of €43 000 while the 
other  4  new  EU  Member  States  had  significantly  lower  averages  ranging  from  €8 
000 in Latvia to €26 000 in Hungary. Portugal's average of €44 000 was very close to 
the Polish average. It should be noted that the countries for which data are available 
are  among  the  10  countries  with  the  lowest  Gross  Domestic  Product  (GDP)87  per 
capita among the EU-27  

As  the  average  amount  of  financial  instruments  held  per  investor  or  securities 
account is most of the time not available at the national scheme level, we calculated 
the  average  amount  of  securities  held  per  household  based  on  the  household's 
financial  accounts  published  by  Eurostat.  This  data  only  provides  an    estimate  and 
therefore needs to be treated with some care. The average amount of securities held 
per household across all EU countries amounts to €21 000. The average for EU-15 
countries amounts to €31 000. The median88 being very close to respectively €28 000 
for EU-15 and €21 000 for EU-27.  

The study commissioned by the Commission on "the EU market for consumer long-
term  retail  savings  vehicle"89  also  sheds  some  light  on  the  amount  and  type  of 
securities  held  by  retail  investors.  This  report  draws  on  the  Eurostat  data  in  1999-
2005  and  a  survey  of  investor  attitudes  in  8  Member  States90.  The  importance  of 
direct  and  indirect  savings  in  securities  by  households  has  generally  increased  in 
developed countries although this trend is mitigated for the EU countries and varies 
by  type  of  securities.  It  should  be  noted  that  savings  behaviour  varies  enormously 
between Member States, and that the % of households investing in securities is still 
sometimes limited depending on the Member State and the type of securities (bonds, 
quoted shares, investment funds).  

Retail bonds holdings grew at a 4% annual rate over the period 1999-2005 although 
according to their consumer survey, fixed income products are the least well-known 
long term savings products to European households. Only 48% of retail investors are 
familiar with them and a mere 7% actually hold them. An important aspect of retail 
bond  investments  is  the  fact  that  the  average  balances  held  by  consumers  are  quite 
substantial. According to the consumer survey, the average amount invested in bonds 
per consumer is €173 000 in the Netherlands, €106 000 euro in France, over €87 000 
in Italy, €43 000 in Germany, €29 000 in Spain, €19 000 in Sweden and €18 000 in 
the  UK.  With  respect  to  equities,  they only  took  into  account  the  category  "quoted 

87  
88 

89 

90 

Source: Eurostat, GDP per capita in Purchasing Power Standards (PPS) (EU-27 = 100), year 2008 
The median is the middle value in a distribution, above and below which lie an equal number of values. 
In certain cases, the median can be a good way to determine an approximate average, especially when 
dealing with a set of numbers that could otherwise be skewed by outliers, 
BME  Consulting,  the  EU  market  for  consumer  long-term  retail  savings  vehicle,  15  November  2007: 
http://ec.europa.eu/internal_market/finances/docs/cross-sector/study_en.pdf 
The survey drew on a representative sample of 1 000 respondents in the selected 8 Member States  (UK, 
Germany, Italy, France, Spain, the Netherlands, Sweden, Poland). The interviews were conducted in the 
summer of 2007. 

EN 

23 

   EN 

 
                                                 
shares"  from  Eurostat  data.  The  value  of  quoted  stocks  in  the  hands  of  European 
households experienced a significant decline of 18% over the period 1999-2005. This 
can  be  explained  by  the  significant  decline  in  share  prices  between  1999  and  2002 
and  a  partial  disinterest  of  retail  investors  reflecting  a  higher  risk  sensitivity  (the 
share  of  households  with  share  ownership  in  1999  was  16.3%  as  compared  to  a 
14.2%  in  2005).  Investment  funds  are  a  popular  investment  vehicle  with  retail 
investors  but  were  also  adversely  affected  by  the  stock  market  downturn  of  2001-
2002  with  a  cumulative  average  growth  rate  of  1.17%  over  the  period  1999-2005. 
According to the results of their consumer survey, the popularity of investment funds 
varies  significantly  between  Member  States:  29%  of  households  in  Germany  have 
them in their portfolios. By contrast, the corresponding figure in France and the UK 
is  only  6  and  4%.  Based  on  data  from  the  consumer  survey  households  in  the 
countries where investment funds are most popular tend to invest between €30 000 
and €50 000 while their French and UK counterparts invest over €120 000.   

3.4.2.  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).  The  option  is  commonly  referred  to  as  a  "co-
insurance principle". The reason for this option in the ICSD is to encourage investors 
to take some care in choosing investment firms. 91 

The  option  of  imposing  the  co-insurance  principle  arguably  reduces  the  level  of 
investor  protection  provided  under  the  ICSD  and  increases  the  differences  between 
the  thresholds  in  different  Member  States.  The  DGSD  included  a  co-insurance 
principle  but  it  was  recently  abolished  as  part  of  the  amendment  increasing  the 
coverage level.  

Only  a  minority  of  Member  States  (Finland,  Germany,  Hungary,  Ireland,  Latvia, 
Malta  and  Poland)  have  adopted  and/or  maintained  the  co-insurance  principle  and 
cover  90%  of  the  claim  up  to  €20  000.  The  UK  scheme  removed  the  co-insurance 
principle at the beginning of 2009. 

The issue is whether it is appropriate to retain in the Directive the option for Member 
States to impose a co-insurance principle, as the application of this principle reduces 
investor  protection  and  investors  cannot  reasonably  be  expected  to  be  able  to 
distinguish and choose between good and bad investment firms. 

4. 

THE BASELINE SCENARIO, SUBSIDIARITY AND PROPORTIONALITY 

If  no  action  is  taken  at  EU  level,  that  is,  under  a  dynamic  baseline  scenario,  the 
problems  defined  in  section  3  would  remain  without  a  response.  Market  based 
financing is playing an important role in the financing of European large and medium 
sized enterprises and in the allocation of European savings. Orderly, transparent and 
effectively  regulated  financial  markets  can serve  as  an  important  motor  for  wealth-

91 

See recital 13 of the Directive. 

EN 

24 

   EN 

 
                                                 
creation.  Investors  need  to  feel  that  there  are  enough  guarantees  in  the  securities 
markets to invest  their savings in financial instruments instead of in a bank deposit. 
In  Europe,  corporate  borrowers  have  turned  to  financial  markets  as  an  alternative 
source of finance to bank-lending. Increased supply is matched by a ready demand as 
investors  turn  to  market-based  investments  as  a  means  of  bolstering  risk-adjusted 
returns on savings and making provision for their retirement. 

MiFID  has  facilitated  the  integration  across  the  EU  of  markets  in  financial 
instruments. However, in order to allow for effective cross-border interaction of all 
potential buy and sell interests it is necessary to create the necessary safeguards for 
investors  to  maintain  confidence  in  these  markets.  A  robust  legal  and  regulatory 
framework  is  crucial  if  investor  confidence  and  liquidity  are  to  be  nurtured  and 
financial  markets  are  to  thrive.  Financial  markets  can  survive  periodic  bouts  of 
volatility,  cyclical  corrections  or  underperformance  of  individual  stocks.  They  will 
not survive the erosion of investor confidence if intermediaries/investment firms fail 
to discharge their fiduciary obligations to the end-investor or if in the case of failure 
due  to  fraud  of  an  investment  firm  they  cannot  recover  their  investments.  It  is 
necessary  to  create  the  appropriate  guarantees  for  an  equal  level  of  investor 
protection  throughout  the  EU.  To  avoid  divergences/fragmentation  of  investor 
protection and any potential distortion of competition, the level of protection should 
be harmonised as much as possible at EU level.  

Investor confidence across Europe: imbalances in the way consumers and investors 
see the EU financial market have broader implications in terms of financial stability, 
monetary  policy  (e.g.  difficulties  in  Greece  affect  the  Euro  and  create  tensions 
among  EU  Member  States  because  trust  in  the  Euro  is  being  damaged)  and  on  the 
real economy in general (e.g. if people lose their savings or their investments there is 
no sufficient consumption to boost the real economy). 

If  there  is  no  action  at  EU  level,  not  all  Member  States  will  modify  their  investor 
compensation arrangements; as we have seen, only those Member States which have 
suffered  a  real  problem  with  the  funding  of  the  schemes  in  a  specific  case  have 
introduced  changes  to  reinforce  the  schemes.  To  take  action  only  after  major  firm 
failure is not good enough to protect investors. A major firm failure implies a huge 
loss of confidence on the markets by investors. If there is no real safety net to protect 
investors,  they  will  have  no  incentives  at  all  to  invest  in  securities  markets. 
Therefore, we consider that simply relying on the response of a Member State after a 
major problem with a national compensation scheme is not an adequate way to create 
investor confidence in markets. 

For instance, the regulation exclusively at national level of the funding of  schemes 
and  payout  delays  would  continue  to  result  in  differences  in  the  ability  of  national 
schemes  to  react  to  firm  defaults  both  in  terms  of  rapidity  and  extent  of 
compensation;  the  lack  of  clarity  about  the  coverage  under  the  compensation 
schemes would cause unjustified differences in the treatment of investors in different 
Member  States;  the  absence  of  a  common  and  effective  regime  for  providing 
information  to  investors  about  scheme  coverage  might  lead  to  a  different 
understanding of coverage conditions among investors; the full harmonisation in the 
coverage  of  Deposit  Guarantee  Schemes  at  EU  level  without  a  parallel  assessment 

EN 

25 

   EN 

 
concerning  the  Investor  Compensation  Schemes  would  not  appear  justifiable, 
especially in the light of the initial alignment of the two Directives. 

Therefore,  the  problems  detected  in  section  3  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.  

At  EU  level  we  should  try  to  avoid  as  much  as  possible  the  recurrence  of  extreme 
situations  which  have  triggered  changes  in  national  legislation.  The  review  of  the 
ICSD  aims  at  improving  the  proper  functioning  of  a  single  market  for  investment 
services, increasing investor protection and investor confidence in the EU. Further, it 
is  necessary  to  take  into  account  the  objective  set  at  G-20  level  of  addressing  any 
loopholes in the regulatory and supervisory system 

In  recent  years,  the  harmonisation  of  the  regulatory  framework  in  the  securities 
sector has significantly increased. Under this harmonised framework for investment 
services,  it  is  not  justifiable  from  an  investor  perspective  that  investment  firms  are 
treated differently in different member States when they fail to return clients assets.  

Further,  the  measures  adopted  at  EU  level  in  the  banking  sector  (and  notably  the 
increase of coverage of the Deposit Guarantee Schemes) have created differences in 
the  level  of  protection  provided  to  investors  to  whom  investment  services  are 
provided  and  banking  depositors.  These  levels  were  initially  aligned.  A  consistent 
approach is important to avoid competitive distortion in the various markets.  

The  amendment  of  the  ICSD  proposed  by  the  European  Commission  respects  the 
principle of subsidiarity and proportionality. There are issues such as the calculation 
of  the  contributions  to  the  schemes  by  firms  and  the  management  of  the  schemes 
which have not been the source of identified problems; therefore, they should be left 
to the Member States. Moreover, the exchange of best practices between the schemes 
might be a good tool to support the application of the new principles to be introduced 
in  the  Directive.  The  current  impact  assessment  will  examine  the  possibility  for 
ESMA to produce technical standards for some specific application issues.  

All solutions have been drafted bearing in mind cost-efficiency; the calculations and 
estimates  that  are  brought  forward  in  section  8  and  Annex  V  advocate  that  the 
objectives  in  terms  of  investor  protection  are  fully  respected.  The  analysis  of  the 
impact of the solutions on stakeholders presented in section 8 shows that the changes 
proposed  by  the  European  Commission  are  likely  to  have  positive  impact  on 
investors and intermediaries. 

5. 

OBJECTIVES 

The general objectives of the review of the ICSD are: 

a)  to  ensure  the  ICSD  provides  a  sufficient  level  of  investor  protection  to  clients 
using investment firms; 

b)  to  improve  the  proper  functioning  of  the  ICSD  and  of  a  single  market  for 
investment services across the EU in a cost-effective way;  

EN 

26 

   EN 

 
c) to renew investor confidence in the use of investment firms, especially in a context 
in which confidence might be affected by the financial crisis; 

d) to ensure there are no gaps in the regulatory system; 

e) to ensure that changes to compensation/guarantee schemes Directives do not lead 
to  unjustifiable  differences  in  the  protection  provided  for  different  types  of 
investments or services in the EU. 

With these objectives in mind, the review of the ICSD aims more specifically 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.   

5.1. 

Ensuring  that  the  functioning  of  the  ICSD  provides  sufficient  investor 
protection 

This general objective can be specified in the following operational objectives:  

–  Establishing detailed criteria or principles for ensuring that investor-compensation 
schemes  are  properly  funded,  in  order  to  ensure  that  different  funding 
arrangements  do  not  become  a  factor  that  alters  competition  between  firms 
established  in  different  Member  States  and  to  improve  the  ability  of  schemes  to 
fulfil fully and rapidly their obligations to investors; 

–  Put in place appropriate payout modalities aiming at reducing the payout delays to 

allow investors to be compensated promptly; 

–  Improving investor awareness of the scope and coverage of schemes by informing 
existing and potential investors of the investor compensation scheme conditions; 

–  Improving investor protection by clarifying that the right to compensation is not 
dependent on whether an investment firm is complying with detailed terms of its 
authorisation so that investors dealing with a firm are protected irrespective of any 
technicalities relating to the firm's authorisation; 

–  Excluding  claims  for  compensation  under  the  Directive  by  persons  who  have 
engaged  in  market  abuse  in  order  to  promote  investor  confidence  and  market 
integrity. 

5.2. 

Update the ICSD in areas where it has become inadequate due to changes in the 
financial  services 
landscape  to  ensure 
appropriate coverage and increase efficiency of protection 

in  the  regulatory 

industry  and 

The following operational objectives should be fulfilled:  

EN 

27 

   EN 

 
   
–  To protect investors from negligent investment advice by considering whether the 
scope  of  the  ICSD  should  be  extended  to  failure  by  a  firm  to  pay  claims  by  a 
client for breach of conduct of business obligations;  

–  Considering  whether  to  increase  the  protection  of  non-retail  investors  by 
extending  the  scope  of  the  ICSD  to  provide  for  compensation  to  be  payable  to 
non-retail clients; 

–  To  ensure  the  protection  of SME's as  investors is consistent within the financial 
markets legislation by aligning the ICSD with the MiFID of retail investors which 
covers a broader range of SMEs; 

–  Clarifying when the ICSD should apply to new MiFID services such as operating 
a  multilateral  trading  facility  (MTF)  or  to  firms  that  are  not  authorised  to  hold 
client assets or to deal with retail clients, in order to avoid different application in 
Member  States  that  may  result  in  different  levels  of  investor  protection  and 
different treatment of firms operating in the EU; 

5.3. 

Reducing gaps in the regulatory system 

In particular, the following operational objectives should be fulfilled: 

–  Improving  investor  protection  by  assessing  what  is  the  most  suitable  means  to 
protect investors from the failure of a third party custodian appointed by the firm 
to hold client assets (i.e. where the default of a third party results in the firm not 
being able to return assets to the client); 

–  Improving  investor  protection  by  assessing  what  is  the  most  suitable  means  to 
protect  UCITS  unit  holders  from  the  failure  of  a  UCITS  depositary  or  sub-
custodian; 

–  Improving  investor  protection  by  assessing  what  is  the  most  suitable  means  of 
protecting money market unit holders from a loss of value of units in such a fund; 

5.4. 

Ensuring  that  recent  amendments  to  the  Deposit  Guarantee  Scheme  Directive 
do not result in unjustified differences in protection for investors 

In particular, the following operational objectives should be fulfilled:  

–  Increasing the minimum level of compensation payable under the ICSD so that it 
approaches or is aligned with the level of compensation for bank deposits under 
the  DGSD  in  order  to  improve  investor  protection  by  fixing  an  appropriate 
compensation  amount    and  to  provide  for  a  more  level  playing  field  between 
banking and investment products;  

–  Improving investor protection  and  confidence by deleting the option of Member 
States being able to introduce a co-insurance principle (that is, the principle that 
clients  be  required  to  bear  a  proportion  of  any  loss)  so  that  clients  receive  full 
coverage within the compensation limit. 

EN 

28 

   EN 

 
6. 

POLICY OPTIONS 

With  the  intention  to  meet  the  objectives  set  out  in  the  previous  section,  the 
Commission services have analysed different policy options. The first section reflects 
the  most  relevant  policy  options  that  have  been  considered  in  relation  to 
improvement of the functioning of the ICSD. The second section contains the list of 
policy options that have been analysed in relation to the update of the ICSD in areas 
where it has become inadequate or no longer provides sufficient investor protection. 
The  third  section  contains  the  list  of  options  examined  to  reduce  gaps  in  the 
regulatory  system.  The  fourth  section  reflects  the  most  relevant  policy  options  that 
have been considered in relation to the alignment between the ICSD and the DGSD. 

6.1. 

Policy options for improving the functioning of the ICSD.   

6.1.1.  Policy options relating to funding of investor-compensation schemes   

(1)  Option 1 – No action at EU level on this issue.   

(2)  Option 2 – Harmonise how schemes should be funded..   

(3)  Option 3 – Introduce a solidarity principle between the national schemes.  

(4)  Option 4 – Create a pan-European scheme.   

6.1.2.  Policy options relating to reducing payout delays 

(1)  Option 1 – No action at EU level.  

(2)  Option 2 – Link the deadline for payouts to the trigger events.  

(3)  Option  3  –  Introduce  an  obligation  for  schemes  to  provisionally  pay 

partial compensation if the payout delay exceeds a specified time period.  

6.1.3.  Policy options relating to lack of awareness by investors about the scope of the ICSD 

(1)  Option 1 – No action at EU level.  

(2)  Option 2 – Amend the MiFID and any other sectoral directives in order to 

introduce a further level of disclosure. 

(3)  Option  3  –  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).   

6.1.4.  Policy options relating to coverage of firms operating MTFs and firms acting outside 

their permission 

(1)  Option 1 – No action at EU level. 

(2)  Option  2  -  Clarify  that  firms  which  are  not  authorised  to  hold  clients 

assets are not covered under the ICSD. 

EN 

29 

   EN 

 
(3)  Option 3 – 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.  

6.1.5.  Policy options relating to excluding claims involving market abuse 

(1)  Option 1 – No action at EU level.  

(2)  Option  2  –  Amend  the  ICSD  to  expressly  exclude  claims  for 

compensation by persons who have engaged in market abuse.  

(3)  Option  3  –  Leave  it  to  Member  States  to  decide  whether  transactions 

where market abuse was involved are to be excluded from compensation.  

6.2. 

Policy options in areas where the ICSD is no longer adequate due to changes in 
the financial services industry or in the regulatory landscape 

6.2.1.  Policy  options  relating  to  coverage  for  claims  where  there  has  been  a  breach  of 

conduct of business obligations.  

(1)  Option 1 – No action at EU level.  

(2)  Option 2 – Extend compensation to cover unpaid claims for any breach 
of conduct of business requirements against a firm that defaults.  

(3)  Option 3 – Extend compensation to cover unpaid claims for a limited set 

of breach of conduct of business requirements. 

6.2.2.  Policy options relating to coverage for non-retail clients 

(1)  Option 1 – No action at EU level. 

(2)  Option 2 – Extend compensation to claims relating to non-retail clients.  

(3) 

Option  3  –  Extend  compensation  to  certain  non-retail  clients  (e.g.  local 
authorities or large corporates).  

6.2.3.  Policy  options  relating  to  aligning  the  classification  of  clients  with  the  MiFID 

definitions 

(1)   Option 1 - No action at EU level. 

(2)   Option 2 - Introduce a new classification of clients under the ICSD based 

on pure quantitative criteria 

(3)  Option  3  –  Align  the  ICSD  with  the  MiFID  as  to  the  classification  of 

clients. 

EN 

30 

   EN 

 
 
 
 
6.3. 

Policy options for reducing gaps in the regulatory system 

6.3.1.  Policy options relating to non-coverage for failure of a third party custodian 

(1)  Option 1 – No action at EU level.  

(2)  Option 2 – Provide in MiFID that firms should be strictly liable to a client 

for any failure of a custodian they appoint. 

(3)  Option  3  –  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.  

6.3.2.  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).   

(1)  Option 1 – No action at EU level. 

(2)  Options 2 – Extend compensation within ICSD to UCITS funds for assets 

that have been lost by a depositary (or sub-custodian).  

(3)  Option 3 – Amend UCITS directive to strengthen safeguards that apply 

to depositaries and sub-custodians.  

(4)  Option  4  –  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. 

6.3.3.  Policy options relating to non-coverage of money market funds 

(1)  Option 1 – No action at EU level.   

(2)  Option 2 – Introduce new requirements in the UCITS directive to define 

"money market funds" and strengthen requirements for such funds.   

(3)  Option 3 - Extend compensation under the ICSD to loss of value of units 

of "MiFID qualifying money market funds".  

6.4. 

Policy options for maintain some alignment between the ICSD and the DGSD.  

6.4.1.  Policy options relating to the minimum level of compensation under the directive  

(1)  Option 1 – No action at EU level.  

(2)  Option  2  –  Amend  the  ICSD  and  replicate  the  coverage  adopted  under 

the DGSD.     

(3)  Option  3  –  Amend  the  ICSD  to  increase  the  minimum  level  of 

compensation to €50 000, but allow individual Member States to specify a 
higher limit (minimum harmonisation of the coverage level).  

EN 

31 

   EN 

 
(4)  Option 4 - 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). 

6.4.2.  Policy options relating to the co-insurance principle 

(1) 

(2) 

(3) 

Option 1 – No action at EU level.  

Option 2 - Modify the co-insurance principle 

Option 3 – Remove the possibility of co-insurance.  

7. 

COMPARING THE OPTIONS  

This  section  discusses  the  advantages  and  disadvantages  of  the  different  policy 
options against the following criteria: 

–  Investor  protection  and  confidence:  the  option  proposed  should  maintain  and, 
when  necessary,  enhance  the  level  of  investor  protection  achieved  by  the  ICSD 
and the level of investor confidence in the use of investment services. 

–  Level playing field: the extent to which the option reduces unjustified differences 
in  the  protection  provided  for  different  types  of  investments  or  services  in  the 
EU.92 

–  Cost-Effectiveness: the extent to which the option achieves the sought objectives 
and facilitates the operation of EU securities markets in a cost effective way.  

The  options  are  measured  against  the  above-mentioned  pre-defined  criteria  in  the 
tables  below.    Each  scenario  is  rated  between  "---"  (very  negative),  0  (neutral)  and 
"+++"  (very  positive).    In  some  cases  not  all  criteria  are  applicable  to  the  issues 
under analysis. The assessment highlights, also graphically, the policy option which 
is best placed to reach the objectives outlined in section 5 and therefore the preferred 
one. 

7.1. 

Policy options for improving the functioning of the ICSD.   

7.1.1.  Policy options in relation to funding of investor-compensation schemes   

(1)  Option  1  –  No  action  at  EU  level  on  this  issue.    Retaining  the  status  quo 
would  mean  that  individual  Member  States  schemes  would  retain  complete 
discretion as to how to fund their investor-compensation schemes. This would 
have  the  consequences  set  out  in  section  3.1.1  regarding  investor  protection 
(i.e. if funding is not adequate in a Member State it can undermine investor 
protection and investor confidence in investment services). It could also affect 
the proper functioning of the single market for investment services if different 

92 

The subsequent comparative tables of policy options will identify the context of level playing field with 
regard to each policy option group. 

EN 

32 

   EN 

 
                                                 
approaches  to  funding  result  in  significant  differences  in  the  likelihood  of  a 
scheme  being  able  to  meet  its  obligations.  The  timing  and  level  of 
contributions  by  firms  would  also  continue  to  vary  between  Member  States 
depending on the extent to which an individual scheme requires pre-funding 
or contributions after a default. So this option is not likely to be effective.  

(2)  Option 2 – Harmonise how schemes should be funded. This option should 
result in more harmonisation of funding of schemes. This policy option would 
require the introduction of principles and some more prescriptive rules for the 
funding of investor-compensation schemes.  

A  prescriptive  model  (if  based  on  sound  methodology)  might  significantly 
reduce the risk of any scheme having inadequate funding to meet its directive 
obligations in the event of a default. So it would improve investor protection 
and  investor  confidence  in  investment  services.  It  would  also  provide  a 
greater degree of harmonisation than principles which is a pre-requisite to the 
proposal to introduce a solidarity principle between the national schemes (see 
Option 3). 

The model would include the following:  compensation schemes should have 
in  place  adequate  systems  to  determine  the  potential  liabilities  of  schemes; 
schemes  should  be  adequately  financed  in  proportion  to  their  liabilities;  a 
target fund level should be established by each scheme to meet the potential 
liabilities  ,  being  a  percentage  of  the  size  of  the  activities  covered  by  the 
members  of  the  scheme  and  should  be  adequately  pre-funding;  adequate 
alternative  funding  arrangements, 
including  borrowing  facilities  from 
commercial  banks  or  public  institutions  if  based  on  commercial  grounds, 
should be in place; the cost of financing schemes should be ultimately borne 
in  relation  to  investment  business  by  the  investment  firms  or  third  party 
custodians covered by the scheme and to a similar extent in relation to UCITS 
activities, by UCITS or their depositaries or third parties who are covered by 
the  scheme.  The  target  fund  level  should  be  reached  within  a  transitional 
period of 10 years to take into account the current differences at national level 
and allow ex post funded schemes (eight Member States have ex post funded 
schemes  and  4  Member  States  have  schemes  with  a  mix  of  ex  ante  and  ex 
post funding – See Annex III) to build up progressively their ex ante funding 
level without jeopardising the financial health of their contributing firms. 

It  would  not  be  possible  to  achieve  the  same  outcome  through  non-binding 
instruments,  such  as  a  recommendation  by  the  Commission,  as  different 
schemes  could  adopt  different  funding  principles  and  the  same  level  of 
funding of the schemes would not be guaranteed in all Member States.  

Contributions to the call for evidence and the views of industry and investor 
associations  supported  the  introduction  of  general  principles  leaving  the 
details to Member States. Also some compensation schemes are in favour of 
the introduction of pre-funding and more transparent systems. 

A  detailed  prescriptive  approach  to  funding  would  not  allow  as  much 
flexibility to adapt to differences in markets in different Member States. Also 

EN 

33 

   EN 

 
 
the  range  of  investment  services  and  firms  covered  by  the  Directive  may 
make it less amenable to detailed prescription compared with for example the 
DGSD (which covers a specific type of investment offered by a specific type 
of institution).  

Although  this  option  would  result  in  a  heavier  burden  for  compensation 
schemes and firms than a purely principle-based approach, this more detailed 
approach would lead to much greater degree of harmonisation of schemes and 
would  also  reduce  the  risks  of  a  scheme  having  inadequate  funding.  As  a 
consequence, it would result in higher consumer protection and would lead to 
greater  confidence  when  investors  use  investment  services.  The  future 
European authority (ESMA) – to be set up under the framework of the new 
European  supervisory  infrastructure93  –,  will  be  entitled  to  produce  binding 
standards to be endorsed by the Commission in some areas in order to ensure 
a coherent application of the Directive. 

This  option  is  considered  to  be  more  effective  than  taking  no  action  at  EU 
level.  Based  on  the  answers  received  from    a  limited  number  of  Member 
States to the call for evidence94, some of them were not convinced about the 
need to introduce general funding principles95.. 

(3)  Option 3 – Introduce a solidarity principle between the national schemes. 
This  policy  option  could  be  in  addition  to  option  2.  It  might  emphasize  the 
role  of  a  European  system  of  national  schemes  by  providing  that,  as  a  last 
resort, funds from schemes in other Member States could be lent to a scheme 
that  has  insufficient  funds  to  meet  its  responsibilities  under  the  ICSD.  This 
would be a measure that provides schemes with an alternative back up source 
of  funding  (although  only  on  a  temporary  basis).  Indeed  compensation 
schemes might have a temporary liquidity problem in the case of the failure 
of a very large investment firm. The ex ante target fund level will be built up 
to  cope  with  a  mid-size  failure,  but  not  with  a  one-off  extreme  case.  The 
proposed  cross-border  solidarity  principle  would  be  a  cost  effective  way  to 
address  these  temporary  and  rather  exceptional  liquidity  problems,  while  at 
the same time ensuring the industry will contribute to the compensation costs. 

This  would  provide  greater  protection  to  investors  and  promote  investor 
confidence  in  investment  services  as  they  would  know  that  funds  for 
compensation  might  as  a  last  resort  be  provided  from  a  network  of 
compensation schemes in other Member States if an individual scheme had 
insufficient funding. 

Together  with  the  establishment  of  consistent  funding  principles  and  rules 
between  Member  States  (option  2),  it  might  facilitate  a  closer  relationship 
and better on-going coordination between national schemes and would act as 

93 

94  

95  

Legislative  proposals  adopted  by  the  Commission  on  23.9.2009:  COM(2009)  499  final,  COM(2009) 
500 final, COM(2009) 501 final, COM(2009) 502 final and COM(2009) 503 final. 
Eight  Member  States  contributed  to  the  call  for  evidence:  Czech  Republic,  Estonia,  Finland,  France, 
Germany, Hungary, Netherlands, United Kingdom. 
France, Hungary, Netherlands, United Kingdom were not in favour of such a measure. 

EN 

34 

   EN 

 
  
                                                 
an incentive to develop more harmonised practices and working procedures. 
In  the  meantime  it  would  limit  a  possible  risk  of  moral  hazard  between 
undersized  and  better  funded  schemes  on  the  basis  of  the  necessary 
repayment  (mid-term)  obligation.  In  any  case,  a  level  of  technical  detail 
should  ensure  that  each  scheme  must  ring  fence  and  have  available  for 
lending a certain amount, established on the basis of common criteria. 

For investment firms, the borrowing power of the schemes would give more 
flexibility in the collection of funds in the case of huge loss events, allowing 
a  more  balanced  distribution  during  the  time.  Indeed,  without  proper 
borrowing arrangements, the scheme in need would be obliged to collect the 
necessary funds from its member firms in a relatively short period of time. 

The  borrowing  power  would  be  limited  to  the  loss-events  covered  by  the 
ICSD and would not extend to any further coverage granted at national level. 

Within  the  pre-funded  portion  of  scheme  funding  it  would  be  necessary  to 
specify  the  amount  ("common  pot")  that  must  be  available  under  the 
solidarity  principle  for  lending  to  other  schemes  to  prevent  the  lending 
scheme from endangering its financial capability. 

Such a network of national schemes would be only possible if required by a 
binding Community instrument. Moreover, the development of the system of 
national schemes would be consistent with the proposed system of European 
supervision,  in  particular  with  the  creation  of  the  European  Securities 
Markets  Authority.  Because  of  its  political  implications,  at  this  stage  this 
option is considered as the preferred one in combination with option 2 above, 
as  option  2  is  a  prerequisite  to  option  3.  These  options  would  also  be 
consistent  with  a  gradual  approach  towards  option  4  (creation  of  a  pan-
European scheme). 

(4)  Option  4  –  Creation  of  a  pan-European  scheme.    This  policy  option 
implies  the  setting  up  of  a  single  Community  scheme,  to  administer  a  fund 
and pay out compensation to investors under the ICSD. 

This option would add to investor protection and confidence in terms of the 
funding of the single scheme (as there would be confidence that there was a 
larger  pool  of  funding).  It  would  improve  the  functioning  of  the  single 
market  for  investment  services  (by  removing  current  differences  between 
schemes  in  different  Member  States).  It  would  also  be  a  cost-effective 
solution due to the economies of scale generated by the operation of a single 
scheme. 

But such a proposal is unlikely at this point in time to be realistic. The ICSD 
only  sets  minimum  standards  and  there  are  still  significant  differences 
between  Member  States  on  issues  such  as  coverage,  the  level  of 
compensation,  the  process  for  determining  the  eligibility  of  claims  and 
funding  of  schemes.    Setting  a  pan-EU  scheme  would  require  a  new 
involve  political  and  economic 
regulatory  framework,  which  would 

EN 

35 

   EN 

 
challenges,  including  the  assessment  of  impacts  on  national  fiscal  policies, 
going beyond the ordinary review of the current ICSD.  

This  option  may  be  a  longer  term  option  but  in  the  short  term  a  greater 
degree of harmonisation and elimination of national differences is necessary. 
The proposed combination of options 2 and 3 would in any case be a step in 
paving the way towards this longer term option.  

Investor protection and 
confidence 

Level playing 
field  

Cost-
Effectiveness  

No action at EU level 

Harmonise how schemes should be funded 

Introduce a solidarity principle between 
the national schemes 

Creation of a pan-European fund  

0 

+++ 

+++ 

+++ 

0 

++ 

+ 

++ 

0 

- 

+ 

-- 

7.1.2.  Policy options relating to reducing payout delays 

(1)  Option  1  –  No  action  at  EU  level.    Under  this  option,  the  current  situation 
would  remain  unchanged.  That  is,  the  time  limit  could  be  taken  as  applying 
from when the claim has been processed and the amount of the claim has been 
established  (not  when  the  firm  is  declared  in  default).  This  would  mean 
potentially long delays in the payment of compensation, depending on national 
administrative  and  insolvency  laws.  This  has  the  serious  consequences  for 
investor  protection  and  confidence  in  investment  services  set  out  in  section 
3.1.2.  It  also  would  leave  existing  discrepancies  between  payout  times  across 
Member States. Compensation schemes have expressed views in favour of this 
option. 

(2)  Option 2 – Link the deadline for payouts to the trigger events.  This policy 
 option  would  require  the  time  limit  (e.g.  of  three  months)  to  apply  from  the 
date on which the firm is declared to be in default (rather than when the claim 
is  established).  This  option  would  not  interfere  with  but  would  operate  in 
parallel with national insolvency laws.  

Under  this  option  the  result  to  be  achieved  would  be  specified  (i.e.  a  claim 
must be paid out within a specified period after the trigger event) but it would 
be left to Member States to determine how this outcome is best achieved96. 

96 

There are a few Member States where the time limit of 3 to 6 months starts to run from the date 
the financial regulator has ascertained the scheme's payment obligation (Finland, France), from when an 
investor has submitted a compensation claim (Netherlands), or from the date the inaccessibility of the 
funds has been ascertained (Slovakia). 

EN 

36 

   EN 

 
 
 
 
                                                 
  
This option would be beneficial in terms of investor protection and confidence 
in investment services as investors would have greater confidence that a claim 
must  be  processed  within  a  specified  period  from  the  trigger  event.  It  would 
also reduce significant differences in payout times between Member States. 

A potential difficulty is that there may be cases where due to fraud or system 
problems within a firm, records are missing or are incomplete. In such cases it 
may  be  difficult  to  accurately  verify  the  eligibility  and  amount  of  a  claim 
within the specified period.   

 (3)  Option  3  –  Introduce  obligation  for  schemes  to  provisionally  pay  partial 
compensation  if  payout  delay  exceeds  a  specified  time  period.  This  policy 
option would entitle investors to receive a partial compensation from a scheme 
if  the  payout  delay  exceeds  a  given  time  period.  This  time  period  would  be 
amended to start running from the date on which the firm is declared to be in 
default (as under option 2). But, if the scheme is not able to make a full pay out 
during  this  period,  it  will  be  required  to  make  provisional  partial  payment 
based  on  an  initial  assessment  of  the  claim.  The  level  of  the  partial  payment 
would  need  to  be  prescribed.  The  balance  would  be  paid  out  later  once  the 
claim had been fully verified. 

This  option  combines  the  approach  under  option  2  but  allows  the  scheme  to 
make a partial payment where it cannot make a final determination of the claim 
within the specified period. It would increase investor protection and investor 
confidence as investors would at least receive part of their claim promptly. It 
would also reduce differences between Member States in payout times.  

Arguments  might  arise  as  for  option  2  about  the  difficulty  for  the  scheme  in 
verifying a claim if there are no records. Schemes would also need the ability 
to  recover  amounts  provisionally  paid  out  if  it  was  subsequently  discovered 
that the claim was not in fact valid. But these difficulties are outweighed by the 
need for investors to receive full or partial compensation within a reasonable 
period.  Failure  to  provide  such  payouts  within  a  reasonable  period  risks 
undermining the objectives set by the Directive. This solution is to be included 
in a binding instrument in order to make it effective and guarantee the rights of 
investors and of the schemes. Investor associations have expressed clear views 
in favour of this option. The schemes' main concern with this option is that in 
case  of  too  large  partial  compensation  payments,  reclaiming  money  from 
investors  is  a  very  sensitive  and  expensive  process.  A  number  of  Member 
States97  having  responded  to  the  call  for  evidence  have  also  expressed 
implementation concerns about this option – at least as long as details are not 
known. 

Investor protection and 
confidence 

Level playing 
field  

Cost-
Effectiveness  

No action at EU level 

0 

0 

0 

97  

Czech Republic, Estonia, France, Germany, Hungary, Netherlands, and the United Kingdom 

EN 

37 

   EN 

 
 
                                                 
Link the deadline for payouts to the 
trigger events 

Require provisional payout of partial 
compensation  

+++ 

+++ 

+ 

+ 

0 

+ 

7.1.3.  Policy options relating to lack of investor awareness about the scope and coverage 

of the ICSD 

(1)  Option 1 – No action at EU level.  Under this policy option, no further action 
would  be  taken.  Reliance  would  be  placed  on  the  adequacy  of  existing 
requirements  in  the  ICSD  and  MiFID  (for  clients  to  be  informed  about  the 
amount  and  scope  of  cover  under  the  ICSD)  and  on  how  they  are  being 
implemented. The consequences in section 3.1.3 would remain. That is, despite 
the  existing  requirements,  there  are  concerns  that  retail  investors  are  not 
sufficiently  aware  of  the  existence  of  the  ICSD,  what  it  covers  and  does  not 
cover  and  how  it  applies  in  cross  border  situations.  There  is  therefore  a  risk 
that the ICSD does not provide the necessary investor protection and the level 
of investor confidence in investment services that it was intended to provide.  

(2)  Option 2 – Amend the MiFID and any other sectoral directives in order to 
introduce a further level of disclosure. Under this option, a further level of 
detail would be added in the sectoral directives where the coverage under the 
ICSD  applies.  In  the  case  of  investment  services  and  activities,  the  MiFID 
would  be  the  relevant  sectoral  directive.  In  the  case  of  UCITS,  the  UCITS 
directive would be modified. This approach is not the most efficient because it 
would fragment in different legal texts the disclosure requirement. 

(3)  Option  3  –  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).  Under  this  policy 
option  the  existing  obligation  for  investment  firms  to  provide  information 
about  compensation  schemes  to  new  clients  would  be  supplemented  by 
requiring  further  detail  to  be  provided  about  what  is  and  is  not  compensated 
under  the  ICSD  and  how  it  applies  in  cross  border  situations.  Specifically  it 
would require them to explain that certain losses (e.g. due to investment risks) 
are not subject to the payment of compensation under the ICSD.  

This  option  would  seem  to  be  the  most  effective  provided  that  disclosure  is 
clear  and  easy  for  the  investor  to  understand.  Moreover,  there  is  a  large 
consensus between industry, investor associations  and compensation schemes 
about  the  fact  that  disclosure  requirements  should  be  strengthened.  For  the 
sake  of  consistency,  the  ICSD  seems  the  most  suitable  directive  to  provide 
further details about the coverage. The reinforcement of the legal requirements 
could be accompanied by non-binding actions such as the development of best 
practices by the firms.  

Investor protection and 
confidence 

Level playing 
field 

Cost-
Effectiveness  

EN 

38 

   EN 

 
 
 
 
No action at EU level 

Provide further detail in the sectoral 
directives (such as MiFID) 

Provide further detail in the 
ICSD  

0 

+ 

+ 

0 

+ 

+ 

0 

+ 

++ 

7.1.4.  Policy  options  relating  to  coverage  of  firms  operating  an  MTF  and  firms  acting 

contrary to the terms of their authorisation 

(1)  Option  1  –  No  action  at  EU  level.    This  policy  option  would  maintain  the 
current  uncertainty  and  potential  lack  of  coverage  for  investors.  It  may  also 
result in different approaches in individual Member States. 

For example in a situation where a firm does in fact hold client assets or deals 
with retail investors (despite the terms of its authorisation) and the assets are 
lost, for example through fraud by an employee of the firm, the investor may 
not  be  entitled  to  any  compensation  in  some  States.  This  would  compromise 
investor  protection  and  investor  confidence.  It  is  also  arguably  unrealistic  to 
expect retail investors to be aware of the precise terms of a firm's authorisation 
and whether or not they are being breached by the firm. Further, it is unfair that 
the  retail  investor  should  be  deprived  of  investor  protection  under  the  ICSD 
where  it  is  the  firm  that  has  not  complied  with  detailed  conditions  of  its 
authorisation.  

Issues relating to whether operation of an MTF should be covered by the ICSD 
are probably less important and more theoretical, given that MTFs usually do 
not hold client assets and MTF users are unlikely to be retail clients. 

This option would result in a continued lack of clarity and perhaps some legal 
uncertainty.  

(2)  Option  2  –  Clarify  that  firms  which  are  not  authorised  to  hold  clients 
assets  are  not  covered  under  the  ICSD.  This  policy  option  would  involve 
establishing  that  some  investment  services  providers,  although  subject  to  an 
authorisation  and  supervisory  regime,  are  not  covered  under  the  ICSD.  The 
rational for this option would be that since, in legal terms, some intermediaries 
cannot find themselves in the situation covered by the ICSD, they should not 
be covered under the directive. This option would leave to investors the burden 
of checking the legal terms of the firms' authorisation; in addition they would 
leave  them  exposed  to  the  risk  that  -  de  facto  and  in  violation  of  the  firm's 
authorisation – it could hold  clients  assets or  deal  with a retail client without 
being covered by the ICSD.  

(3)  Option 3 – Clarify that if firms do in fact hold client assets (irrespective of 
restrictions  on  their  authorisation  or  the  nature  of  their  investment 
service) then clients should be entitled to compensation under the ICSD if 
the  firm  defaults.    This  policy  option  would  involve  clarifying  in  the  ICSD 

EN 

39 

   EN 

 
 
that a claim for compensation can be made by a client if in fact the investment 
firm holds moneys or financial instruments on behalf of a retail client and fails 
to return them. This would be irrespective of whether the firm is doing so in 
contravention  of  any  limitation  on  the  firm's  authorisation  (e.g.  preventing  it 
from holding client assets or from dealing with retail clients) and irrespective 
of the legal nature of the investment service it provides (e.g. if it is operating a 
MTF).  This  option  would  provide  greater  clarity  and  legal  certainty  and 
provide some increase in investor protection and investor confidence. It would 
enable  retail  investors  to  assume  that  they  are  covered  by  the  ICSD  without 
checking  detailed  conditions  on  a  firm's  authorisation.  The  issue  of  whether 
contributions  are  required  from  such  firms  would  be  left  to  the  discretion  of 
each individual scheme (as it is currently the case). 

This option would provide greater clarity and promote confidence in the use of 
investment  services.  It  would  also  result  in  more  consistency  across  Member 
States in the application of the ICSD which would assist the proper functioning 
of the ICSD and the passport; for this to happen the extension of the coverage 
by the schemes is to be introduced in a binding instrument to ensure the level 
playing  field  in  the  EU.  This  option  was  generally  supported  by  many 
stakeholders in the contributions to the call for evidence. Among the Member 
States  having  contributed  to  the  call  for  evidence,  a  minority  of  them  were 
against98. 

Investor protection 
and confidence 

Level 
playing 
field  

Cost-
Effectiveness  

No action at EU level 

Clarify that firms which are not authorised to hold 
clients assets are not covered under the ICSD 

Clarify that if firms do in fact hold client assets 
then clients should be entitled to compensation if 
the firm defaults 

0 

-- 

0 

0 

++ 

++ 

0 

- 

+ 

7.1.5.  Policy options relating to coverage for claims involving market abuse 

(1)   Option  1  –  No  action  at  EU  level.    Under  the  status  quo,  claims  involving 
conduct that is market abuse could in theory still be eligible for compensation 
under the ICSD. This is a largely theoretical issue and is unlikely to occur in 
practice  (i.e.  that  a  person  who  has  engaged  in  market  abuse  would  claim 
against  the  scheme).  But  leaving  open  the  possibility  is  inconsistent  with  the 
general objective of prohibiting market abuse and promoting market integrity 
in financial markets.  

(2)   Option 2 – Amend the ICSD to expressly exclude claims for compensation 
by  persons  who  have  engaged  in  market  abuse.  This  policy  option  would 

98  

Member States against were Finland, Estonia, and Hungary. 

EN 

40 

   EN 

 
 
 
 
                                                 
exclude  any  claim  for  compensation  where  a  person  has  engaged  in  market 
abuse. It would promote investor confidence and market integrity by removing 
this  theoretical  loophole.  The  loophole  is  inconsistent  with  the  objective  of 
financial  services  directives  to  prohibit  market  abuse  and  promote  market 
integrity.  It  is  necessary  to  introduce  this  exclusion  in  a  binding  legal 
instrument, as it should be binding for all schemes within the EU. 

(3)   Option  3  –  Leave  it  to  Member  States  to  decide  whether  transactions 
where market abuse was involved are to be excluded from compensation. 
This  policy  option  would  introduce  an  option  in  the  ICSD  allowing  Member 
States to exclude claims for compensation involving market abuse. This is not 
a credible option from an investor confidence or market integrity perspective; 
as  such  an  amendment  would  imply  that  individual  Member  States  would  be 
free to choose to permit claims for compensation involving market abuse. 

Investor protection and 
confidence 

Level playing 
field  

Cost-
Effectiveness  

No action at EU level 

Exclude coverage of claims where market 
abuse was involved 

Leave it to Member States to decide  

0 

+ 

-- 

0 

+ 

- 

0 

+ 

0 

7.2. 

Policy  options  for  updating  the  ICSD  in  areas  where  it  is  no  longer  adequate 
due to changes in the financial services industry or in related directives 

7.2.1.  Policy  options  relating  to  the  non-coverage  of  claims  for  breach  of  conduct  of 

business obligations  

(1)   Option  1  –  No  action  at  EU  level.    Under  this  policy  option,  the  scope  of 
mandatory coverage would not be expanded to include civil claims for breach 
of  conduct  of  business  rules  against  a  firm  that  becomes  insolvent.  It  would 
remain  optional  for  Member  States  to extend  the  scope  of  claims  covered  by 
their  schemes  based  on  the  characteristics  of  their  specific  market  (e.g.  the 
frequency  of  breaches  of  conduct  of  business  requirements  by  firms  in  that 
market, the extent to which civil claims are made and the likelihood of firms 
failing with unpaid claims against them).  

Leaving  discretion  to  individual  Member  States  would  mean  that  Member 
States can take into account market differences and the risks in their particular 
market  when  deciding  whether  to  extend  the  coverage  of  their  schemes  to 
cover  this  situation.  The  risk  set  out  in  section  3.2.1  would  remain  (i.e.  that 
individual  Member  States  fail  to  recognise  that  negligent  advice  becomes  an 
increased  source  of  risk  and,  if  firms  fail,  investors  with  civil  claims  against 
the  firms  are  left  without  adequate  compensation).  If  this  risk  materialises  it 
could  have  a  detrimental  effect  on  investor  protection  and  confidence  in  the 
use  of  investment  firms.  But  it  might  also  be  argued  that  there  may  be  other 
more  effective  means  to  deal  with  this  risk,  e.g.  closer  supervision  of  such 

EN 

41 

   EN 

 
 
 
 
firms, requiring firms to take out professional liability insurance or enhancing 
civil liability by intermediaries. All these options will need to be considered in 
the forthcoming MiFID review – which is the most appropriate instrument in 
order  to  deal  with  issues  related  to  the  activity  of  investment  firms  and  their 
relationship with their clients. For these reasons taking no action in the context 
of  the  ICSD  is  our  preferred  option.  Nearly  all  the  Member  States99  having 
answered the call for evidence were in favour of keeping the status quo, except 
the United Kingdom where any breach of conduct of business rules is already 
covered. 

(2)   Option 2 – Extend compensation to cover unpaid claims for any breach of 
conduct of business requirements against a firm that defaults. This policy 
option would require the schemes to extend their coverage under the ICSD to 
compensate  investors  for  unpaid  claims  against  a  firm  for  breach  of  MiFID 
conduct  of  business  rules  where  the  firm  has  defaulted.  This  option  could 
cover  the  breach  of  a  wide  number  of  conduct  of  business  rules  for  all 
investment  services  (e.g.:  information  requirements,  know  your  customer 
obligation; suitability requirements; conflict of interest rules100). 

This  would  be  a  significant  extension  of  the  scope  of  the  ICSD  and  would 
significantly increase investor protection and investor confidence in the use of 
investment services. There is currently only one Member State (the UK) which 
covers such claims. 

There  may  be  an  issue  about  the  necessity  of  such  a  measure  in  different 
markets.  For  example,  in  some  Member  States  typically  retail  investment 
services are more likely to be provided by firms belonging to large banking or 
insurance  groups  while  in  other  Member  States,  there  are  a  larger  number  of 
smaller  firms  providing  investment  advice101.  While  the  risk  of  poor 
investment  advice  might  not  necessarily  be  higher  for  a  small  independent 
firm, the risk of default might be perceived to be higher. A small independent 
firm  normally  has  less  financial  resources  to  pay  out  large  amounts  of 
compensation claims.  

There  is  not  yet  clear  evidence  of  an  EU  wide  problem  of  small  investment 
firms that are subject to civil claims defaulting with unpaid claims. Moreover, 
most  of  the  respondents  to  the  call  for  evidence  expressed  that  this  option 
would be legally and administratively very complicated and even unworkable, 
including that it would imply an increase in costs for the financial system. 

99  

100 
101 

EN 

Member States in favour of the status quo were Czech Republic, Estonia, France, Germany, Hungary, 
and the Netherlands.  

Article 19 (2), (3), (4) and (5) of MiFID and Article 18 of MiFID. 

            See Oxera report pages 105-106 for further details on market structure. 

42 

   EN 

 
 
 
                                                 
  
A  related  complexity  for  this  option  is  that  Member  States  have  the  choice 
under  MiFID  to  not  apply  that  Directive  to  investment  firms  that  are  only 
allowed  to  provide  investment  advice  and  are  not  allowed  to  hold  client 
assets.102This  option  has  been  exercised  in  a  number  of  Member  States. 
Therefore  the  conduct  of  business  obligations  that  apply  to  many  smaller 
investment  advisers  across  Europe  may  vary  and  depend  on  the  national 
legislation  in  each  Member  State.  The  appropriateness  of  this  optional 
exemption is an issue that will be reviewed as part of the 2010 MiFID review.   

A more cost effective option may be as part of the MiFID review to review the 
continued  appropriateness  of  the  optional  exemption  and  also  to  consider 
whether  other  requirements  could  be  imposed  to  ensure  that  firms  providing 
investment advice have sufficient capital, appropriate insurance to pay out any 
outstanding  civil  claims  for  breaches  of  conduct  of  business  requirements  or 
enhance  the  liability  borne  by  investment  firms.  Pending  the  issue  being 
considered  as  part  of  the  MiFID  review,  extending  compensation  under  the 
ICSD would remain optional. 

(3)   Option 3 – Extend compensation to cover unpaid claims for a limited set of 
breach of conduct of business requirements. As the previous one, this policy 
option would require the schemes to extend their coverage under the ICSD to 
compensate  investors  for  unpaid  claims  against  a  defaulted  firm.  However, 
under  this  option  a  more  narrow  set  of  conduct  of  business  rules  would  be 
covered  (e.g.:  only  violations  in  the  provision  of  investment  advice  or  even 
only breach of the suitability rule for investment advice103). 

Although the extension of the scope of the Directive under this option would 
be less broad than in the previous one, it still faces the same issues. In addition, 
it  would  require  a  complex  graduation  of  services  and  conduct  of  business 
rules  in  order  to  establish  the  ones  which  would  be  covered  under  the  ICSD 
and  the  ones  which  wouldn't.  This  could  add  uncertainty  as  to  the  actual 
coverage and client protection. 

Investor protection 
and confidence 

Level 
playing 
field 

Cost-
Effectiveness  

No action at EU level 

Extend compensation to claims relating to any breach 
of conduct of business requirements 

Extend compensation to claims relating to a limited set 
of breaches of conduct of business requirements 

0 

+ 

+ 

0 

0 

- 

0 

-- 

-- 

102 
103 

Article 3 (1) of MiFID 
Article 19 (5) of MiFID. 

EN 

43 

   EN 

 
 
 
 
                                                 
  
  
7.2.2.  Policy options relating to coverage for non-retail clients 

(1)   Option 1 – No action at EU level.  Under this policy option, Member States 
would maintain the possibility to include non-retail clients, if they elect to do 
so. Member States would retain flexibility depending on the characteristics of 
their own market. This approach is consistent with the initial focus under the 
ICSD and under MiFID of protecting small investors.  

In  practice  a  few  Member  States  cover  non-retail  clients  under  the 
compensation  schemes.  There  is  no  evidence  that  failure  by  other  Member 
States to cover non-retail clients has caused significant or widespread problems 
under the ICSD and therefore retaining the current option appears appropriate. 
Most stakeholders supported this option. 

(2)   Option  2  –  Extend  compensation  to  claims  relating  to  non-retail  clients. 
This  policy  option  would  extend  compensation  to  all  types  of  clients  of 
investment firms. 

In  reality  this  would  not  provide  much  further  investor  protection  for  larger 
non-retail  investors.  Relative  to  the  value  of  investments  held  by  non-retail 
investments  the  compensation  payable  under  the  ICSD  (even  if  increased)  is 
relatively low. For example, if a local authority had hundreds of thousands of 
Euros  of  cash  or  financial  instruments  held  by  an  investment  firm  that  then 
defaulted,  it  would  only  currently  be  entitled  to  receive  €20  000  from  most 
schemes.  

Such  an  extension  would  add  to  the  cost  for  firms  without  really  providing 
much  protection  to  this  category  of  clients,  due  to  the  limited  amount  of  the 
compensation, which is tailored to small investors' situations. As set out above 
in  option  1,  there  is  no clear  evidence  suggesting  that  the  scope  of  the  ICSD 
should  be  extended  to  cover  non-retail  investors.  Further,  compensating 
professional and/or institutional investors may create moral hazard issues, as it 
may  discourage  such  investors  from  doing  adequate  due  diligence  on  firms 
they  propose  to  use.  In  this  respect  non-retail  investors  are  in  a  much  better 
position to be able to assess the soundness of a firm.  

So this option does not appear to be cost effective and would not significantly 
enhance investor protection. 

(3)   Option  3  –  Extend  compensation  to  certain  non-retail  clients  (e.g.  local 
authorities  or  large  corporates).  Under  this  option,  coverage  would  be 
extended  only  to  specific  non-retail  clients  (e.g.  local  authorities  or  large 
corporates),  leaving  the  option  to  Member  States  to  also  extend  coverage  to 
other non-retail clients. 

The  same  arguments  as  set  out  for  option  2  would  apply  (i.e.  this  option 
provides  only  limited  additional  investor  protection  and  potentially  creates 
moral hazard issues). Therefore this option is also not a preferred one. 

Investor protection and 
confidence 

Level 
playing field 

Cost-
Effectiveness  

EN 

44 

   EN 

 
 
 
 
No action at EU level 

Extend compensation to claims relating to non-
retail clients 

Extend compensation to certain non-retail clients 

0 

0 

0 

0 

+ 

0 

0 

--- 

-- 

7.2.3.  Policy  options  relating  to  aligning  the  classification  of  clients  with  the  MiFID 

definitions 

(1)   Option  1  –  No  action  at  EU  level.    Under  this  policy  option,  the  slight 
differences  between  the  definition  of  some  "professional  and  institutional 
investors"  in  the  ICSD104  and  the  definition  of  "professional  clients"  in 
MiFID105 would remain. This would result in some inconsistency.  

(2)  Option 2 – Introduce a new classification of clients under the ICSD based 
on pure  quantitative criteria. Under this policy  option, a new  classification 
could  be  introduced  under  the  ICSD  in  order  to  take  into  account  the 
dimension  of  clients'  assets  involved  in  the  provision  of  investment  services 
independently  of  their  professional  qualification  or  their  formal  classification 
between  professional  or  retail  clients  (for  instance  only  clients  with  assets 
below  a  certain  threshold  would  be  covered).  This  solution  would  have    the 
advantage  of  providing  coverage  where  it  may  be  useful  in  the  light  of  the 
limited amount covered by the directive (currently, EUR 20.000). On the other 
hand, it would introduce an additional criterion of client categorization in the 
context of investment services and activities that could create uncertainty and 
make the classification of clients more complex.  

(3)   Option 3 – Align the classification of clients in the ICSD with the MiFID 
definition.      This  option  would  provide  greater  consistency  and  clarity  and 
simplify the position for compensation schemes and investors. It would also be 
consistent  with  the  intent  of  the  ICSD,  i.e.  to  complement  the  ISD  (now 
replaced by MiFID).  

Further  adopting  the  MiFID  definition  could  cover  a  broader  range  of  small 
and medium enterprises (SMEs) than the current ICSD definition106.  

104 
105 
106 

 Annex I of the ICSD and notably n. 1, 2, 3 and 8. 
 Annex II.I of the MiFID. 

 Currently firms which meet at least two of the following criteria are always able to claim compensation 
under  the  ICSD:  Balance  sheet  total  ≤  €4  400  000,  net  turnover  ≤  €8  800  000,  average  number  of 
employees ≤ €50. Under MiFID, only the bigger firms meeting at least two of the following criteria may 
be classified as professional clients per se: Balance sheet total < €20 000 000, net turnover < €40 000 
000,  own  funds  <  €2  000  000.  As  a  result,  the  adoption  of  the  MiFID  definitions  would  narrow  the 
scope of firms that may be excluded under the ICSD.  

EN 

45 

   EN 

 
 
 
                                                 
 
This  option,  which  can  be  implemented  only  through  the  amendment  of  the 
existing  Directive,  also  has  the  advantage  that,  if  under  the  MiFID  review  it 
were  considered  appropriate  to  extend  the  scope  of  protection  of  the  retail 
client  category  to  include  other  classes  of  clients,  those  clients  would  then 
automatically  be  covered  under  the  ICSD,  as  the  scope  of  coverage  of  the 
ICSD is linked to the scope of MiFID. For these reasons this is the preferred 
option. The alignment of the definitions under the two directives was generally 
supported by stakeholders. 

Investor protection and 
confidence 

Level 
playing field 

Cost-
Effectiveness  

No action at EU level 

Introduce a new classification of clients under 
the ICSD 

Align the definition of a clients in the ICSD 
with the MiFID definition 

0 

0 

+ 

0 

- 

++ 

0 

- 

+ 

7.3. 

Policy options relating to reducing gaps in the regulatory system 

7.3.1.  Policy options relating to non-coverage for failure of a third party custodian 

(1)   Option  1  –  No  action  at  EU  level.    Under  this  option,  the  coverage  of  the 
failure  of  a  "third  party  custodian"  would  not  be  guaranteed  at  EU  level. 
Member States would still retain the possibility of extending at national level, 
the  coverage  of  their  national  investor-compensation  schemes  to  cover  such 
cases.  MiFID  imposes  specific  requirements  on  firms  who  use  third  party 
custodians.  It  also  requires  the  firm  to  provide  a  prominent  warning  to  retail 
investors  about  the  risks  where  third  party  custodians  are  used.  Still,  retail 
investors  might  not  fully  appreciate  the  different  coverage  under  the  ICSD  if 
there is failure of a third party custodian. It also means that protection of retail 
investors  will  be  quite  different  under  the  ICSD  depending  on  whether  their 
assets  (i.e.  financial  instruments)  are  held  by  the  firm  itself  or  a  third  party 
custodian.  Further,  different  positions  taken  in  different  Member  States 
regarding extending coverage and different national laws about the liability of 
firms  for  custodians  would  mean  that  in the  event  of  a  failure  of  a  custodian 
the  position  of  investors  could  vary  considerably  from  Member  State  to 
Member State. So taking no action is not considered to be the best option.   

(2)   Option 2 – Provide in MiFID that firms should be strictly liable to a client 
for  any  failure  of  a  custodian  they  appoint.  Under  this  option,  if  an 
investment  firm  appoints  a  custodian  and  the  custodian  fails  to  return  the 
financial instruments, the client would still have a legal claim against the firm 
for the return of financial instruments held by the custodian. That is, the firm 
could  not  avoid  liability  by  arguing  that  it  complied  with  all  of  its  MiFID 
obligations and exercised all due diligence in the appointment of a custodian. 
This  would  potentially  increase  the  protection  provided  to  the  client  but  the 
ability  of  the  client  to  be  compensated  by  the  firm  for  any  civil  claim  would 

EN 

46 

   EN 

 
 
 
 
still  depend  on  the  firm  having  sufficient  assets  and  capital  to  pay  for  the 
client's  loss.    Further,  in  an  extreme  situation  imposing  such  liability  could 
result  in  the  failure  of  the  firm  itself  (even  though  it  has  exercised  all  due 
diligence  in  selecting  and  monitoring  the  custodian).  As  MiFID  already 
specifies  relatively  detailed  requirements  relating  to  the  use  of  third  party 
custodians it does not seem appropriate in this context to extend liability to a 
firm for failure of a third party custodian where the firm has complied with the 
MiFID requirements. We also note that the jurisdictions that currently impose 
strict liability regimes tend to be those jurisdictions where firms normally use a 
custodian  within  the  same  group  rather  than  independent  third  party 
custodians. For these reasons this is not the preferred option. 

(3)   Option  3  –  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.  This  policy  option  would  give  investors  the  right  to  be 
compensated by the investor-compensation scheme in case of failure of a third 
party  custodian  that  results  in  the  firm  not  being  able  to  return  the  client's 
financial instruments. 

This  option  would  increase  investor  protection  and  investor  confidence  in 
investment  services  by  dealing  with  the  potential  gap  that  would  arise  if  a 
custodian  were  to  default.  Further  it  would  do  so  without  intervening,  in  this 
context, on the broader issue of the liability of firms  in the case of default by a 
third party custodian. The extension of the coverage of compensation is to be 
included in a binding instrument, i.e. the ICSD, as it is necessary to provide for 
legal certainty both to the investors and to the market participants. This option 
will have cost implications for investment firms and entities providing custody 
services in terms of the contributions that need to be paid to schemes. But this 
is  outweighed  by  the  increase  in  the  investor  protection  provided  by  the 
extension of coverage. This is the preferred option based on cost effectiveness 
and investor protection and confidence. A majority of Member States107 having 
contributed to the call for evidence were against this option.  

Investor protection 
and confidence 

Level 
playing 
field 

Cost-
Effectiveness  

No action at EU level 

Provide in MiFID that firms should be strictly liable 
to a client for any failure of a custodian they appoint 

Extend direct compensation to investors for 
claims relating to the failure of a custodian 

0 

++ 

+++ 

0 

+ 

+ 

0 

--- 

+ 

107  

Member States against were Czech Republic, Finland, France, Netherlands, and the United Kingdom.    

EN 

47 

   EN 

 
 
 
                                                 
7.3.2.  Policy  options  relating  to  non-coverage  for  the  default  of  a  depositary  or  sub-

custodian of a UCITS fund  

(1)   Option  1  –  No  action  at  EU  level.  Under  this  option,  the  coverage  of  the 
default of a depositary or sub-custodian of a UCITS would not be guaranteed 
at  EU  level.  UCITS  holders  would  still  be  unable  to  claim  for  compensation 
under the ICSD because due to failure of a depositary or sub-custodian and a 
loss  of  assets,  their  units  or  shares  have  lost  value.  Member  States  would  be 
allowed  to  extend  the  coverage  of  their  national  investor-compensation 
schemes to these cases. This might have the potential consequences set out in 
section 3.3.2.  

(2)   Option  2  –  Extend  compensation  to  UCITS  where  assets  have  been  lost 
subsequent to the default of its depositary or its sub-custodian. This policy 
option would give UCITS (i.e. the fund itself) the right to be compensated by 
the  investor-compensation  scheme  if  the  assets  cannot  be  returned  to  it, 
because its depositary or a sub-custodian is insolvent.  

This  option  would  however  only  result  in  limited  protection  for  UCITS 
investors  as  the  level  of  UCITS  losses  that  could  be  claimed  by  the  UCITS 
fund  through  the  ICSD  (i.e.  currently  20  000  Euros)  would  be  very  marginal 
compared with the average value of a UCITS portfolio (a few million euros108). 
Therefore  this  option  would  not  seem  to  result  in  any  significant  increase  of 
investor protection  

(3)   Option 3 – Amend UCITS Directive to strengthen the safeguards applying 
to  depositaries  and  sub-custodians.  This  option  involves  amending  the 
UCITS  Directive  to  strengthen  the  requirements  that  apply  in  relation  to 
depositaries and the use of sub-custodians and to clarify the UCITS depositary 
liability.  This  option  contributes  to  increasing  the  UCITS  investor  protection 
and the level of confidence in investment in UCITS schemes.  

 This option would seem effective and proportionate as arguably there has been 
a lack of clarity in the UCITS requirements relating to depositaries and the use 
of sub-custodians and a lack of consistency in applying those requirements. In 
this  respect,  the  Commission  has  recently  consulted  on  depositary  issues  to 
gather views and evidence on the need to adjust the current UCITS framework. 
It is likely that this will result in specific amendments to the UCITS framework 
to  strengthen  the  existing  legislation  in  order  to  clarify  what  their  duties  and 
liability are. This will constitute a separate work stream in the UCITS context.  

(4)   Option  4  –  Extend  ISCD  compensation  to  UCITS  holders  where  assets 
have been lost subsequent to the default of a UCITS depositary or its sub-
custodian.  This  policy  option  would  give  UCITS  holders  the  right  to  be 
compensated  by  the  investor-compensation  scheme  if  the  assets  cannot  be 
returned to the UCITS, because the UCITS depositary or any sub-custodian is 
insolvent.  UCITS  investors  could  claim  for  compensation  under  the  ICSD, 
because their units or shares have lost their initial value due to a loss suffered 

108 

  UCITS funds AuM amounts to 167 millions Euros in average  - Source EFAMA fact book 2008  

EN 

48 

   EN 

 
                                                 
by  the  UCITS  subsequent  to  the  default  of  the  UCITS  depositary  or  its  sub-
custodian. 

This option would increase investor protection and confidence in investment in 
UCITS schemes. In addition, in the light of the choice made under point 7.3.1, 
it  is  reasonable  that  the  risk  of  losing  assets  because  of  problems  with  third 
party  custodians  under  MiFID  is  addressed  in  similar  terms  in  the  case  of 
problems with depositaries or sub-custodians of the UCITS. 

Compared with option 2, the level of compensation offered through the ICSD 
seems  proportionate  for  unit  holders  and  covers  the  average  amount  that 
investors invest in a UCITS109. 

This option could be complementary to option 3. Coverage of UCITS would of 
course be a significant extension of the scope of the ICSD beyond investment 
firms  providing  investment  services.  Also,  the  cost  of  this  extension  in 
coverage  would  logically  be  expected  to  be  provided  by  UCITS  or  UCITS 
depositaries  or  sub  custodians  rather  than  investment  firms.  Moreover, 
strengthening  the  requirements  for  UCITS  depositaries  by  its  own  could  not 
efficiently address the problem. Nowadays, the ICSD is a safety net on top of 
the requirements on firms imposed by MiFID; a similar system should be built 
for  UCITS.  On  balance  this  option  along  with  option  3  would  be  the  best 
options  to  protect  investors  and  promote  investor  confidence  in  UCITS.  The 
Member  States110  being  opposed  to  extend  the  coverage  to  failure  of  a  third 
party custodian were also against this option. 

Investor protection 
and confidence 

Level 
playing 
field 

Cost-
Effectiveness  

No action at EU level 

Extend compensation to UCITS funds for assets that 
have been lost by a depositary (or sub-custodian). 

Amend UCITS to strengthen safeguards that apply 
to depositaries 

Extend compensation to UCITS holders where 
assets have been lost by a depositary or sub-
custodian 

0 

+ 

++ 

+++ 

0 

0 

0 

0 

0 

-- 

+ 

+ 

109 

110  

   According to estimation based on data provided in the EFAMA Fact book Euro household invest an 
average of 10.000 euros in collective investment funds.  
Member States against were Czech Republic, Finland, France, Netherlands, and the United Kingdom.    

EN 

49 

   EN 

 
 
 
 
 
 
                                                 
7.3.3.  Policy options relating to non-coverage of money market funds 

(1)   Option 1 – No action at EU level.  Under this policy option, loss arising from 
investment  in  money  market  funds  would  continue  not  to  be  compensated 
under  the  ICSD.  This  would  be  consistent  with  the  general  principle 
underlying  financial  regulation  in  the  EU,  that  investors  in  financial 
investments should not be protected from investment risk associated with their 
investments  (e.g.  if  the  value  of  the  underlying  assets  or  the  value  of  the 
market declines). It would also mean that the ICSD is not extended to cover an 
entirely  different  set  of  participants  from  investment  firms  (i.e.  operators  of 
money  market  funds).  The  majority  of  contributors  to  the  call  for  evidence, 
including  all  Member  States,  considered  that  money  markets  should  not  be 
covered by the ICSD.  

(2)   Option 2 – Introduce new requirements in the  UCITS  directive  to define 
"money  market  funds"  and  strengthen  requirements  for  such  funds.  
Under this policy option, requirements relating to money market funds would 
be  strengthened.  For  example,  by  setting  specific  criteria  for  what  can  be 
described  as  a  money  market  fund  and  prescribing  specific  regulatory 
requirements that apply to the operation of such funds. This initiative has been 
undertaken by CESR in order to create a European money market fund label. 
Equivalent initiatives have also been undertaken in the US, where the SEC is 
currently developing some proposals to strengthen the current definition of the 
US  money  market  funds.  Defining  money  market  funds  would  help  create  a 
homogenous class of assets in the EU. It would be an essential first step should 
any further alternative solution need to be developed by authorities in order to 
avoid another liquidity crisis. This  option  would  imply  the  amendment  of  the 
UCITS  Directive,  for  which  a  new  impact  assessment  would  be  developed 
assessing appropriate options. This is the preferred option from the perspective 
of increasing investor protection and being the most cost effective. 

(3)   Option 3 – Extend compensation under the ICSD to loss of value of units 
of "MiFID qualifying money market funds". This option would provide for 
investors  to  be  compensated  in  the  event  of  a  specific  loss  of  value  of  their 
units in money market funds. It would apply to the safest money market funds 
based on the MiFID definition of a qualifying money market fund. 

It  would  increase  investor  protection  and  investor  confidence  in  qualifying 
MiFID money market funds. However this might not be significant as only the 
safest  funds,  those  theoretically  posing  the  least  risk  to  investors  would  be 
covered.  

Any  proposal  to  compensate  unit  holders  would  need  to  consider  why 
compensation should be payable for "investment risk" on such an investment, 
which is not a risk covered by the ICSD or other Directives. It would also be 
necessary to identify which types of money market funds are considered to be 
low risk, and why other similar "low risk" funds or products should not also be 
guaranteed.  Singling  out  only  one  class  of  investment  (money  market  funds) 
for  special  treatment  would  also  seem  to  create  a  competitive  advantage  to 
money market funds over other analogous funds and products.    

EN 

50 

   EN 

 
Investment  risk  is  inherent  in  all  financial  decisions  in  investment  products 
such as money market funds and is rarely the subject of regulation. The only 
exception  is  bank  deposits,  which  due  to  their  universal  use,  unique 
characteristics  and  systemic  importance  are  treated  as  requiring  special 
treatment (due to the risk of bank runs). But money market funds are not the 
same  as  bank  deposits.  They  are  popular  with  retail  investors  in  certain 
Member States but are not universally used in the same way as bank accounts. 
They  are  an  investment  product  with  investment  risk  and  the  investment  risk 
can vary significantly from fund to fund. 

There would clearly be a cost to this option in terms of funding the scheme. It 
is  assumed  that  this  would  be  borne  by  money  market  fund  operators  rather 
than  investment  firms  (as  investment  firms  are  a  distinct  and  separate 
population). This appears to be a less cost efficient option than other options. 

An alternative solution would be to apply coverage to all money market funds 
(not just the safest funds). But this would highlight even more starkly the issue 
of  why  money  market  funds  that  invest  in  higher  risk  instruments  should  be 
protected  under  the  ICSD  while  other  types  of  funds  or  investments  are  not 
protected. It might also raise moral hazard issues. 

On the assumption that the issue will be dealt with through a strengthening of 
the  requirements  under  UCITS  that  apply  to  money  market  funds  (option  2), 
that option would appear to be the most effective means of dealing with issues 
relating to money market funds.  

This option is therefore considered not to be justifiable or cost effective. 

Investor protection 
and confidence 

Level 
playing field  

Cost-
Effectiveness  

No action at EU level 

Take action to strengthen requirements 
applying to Money Market Funds 

Extend of compensation under the ICSD to loss of 
value of the safest money market funds 

0 

++ 

++ 

0 

0 

-- 

0 

+ 

- 

7.4. 

Policy options to maintain some alignment between the ICSD and the DGSD.  

7.4.1.  Policy options relating to the minimum level of compensation under the ICSD  

(1)   Option 1 – No action at EU level.  Under this option, Member States would 
continue  to  be  free  to  increase  their  compensation  levels,  but  the  minimum 
compensation level would remain unchanged. The potential consequences set 
out  in  section  3.3.1  would  remain,  especially  regarding  distortion  of  the 
internal  market  and  compromising  investor  protection  and  confidence  in 
investment  services.  It  would  also  leave  significant  differences  between  the 

EN 

51 

   EN 

 
 
 
level of compensation payable for investments and deposits (where the level is 
now significantly higher since the DGSD has been amended). 

(as 

So  this  option  is  not  considered  credible  either  from  an  investor  protection 
remain 
viewpoint 
comparatively low) or from the perspective of maintaining a level playing field 
between  investments  and  deposits  and  between  the  levels  of  compensation 
provided for in different Member States.        

level  of  compensation  would 

the  minimum 

(2)   Option 2 – Amend the ICSD and replicate the coverage adopted under the 
DGSD. This policy option would re-introduce the level playing field between 
the ICSD and the DGSD. It would introduce a maximum compensation level, 
so that Member States would not be able to set different amounts. 

This option would be significant in terms of investor protection. Especially in 
those  limited  situations  where  cash  is  held  by  a  bank  and  it  is  difficult  to 
determine  if  it  is  a deposit  or is  being held in  connection  with  an investment 
service.  In  such  cases  the  investor  would  receive  the  same  level  of 
compensation irrespective of how the cash is classified. 

But  it  is  unclear  that  it  would  necessarily  result  in  a  significant  increase  in 
confidence  in  investment  services.  For  example,  if  on  average  investors  have 
cash  or  investments  worth  €30  000  held  by  investment  firms,  increasing  the 
level  to  €100  000  would  arguably  not  provide  much  further  investor 
confidence than increasing the level to €50 000.111 

Therefore  while  it  would  promote  a  level  playing  field  between  investments 
and  deposits  and  between  the  protections  provided  for  in  different  Member 
States, this option is not considered to be cost effective. 

(3)  Option  3  –  Amend  the  ICSD  and  increase  the  minimum  level  of 
compensation  to  €50  000,  but  allow  Mem ber  States  to  specify  a  higher 
limit  (minimum  harmonisation  approach).    This  policy  option  would 
increase the minimum compensation level by fixing it at a level which is more 
closely related to the average value of investments held by retail clients, while 
allowing  Member  States  to  apply  higher  compensation  levels.  112.  Most 
industry associations expressed the view that there should not be an automatic 
alignment  with  the  DGSD;  although  investor  representatives  supported  the 
alignment  of  the  compensation  level.  Investor  compensation  schemes  have 
expressed mitigated views. The Commission's view is that this option is a fair 
compromise  between  on  the  one  hand  increasing  investor  protection  and 
investor confidence in investment services, and on the other hand reducing the 
risk  of  a  level  playing  field  issue  between  deposits  and  investment  products. 

111 
112  

Please refer to Annex IV for the average amount held by investment firms on behalf of retail investors 
Put  customers  first  –  European  survey  on  people's  approach  to  savings,  Fidelity  International,  April 
2010:  "Around  half  of  those  surveyed  think  they  have  good  or  reasonable  knowledge  of  financial 
products while around half admit to having a poor level of knowledge. There are significant differences 
between  countries.  The  UK  stands  out  as  the  country  with  the  highest  level  of  claimed  knowledge, 
which may reflect more independent advice and a more sophisticated financial press." 

EN 

52 

   EN 

 
 
 
 
 
                                                 
This  option  is  to  be  introduced  by  a  change  in  the  ICSD  as  it  should  have 
binding  effects  to  ensure  a  minimum  level  of  protection  to  investors  in  all 
Member States.  

It would potentially require further funding depending on the average level that 
would  be  established  (especially  if  further  pre-funding  was  required).  But  it 
would ensure that the level of costs would be calibrated to a realistic level of 
investments  held  by  investors.  Indeed  the  target  fund  level will  be  calculated 
taking into account the amount of securities and monies held by the members 
of  the  scheme  on  behalf  of  retail  investors.  As  a  result  national  schemes  of 
Member States where the average amount of securities held by retail investors 
is  lower  than  the  minimum  compensation  limit  will  require  lower  level  of 
contributions from their participating firms.  

As  the  national  schemes  do  not,  as  a  general  rule,  have  any  data  on  the 
distribution of the amount of monies and securities among retail investors, they 
could not provide us neither with the average and median of securities held by 
retail investors neither with an assessment of the impact on contributions from 
participating firms if the minimum compensation limit would be increased (see 
question 13 in the second set of questions sent to the national schemes).   

In  terms  of  data  on  the  amount  of  monies  and  securities  held  by  investment 
firms on behalf of retail investors, only 6 Member States, 5 of them being new 
EU-12  Member  States  and  Portugal,  could  provide  us  with  average  data.  As 
explained  under  paragraph  3.4.1.,  among  the  5  new  EU-12  Member  States, 
Poland  had  the  highest  average  with  an  amount  of  €43  000  very  close  to  the 
Portugal's average of €44 000. As a reminder these two countries are ranked in 
the  lowest  10  EU-27  countries  in  terms  of  GDP  per  inhabitant.  For  a  more 
representative  sample  of  data  we  used  the  study  commissioned  by  the 
Commission  on  "the  EU  market  for  consumer  long-term  retail  savings 
vehicle". It should be noted that savings behaviours vary enormously between 
Member  States.  Based  on  their  customer  survey  (see  paragraph  3.4.1.),  retail 
investors  can  invest  significant  amounts  in  bonds  and  in  investment  funds113, 
even exceeding €50 000 in several Member States. The third source of data we 
used  was  Eurostat.  As  the  average  amount  of  financial  instruments  held  per 
investor or securities account is most of the time not available at the national 
scheme  level,  we  calculated  the  average  amount  of  securities  held  per 
household based on the household's financial accounts published by Eurostat. 
These  data  are  only  rough  estimates  and  should  be  analysed  with  care.  The 
average  amount  of  securities  held  per  household  across  all  EU  countries 
amounts to €21 000. The average for EU-15 countries amounts to €31 000. As 
you  will  notice  the  data  from  the  different  sources  are  not  easily  comparable 
and  give  a  wide  range  of  estimations.  If  you  compare  the  amounts  per 
consumer from the consumer survey carried out by BME Consulting with the 

113  

Based on data from their consumer survey, the average amount invested in bonds per consumer is €173 
000 in the Netherlands, €106 000 euro in France, over €87 000 in Italy, €43 000 in Germany, €29 000 
in  Spain,  €19  000  in  Sweden  and  €18  000  in  the  UK.  Households  in  the  countries  where  investment 
funds  are  most  popular  tend  to  invest  between  €30  000  and  €50  000  while  their  French  and  UK 
counterparts invest over €120 000. 

EN 

53 

   EN 

 
 
 
 
                                                 
Eurostat  data  per  household,  the  main  conclusion  we  can  draw  is  that  the 
number of retail investors should be lower than the number of households. As 
a  result  the  new  minimum  compensation  amount  should  be  higher  than  the 
average amount calculated per household based on Eurostat data.  

Only three schemes (Germany, Ireland, and Italy) were able to provide us with 
an  impact  assessment  in  terms  of  compensation  amounts  to  be  paid  and 
investors'  coverage based on  a concrete compensation case (except for Italy). 
Indeed  when  a  compensation  case  is  triggered,  the  scheme  will  receive  the 
distribution of the monies and securities held by the defaulted firm for each of 
its retail client. Two additional schemes (Portugal and Bulgaria) were able to 
provide  an  assessment  in  terms  of  investors'  coverage.  It  should  be  stressed 
that  it  is  difficult  to  assess  to  what  extent  these  5  examples  might  be 
representative  of  the  other  22  Member  States  in  view  of  the  different 
investment patterns by retail investors between the different Member States.  

in 

Based on the Phoenix case in Germany, an increase of the compensation limit 
to € 50 000 would result in the compensation costs rising by 23% and would 
benefit approximately 4.0% of the investors. An increase to € 100 000 would 
result 
the  compensation  costs  rising  by  37%  and  would  benefit 
approximately 5.5% (4.0% + an additional 1.5%) of the investors. The number 
of  investors  having  filed  a  claim  in  the  Phoenix  case  amounted  to  30  000 
investors out of which approximately 90% had invested less than € 20 000. As 
a result 10% of the investors remained unprotected (for the amount above €20 
000).  The  number  of  additional  investors  that  would  have  benefited  from  an 
increase of the limit to € 50 000 or € 100 000 would have been respectively 1 
200 or 1 650 additional investors out of the 3 000 unprotected investors. 

Based on data collected by the Irish scheme in relation to the W&R Morrogh 
case,  an  increase  of  the  compensation  limit  to  €  50  000  would  result  in  the 
compensation  costs  rising  between  15%  and  31%  and  would  benefit 
approximately  2.9%  of  the  2  605  investors  having  filed  a  claim  (or  78 
claimants).  An  increase  to  €  100  000  would  result  in  the  compensation  costs 
rising  between  46%  and  73%  and  would  benefit  4.4%  (2.9%  +  an  additional 
1.5%) of the investors (or 117 claimants). 

In the case of Italy, with the current level of compensation of €20 000, 70% of 
the investors are covered. An increase to €50 000 would mean that 90% of the 
investors would be covered at a costs increase of 50%. 

According to the Portuguese scheme, with the current level of coverage € 25 
000, in average, 82.6% of covered investors would be fully compensated if the 
ICS  was  triggered.  The  increase  in  the  level  of  coverage  to  €  50  000  and  to 
€100 000 would lead to an increase in the proportion of investors that would be 
fully compensated to respectively 91.4% and 96.1%. If we use as a proxy the 
number  of  securities  accounts  (circa  2.3  million)  to  assess  the  number  of 
investors,  the  increase  of  the  limit  would  benefit  respectively  circa  205  000 
(8.8% of the investors) and 315 000 investors (13.5% of the investors). 

EN 

54 

   EN 

 
  
In  the  case  of  Bulgaria,  95%  of  the  investors  are  covered  with  the  current 
compensation limit of €20 000. 

The optimal level of coverage is likely to be less than that adopted under the 
DGSD. But to deal with situations where it is unclear if assets held by banks 
are covered by the ICSD or the DGSD, the ICSD could be amended to specify 
that the investor is to be compensated under the directive providing the highest 
level of coverage (i.e. the DGSD); the current option to Member States under 
Article 2(3) of the ICSD should be modified accordingly. This would protect 
investors,  reduce  level  playing  field  concerns  and  provide  an  incentive  to 
banks to clearly specify the character of an account (i.e. whether a deposit or a 
securities account). 

Although  this  option  would  contribute  to  increased  investor  protection  and  a 
fair level playing field between investment products and deposits, there is still 
the risk of arbitrage between Member States since they would still be allowed 
to  apply  higher  compensation  levels.  In  some  Member  States  the  current 
compensation limits are already higher than the proposed compensation level 
of €50 000 (e.g. Spain €100 000, the UK £50,000 and France €70 000).  As a 
result investors might move their securities within their home country from a 
national  investment  firm  to  the  branch  of  an  investment  firm  from  another 
Member  State  where  the  compensation  limit  is  higher.  Investors  might  also 
move their securities from one Member State to another Member State where 
higher  compensation  limits  are  in  place.  Although  such  behaviour  was  not 
experienced during the crisis, this situation potentially undermines the purpose 
of the ICSD which was to ensure the proper functioning of a single market for 
investment services and to eliminate competitive distortions.  

(4)  Option 4 _ 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).  

The  approach  of  maximum  harmonisation  would  require  a  fixed  level  of 
compensation of €50 000 in all Member States. This new compensation limit 
of €50 000 will be close to the limit in place in the UK (£50 000) where retail 
investors  are  more  acquainted  with  investment  products.  If  in  the  UK,  where 
there  is  a  high  number  of  investment  firms  active  the  authorities  have 
considered  that  this  limit  is  adequate,  being  a  more  dynamic  and  developed 
market in terms of investment products, it could also be adequate for the EU. 
To allow for a smooth transition in Member States with a higher compensation 
limit than €50 000 (e.g. Spain €100 000, the UK £50,000 and France €70 000), 
the  existing  higher  compensation  amount  could  continue  to  apply  in  these 
Member  States  for  a  period  of  3  years  from  the  date  of  transposition  of  the 
revised  ICSD.  The  UK  compensation  limit  being  relatively  close  to  the 
proposed  level  of  compensation  of  €50  000,  the  transition  may  be  possible 
more quickly. In the case of Spain and France, the difference being greater, a 
decrease of their compensation limits might justify a longer transition period. 

EN 

55 

   EN 

 
 
 
 
 
In  summary  the  transitional  period  of  3  years  seems  to  be  reasonable  as  the 
funding  needs  of  these  schemes  should  be  impacted  in  a  positive  way.  This 
option  would  present  the  same  advantages  as  Option  3  in  terms  of  investor 
protection  while  in  addition  reducing  the  risk  of  cross  border  discrepancies. 
Nonetheless  we  have  to  acknowledge  that  the  decrease  of  the  compensation 
limit in the two Member States with an existing significantly higher limit (i.e. 
Spain  and  France)  might  create  competitive  distortions  between  investment 
products and deposits. But the Commission is of the view that this risk is lower 
than the risk of arbitrage between Member States with different compensation 
limits.  This  option  is  therefore  the  preferred  option.  Views  expressed  by 
Member States in the call for evidence about an increase of the compensation 
limit were divided. Half of them were in favour of an increase, but not always 
necessarily to the level of coverage under the DGSD114. 

Investor protection 
and confidence 

Level 
playing 
field  

Cost-
Effectiveness  

No action at EU level 

Amend the ICSD and replicate the coverage adopted 
under the Deposit Guarantee Scheme Directive 

Amend the ICSD and increase the minimum level of 
compensation to a minimum level of €50 000 

Amend the ICSD and increase the level of 
compensation to a fixed amount of €50 000 

0 

++ 

++ 

++ 

0 

+ 

+ 

++ 

0 

- 

0 

0 

7.4.2.  Policy options relating to the co-insurance principle 

(1)   Option 1 – No action at EU level.  Under this policy option, Member States 
would  continue  to  have  the  option  of  limiting  the  compensation  for  an 
investor's  claim  to  90%  or  more  of  the  claim.  That  is,  Member  States  could 
require  investors  to  bear  a  proportion  of  any  loss  ("the  co-insurance 
principle").  This  option  would  mean  that  the  consequences  set  out  in  section 
3.4.2 would remain. 

(3)   Option 2 – Modify the co-insurance principle. Under this policy option, the 
co-insurance  principle  would  be  modified  in  order  to  require  a  qualitative 
element i.e. the assessment of whether the client could have become aware of 
problems  in  the  holding  of  assets  by  the  investment  firm.  The  option  would 
further  strengthen  the  rationale  of  the  co-insurance  principle  (that  is  to 
encourage  investors  to  take  some  care  in  choosing  and  maintaining  the 
investment firms). On the other hand, it would add complexity and delay in the 
management of ICSD cases. 

114  

Member  States  in  favour  of  an  increase  were  Estonia  and  France,  as  well  as  Finland  and  the  United 
Kingdom but in these two cases not necessarily to the level of coverage under the DGSD. 

EN 

56 

   EN 

 
 
 
                                                 
(3)   Option 3 – Remove the possibility of co-insurance. This policy option would 
eliminate  the  option  for  Member  States  to  require  investors  to  bear  a 
proportion of any loss.  

The co-insurance principle diminishes the compensation that clients can claim. 
Eliminating this option would provide increased investor protection under the 
ICSD  and  would  also  improve  investor  confidence  in  investment  firms,  as 
clients would no longer have to bear part of the loss if there is fraud at a firm 
or  other  problems  with  the  firm's  systems  or  controls.  The  elimination  of  the 
co-insurance  principle  would  be  done  through  amendment  of  the  ICSD  to 
ensure  the  same  level  of  investor  protection  in  all  Member  States.  A  non-
binding solution would not be able to achieve the same purpose. 

The  rationale  for  this  option  was  expressed  in  the  ICSD  to  be  to  encourage 
investors to take due care in their choice of investment firms.115 It addressed an 
element  of  moral  hazard  risk  (i.e.  that  the  introduction  of  the  ICSD  may 
encourage investors not to take care in their selection of investment firms). But 
arguably it is unrealistic to expect retail investors to be able to identify which 
firms are more or less likely to be affected by fraud or systems failures (unless 
a  firm  is  making  claims  about  a  service  that  are  clearly  unrealistic). 
Contributors  to  the  call  for  evidence,  industry  and  investor  associations  have 
expressed a great consensus on removing the co-insurance principle. 

Therefore this option is the preferred option based on investor protection and 
confidence  and  ensuring  a  level  playing  field  between  investments  and 
deposits and across Member States. 

Investor protection and 
confidence 

Level playing 
field 

Cost-
Effectiveness  

No action at EU level 

Modify the co-insurance principle 

Remove the possibility of co-
insurance 

0 

0 

++ 

0 

0 

+ 

0 

-- 

0 

8. 

ANALYSIS OF IMPACTS 

8.1. 

Impact on stakeholders 

The following table shows the impact of the changes comprising the preferred policy 
options in relation to the main stakeholders. 

        Impact on 
stakeholders 

Investors 

Compensation 
schemes 

Investment firms 

Supervisors 

Other 
stakeholders 

Scenario 

115 

See recital 13 of the Directive. 

EN 

57 

   EN 

 
  
                                                 
        Impact on 
stakeholders 

Investors 

Compensation 
schemes 

Investment firms 

Supervisors 

Other 
stakeholders 

Compensation 
schemes would 
benefit from common 
and clearer funding 
requirements. 

Scenario 

Harmonise how 
schemes should 
be funded 

Investor protection 
and confidence 
would be reinforced 
as these principles 
and rules would 
reduce the risk of a 
scheme having 
insufficient funding 
to meet its 
obligations. There 
would also lead to 
an increased 
harmonisation of the 
level of investor 
protection between 
Member States. 

Investor protection 
and confidence 
would be reinforced 
through borrowing 
possibilities among 
national schemes. 
They would be 
confident to be 
compensated within 
a reasonable period 
of time even in the 
case of the failure of 
a very large 
investment firm. 

National schemes 
would benefit from 
the development of 
common network 
leading to problem- 
and solution-sharing. 
This solidarity 
principle would be a 
cost-effective way to 
cope with liquidity 
problems that might 
arise from the failure 
of  a large investment 
firm. 

Introduce a 
solidarity 
principle in the 
context of the 
European 
system of 
national 
schemes 

Investment firms 
would be required 
to provide more 
contributions ex 
ante which would 
increase the 
funding costs (1).  

The increased 
harmonisation of 
the funding rules 
would   improve 
the proper 
functioning of the 
single market by 
reducing 
discrepancies 
affecting the 
treatment of 
investment firms 
between Member 
States. 

This option would 
provide more 
flexibility in the 
collection of 
contributions from 
investment firms, 
with the possibility 
to distribute 
overtime any 
important losses. 
This solidarity 
principle would be 
a cost-effective 
way to cope with 
the failure of a 
major investment 
firm, while 
ensuring the 
industry will 
contribute to such 
a failure. 

Require 
provisional 
payout of partial 
compensation if 
payout delay 
exceeds a given 
time period 

Investor protection 
and confidence 
would be reinforced 
as investors would 
be confident that 
they would receive 
part of the 
compensation 
amount after a given 
time period.  

Schemes would need 
more resources to 
verify the eligibility 
and the provisional 
amount of the claim 
within the specified 
time period.  

The earlier 
payment of claims 
could have an 
impact on the 
funding levels 
required from the 
investment firms. 

No impact 

Supervisors 
would have 
common and 
clearer rules 
in order to 
assess the 
adequacy of 
the funding of 
the scheme. 

No impact 

This solution 
would be 
consistent 
with the 
current 
common 
framework of 
supervisors 
and with the 
forthcoming  
EU system of 
supervisory 
authorities 

No impact 

No impact 

EN 

58 

   EN 

 
        Impact on 
stakeholders 

Investors 

Compensation 
schemes 

Investment firms 

Supervisors 

Other 
stakeholders 

Schemes would 
receive fewer invalid 
claims if the scope of 
coverage is clearer to 
investors. 

Investment firms 
would have to 
improve their 
existing disclosure 
procedures. 

No impact 

Supervisors 
would have 
clearer rules 
against which 
to assess the 
compliance 
by investment 
firms with the 
disclosure 
requirements. 

No impact 

No impact 

No impact 

No impact 

Scenario 

Require firms to 
disclose to 
investors what is 
covered and 
what is not 
covered by 
ICSD schemes  

This option would 
increase investor 
awareness of the 
level and scope of 
coverage and result 
in greater investor 
confidence. 

No action at EU 
level: Do not 
expand the 
scope of 
mandatory 
coverage to 
breach of 
conduct of 
business 
obligations 

 Investor protection 
in the event of the 
failure of a firm 
giving poor 
investment advice 
may vary between 
Member States 
depending on 
whether coverage in 
that State is 
extended to cover 
such situations.  

Align the 
definition of  
clients in the 
ICSD with the 
MiFID 
definition 

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 

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

It would provide 
greater certainty and 
clarity leading to 
improved investor 
confidence. More 
medium-sized 
companies would 
fall under the scope 
of the ICSD. 

The identification of 
investors eligible to 
the coverage of the 
scheme would be 
easier as it would 
correspond to the 
MiFID classification 
implemented by the 
investment firm.  

There would be a 
common 
categorisation  of 
retail investors in 
the two directives 
avoiding any 
duplication of 
categories. 

No impact 

No impact 

Increased protection 
for investors in 
situations where 
there was failure of a 
third party 
custodian. 

Potentially more 
claims will need to be 
processed if there is 
default of a third 
party custodian. 

Increased funding 
will be required 
from firms to 
cover the 
extension in scope 
of the Directive. 

No impact. 

Third party 
custodians may 
also be required 
to contribute to 
funding the extra 
coverage. 

No impact 

No impact 

Increased investor 
protection and 
confidence when 
investing in UCITS 
schemes  

Improved 
supervision of 
UCITS funds 
and their 
depositaries 
and sub-
custodians 

UCITS funds 
would have to 
comply with 
stronger 
requirements in 
relation to 
depositaries and 
sub-custodians 
whose liability 
would be 
clarified. 

EN 

59 

   EN 

 
        Impact on 
stakeholders 

Investors 

Compensation 
schemes 

Investment firms 

Supervisors 

Other 
stakeholders 

Scenario 

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 

Take action to 
define "money 
market funds" in 
the UCITS 
directive and to 
strengthen 
requirements 
applying to such 
funds 

Clarify that if 
firms do in fact 
hold client 
assets the clients 
should be 
entitled to 
compensation if 
the firm defaults 

Increased investor 
protection and 
confidence when 
investing in UCITS 
schemes 

A wider range of 
claims will need to be 
processed by schemes 
as a result of the 
extended scope of 
scheme coverage.  

No impact 

No impact (on the 
assumption that 
the cost of funding 
the extra coverage 
is borne by UCITS 
funds and/or 
depositaries and 
not by investment 
firms). 

UCITS funds 
and/or 
depositaries are 
likely to be 
required to 
provide funding 
to cover the 
extension of 
coverage under 
the Directive. 

Increased investor 
protection and 
confidence resulting 
from the clarity of 
having a common 
definition of Money 
Market Funds and 
specific regulatory 
requirements in 
terms of types of 
investments and risk 
management. 

Investor protection 
and confidence 
would be increased 
as investors could 
claim irrespective of 
the investment's 
authorisation and of 
the nature of the 
investment service 
provided. 

No impact  

No impact. 
Compensation 
schemes would not 
cover investment 
risk. 

Improved 
supervision of 
Money 
Market funds  

Money Market 
Funds would 
have to comply 
with new 
regulatory 
requirements. 

No impact 

No impact 

This option would 
bring clarity to the 
scope of the scheme 
and avoid any 
situation like the 
AMIS case where 
investors and the 
scheme do not agree 
on the scope of the 
coverage. 

In Member States 
where such claims 
are not currently 
permitted, firms 
may have to 
provide funding 
where previously 
they were not 
required to do so.    

Exclude 
coverage of 
claims when 
market abuse 
was involved 

It would improve 
investor confidence 
and market integrity 
by removing this 
loophole. 

No impact 

No impact 

No impact 

It would increase 
market integrity 
by removing this 
loophole. 

EN 

60 

   EN 

 
 
        Impact on 
stakeholders 

Investors 

Compensation 
schemes 

Investment firms 

Supervisors 

Other 
stakeholders 

No impact 

No impact 

No impact 

No impact 

Contributions 
required from 
investment firms 
would be 
increased 
(especially if 
greater ex ante 
funding is 
required). 

Harmonisation of 
compensation 
levels between 
Member States 
ensuring a level 
playing field 
between firms in 
different States. 

The higher 
compensation 
limit for 
investments would 
reduce the 
competition 
distortion between 
investing in 
deposits and 
investment 
products.  

Contributions 
required from 
investment firms 
would be slightly 
increased116. 

Scenario 

Amend the 
ICSD and 
increase the 
level of 
compensation to 
a fixed amount 
of €50 000 

No impact 

The compensation 
level would be 
aligned with the 
average amount of 
investment held by 
investors leading to 
increased protection 
and confidence in 
many Member 
States. This would 
also increase 
harmonisation of the 
level of investor 
protection between 
Member States. 

Remove the 
possibility of 
co-insurance 

No impact. 

The compensation 
amount would 
slightly be increased 
resulting in 
increased investor 
protection and 
confidence. 

Investors would 
receive consistent 
treatment across 
Member States as 
there would no 
longer be discretion 
for individual States 
to impose co-
insurance. 

116 

The UK FSA conducted a detailed cost benefit analysis in October 2008 before deciding to remove the 
co-insurance principle for investment products: "If co-insurance had not been applied to the 
compensation payments made during the period December 2001 to December 2007, claimants would 
have, as a group, benefited from payments being approximately 1.4% higher."; 
http://www.fsa.gov.uk/pages/Library/Policy/CP/2008/08_15.shtml  

EN 

61 

   EN 

 
 
                                                 
(1) The IA Board has called for an assessment of the one-off and ongoing costs for 
the  relevant  stakeholders.  To  assess  the  costs  impact  upon  investment  firms  of  the 
introduction  of  harmonised  funding  rules  is  hypothetical  at  this  stage  as  these 
funding  rules  will  be  defined  based  on  a  number  of  variables  that  will  need  to  be 
determined  on  a  State  by  State  basis  and  as  there  is  a  lack  of  data  at  the  national 
schemes  level  which  makes  the  calibration  of  an  appropriate  target  fund  level  very 
difficult. As a result the following figures should be looked at very carefully and in 
no case are these claimed to be representative.  

We have made our simulation based on the amount of covered securities and monies 
which is the most appropriate calculation base to calculate the amount of the target 
fund  level.  But  it  should  be  noted  that  the  amounts  of  the  covered  securities  and 
monies communicated by the schemes are based on the existing compensation limit 
(in  most  cases  €20  000)  whereas  we  propose  to  increase  the  compensation  limit  to 
€50 000. It is also worth noting that these simulations do not take into account the 
extension  of  the  coverage  to  firms  providing  custody  services  or  UCITS 
depositaries117. Nonetheless two scenarios have been developed which gives a rough 
estimate of the potential costs impact upon investment firms in a limited number of 
Member  States  (10  schemes).  In  the  first  scenario,  where  the  target  fund  level  has 
been set at 0.50% of the covered securities and monies held by investment firms on 
behalf of retail investors with an ex ante funding proportion of 100%,  there would 
be  4  schemes  with  a  deficit  of  funding  and  6  schemes  with  an  excess  of  funding.  
Portugal  which  is  currently  ex  post  funded  would  be  the  most  severely  impacted 
scheme with an average increase of funding of circa € 1.2 million per participating 
firm (it should be taken into account however that big firms will have to contribute 
more  than  smaller  ones  in  proportion  to  their  business  size  and  there  would  be  a 
transition period of 10 years to reach the target fund level).. Hungary would have the 
second highest deficit in funding with an average of circa €400 000 per participating 
firm.  Luxembourg  and  Netherlands  would  incur  a  deficit  of  respectively  circa  €40 
000 and €20 000 per investment firm118. The six schemes with an excess of funding 
are  Bulgaria,  Cyprus,  Denmark,  Romania,  Slovakia,  and  Spain  (Fogain).  In  the 
second scenario the target fund level has been set at 1.00% of the covered securities 
and monies held by investment firms on behalf of retail investors with the same ex 
ante  funding  proportion  of  100%.  The  proportion  of  schemes  with  a  deficit  of 
funding  and  schemes  with  an  excess  of  funding  would  remain  the  same.  The 
Portuguese scheme would still have the highest deficit with about € 2.4 million per 
participating  firm.  Hungary  would  rank  second  with  circa  €1  million  per 
participating firm. Luxembourg (ex post funded scheme) and Netherland would have 
a  similar  level  of  deficit  with  around  €70  000  per  participating  firm119.  The  six 
schemes  left  with  an  excess  of  funding  are  Bulgaria,  Cyprus,  Denmark,  Romania, 
Slovakia, and Spain (Fogain). 

117  

118  

119  

The number of retail investors in UCITS funds in Europe is significant. Based on EFAMA data as of 
end 2008 (see page 19), there are around 35 500 UCITS funds in Europe. Based on the assumptions that 
there are 2 000 unit holders per UCITS fund and that 37% of these unit holders are retail investors, the 
estimated number of retail investors in Europe is approximately 26 millions. 
With  respect  to  the  Netherlands,  these  data  relate  to  non-bank  investment  firms  (i.e.  data  from  the 
scheme covering bank investment firms were not available). 
With  respect  to  the  Netherlands,  these  data  relate  to  non-bank  investment  firms  (i.e.  data  from  the 
scheme covering bank investment firms were not available). 

EN 

62 

   EN 

 
                                                 
The  additional  costs  calculated  per  firm  will  be  (partially)  passed  on  to  retail 
investors. Taking the assumption that 100% of the costs would be pass on to retail 
investors, this would mean a one-off costs increase (to be spread over a transitional 
period  of  10  years)  per  retail  investor  in  the  first  scenario  of  between  €25  and  €40 
and in the second scenario of between €65 and €135 for the countries with a deficit 
of funding for which the number of securities accounts were available120.  

8.2. 

Other impacts 

8.2.1. 

Impacts on the environment, employment and third countries 

It is not expected that the changes in the ICSD are going to have any impact on the 
natural environment or on the gender policy of the EU. 

Concerning the social impact of the amendments to be introduced in the ICSD, it is 
not possible to assess the direct impact, however as the amendments to the ICSD are 
introduced in order to enhance investor protection and investor protection is essential 
in maintaining a social order, social welfare, prosperity etc., the overall impact will 
be  positive  for  the  society.  Consumers  will be  better  protected  and  thus  have  more 
confidence in the system, that they will trust to, for instance, finance their pensions 
through  alternative  investments  and  not  simply  rely  on  national  social  security 
budgets  –  which  have  become  very  tight  through  the  crisis.  Moreover,  the 
enhancement of investor protection (buy side) will facilitate the access of SMEs (sell 
side) to alternative financing mechanisms. As a consequence, SMEs will have more 
financing  to  create  further  jobs,  thus  it  will  create  a  positive  impact  on  the 
employment.  

As regards investment firms of third country origin, as in order to operate in the EU 
under  the  MiFID  framework  they  have  to  become  EU  investment  firms  and  be 
established  in  the  EU,  they  will  not  be  impacted  in  a  different  way  as  EU  firms. 
Investors  of  third  countries  will  be  protected  in  the  same  way  as  EU  investors; 
therefore their level protection will also be enhanced. 

8.2.2. 

Impacts on small and medium size enterprises 

"Small"  companies121  are  covered  by  the  ICSD,  but  "medium  sized  companies"122 
were excluded from the scope of the ICSD.123 The alignment of definition of retail 

120  

121 

122 

These estimates are only based on the four Member States out of the 10 Member States which could 
also provide us with the number of securities accounts held for retail clients by investment firms. These 
four Member States are: Hungary, Netherlands, Portugal and Hungary. All of these four schemes have a 
deficit of funding in our two simulations except Romania which in the first scenario has a slight surplus. 
See Article 4(2) and Annex I Category (8) of the ICSD; Companies which are of such a size that they 
are  permitted  to  draw  up  abridged  balance  sheets  under  Article  11  of  the  Fourth  Council  Directive 
78/660/EC are covered by the ICSD. 
As per the definition of the Fourth Accounting Directive 78/660/EC,  “medium-sized” companies are 
companies which, on their balance sheet dates, do not exceed the limits of two of the following three 
criteria:: 

- balance sheet total: EUR 17 500 000;  
- net turnover: EUR 35 000 000;  
- number of employees: 250. 

EN 

63 

   EN 

 
                                                 
 
 
 
investors under the ICSD with MiFID would bring more "medium sized" companies 
under  the  scope  of  the  ICSD.124  Therefore,  SMEs  will  be  better  protected,  as  they 
will  have  the  right  to  claim  compensation  in  case  of  failure  of  an  investment  firm. 
Currently,  there  is  no  level  playing  field  at  EU  level  on  the  coverage  of  SMEs  by 
compensation schemes.  

The  changes  envisaged  to  improve  the  functioning  of  the  ICSD  (principles  about 
funding, provisional payout of partial compensation, more detailed information about 
compensation  scheme  coverage)  would  lead  to  a  better  protection  of  the  retail 
investors including the "small" and "medium sized" companies. The increase of the 
minimum level of compensation and the removal of the co-insurance principle would 
also enhance retail investor protection and confidence. 

Concerning investment firms, as their contributions to the compensation schemes is 
likely to be proportionate to the size of their business, compliance costs may not be 
as significant as for larger firms.  A direct effect of the amendments to the ICSD will 
be  that  as  investor  protection  is  enhanced,  investors  will  have  more  incentives  to 
invest in securities markets and thus the scope for business of investment firms will 
be extended, including for SMEs. 

8.3. 

Estimation of reduction or increase in administrative burden 

No additional administrative burden is foreseen for investment firms, as supervisory 
authorities  have  already  the  necessary  information  to  be  transmitted  to  the  national 
compensation schemes to calculate the amount that every firm will have to contribute 
-  in  compliance  with  MiFID,  investment  firms  have  to  report  all  the  relevant 
information to the supervisory authorities.  

Concerning UCITS depositaries and sub-custodians, the extension of the coverage of 
the  investor  compensation scheme to the UCITS unit  holders  in  case of loss  of the 
assets by a UCITS depositary or a sub-custodian will involve additional reporting by 
the depositaries and sub-custodians to the relevant authorities.  

There will be increased disclosure obligations upon investment firms, UCITS and the 
national  schemes.  The  existing  disclosure  obligations  upon  investment  firms  will 
need to be reinforced by requiring firms to disclose in clear and simple terms what is 
covered  and  what  is  not  covered  by  the  schemes.  The  full  set  of  disclosure 
obligations upon investment firms will be extended to UCITS which were currently 
not  covered  by  the  ICSD.  National  investor  compensation  schemes  will  have  to 
publish  annually  information  about  their  level  of  funding  and  the  target  funding 
level. 

123 

124 

As per the definition of the Fourth Accounting Directive 78/660/EC,  "small" companies are companies 
which, on their balance sheet dates, do not exceed the limits of two of the following three criteria: 

- balance sheet total: EUR 4 400 000;  
- net turnover: EUR 8 800 000;  
- number of employees: 50. 

Article 4 (11) & (12) and Annex II of MiFID: Professional investors are defined in Annex II of MiFID 
and includes large undertakings. Article 4(12) of MifFID defines retail investors as investors not being 
professional investors. 

EN 

64 

   EN 

 
                                                                                                                                                         
 
 
 
Based  on  the  calculations  presented  in  Annex  XII,  we  estimate  that  there  will  be 
approximately €1 500 000 of one-off administrative burden on investment firms and 
credit  institutions  providing  investment  services.  There  will  not  be  any  measurable 
on-going costs imposed by the planned amendment on these firms. 

The on-going administrative burden on UCITS is estimated at € 9 400 000, and the 
on-off costs on UCITS are estimated at €240 000. 

For  the  compensation  schemes  we  estimate  a  recurring  administrative  burden 
between €15 000 and €30 000 per year overall in the EU 27. 

8.4. 

Summary of the final outcome 

In  view  of  the  conclusions  reached  in  this  impact  assessment,  the  European 
Commission  considers  appropriate  to  present  a  proposal  amending  the  Investor 
Compensation Scheme Directive. The fulfilment of the policy objectives described in 
section  5  is  to  be  achieved  through  a  legislative  solution,  as  it  is  necessary  to 
harmonise  the  details  for  the  funding  of  investor  compensation  schemes,  the 
coverage  of  the  schemes,  the  minimum  compensation  limit  and  the  compensation 
payout periods in order to create a level playing field for investors' compensation in 
the  European  Union.  A  Directive  is  the  proposed  instrument,  as  it  will  ensure  a 
common framework while leaving some margin of discretion to the Member States 
when implementing it, since national compensation schemes operate in very different 
ways  due to differences in national markets. The issuance of a recommendation by 
the  Commission  on  the  issues  covered  by  this  review  would  not  be  enough,  as  it 
would not create the necessary legally binding obligations to ensure a level playing 
field for investor protection within the EU. The exchange of best practices between 
the schemes might be a good tool to support the application of the new principles to 
be introduced in the Directive. 

However,  as  a  legislative  measure  should  be  principles  based  and,  to  the  extent 
possible, avoid unnecessary technical details,  it is necessary to recognize a role for 
the  forthcoming  European  Securities  and  Markets  Authority  (ESMA)  –  set  up  in  a 
proposal for a Regulation adopted by the European Commission in September 2009 
and  currently  under  negotiation  through  the  co-decision  procedure  –  in  elaborating 
technical  standards  with  regard  to  the  highly  technical  functioning  of  the 
compensation schemes.  

The  proposal  should  aim  at  solving  the  problems  identified  in  this  impact 
assessment: 

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

-  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). 

EN 

65 

   EN 

 
- 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  assets  for  retail  clients  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. 

9. 

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 

EN 

66 

   EN 

 
the new requirements in terms of funding and disclosure of information. The review 
should be disclosed to the Council and the European Parliament. 

EN 

67 

   EN 

 
ANNEX I – OUTCOME OF THE CALL FOR EVIDENCE  

The European Commission received 70 contributions: 9 from compensation schemes, 4 from 
investors or  investor  groups,  45  from  industry bodies, professional  bodies  and  firms and 12 
from Member States (securities regulators and finance ministries).  

Contributions  received  from  stakeholders  varied  in  detail.  There  was  a  large  amount  of 
consensus on a number of technical issues. Also, there was consensus against extending the 
scope  of  the  directive  in  a  number  of  areas  (especially  from  industry  rather  than  investor 
groups). On issues relating to the structure and funding of schemes, opinion was divided. A 
summary of the main comments received is presented in the following: 

(cid:131)  Should  Multilateral  Trading  Facilities  be  covered  by  the  directive?  –  There  was 
general consensus that in practice MTFs do not hold clients assets so it is unlikely that 
investors may suffer losses as a direct consequence of the operation of an MTF. Other 
emphasised that, still, the directive should cover this possibility (even if remote) and 
that this should also apply to regulated markets that operate an MTF in order to ensure 
a level playing field.  

(cid:131)  Should investment firms be covered even if their permission does not entitle them 
to  hold  client  assets?  –  The  principle  was  generally  supported.  Some  respondents 
argued  that  the  coverage  should  be  consistent  with  any  limits  in  the  authorisation. 
Others underlined that investors should be protected under the directive even if a firm 
was  not  entitled  under  its  permission  to  hold  funds.  It  is  reasonable  that  a  client's 
protection should not depend on a factor (the precise terms of a firm's permission) that 
client's cannot be expected to be aware of. 

(cid:131)  Should  investment  firms  be  covered  if  they  provide  services  only  to  non-retail 
clients? – In line with the reasoning developed in the previous point, some respondent 
emphasised  that,  since  retail  customers  may  not  be  aware  of  the  precise  terms  of  a 
firm's permission, firms should be covered under the ICSD if they do in fact provide 
services to a retail customer (although their contribution to the fund should reflect the 
limitation  in  their  authorisation).  Under  a  different  point  of  view,  some  respondents 
were  also  open  to  the  idea  of  extending  coverage  to  professional  clients;  most 
responses,  however,  opposed  extending  coverage  under  the  directive  beyond  retail 
clients to, for example, local authorities, professional or institutional investors.  

(cid:131)  Should  investors  be  compensated  for  default  of  a  third  party  where  assets  have 
been deposited? Should UCITS and UCITS unit holders be able to claim for the 
failure of a UCITS depositary or sub-custodian?  – Many responses opposed such 
perspectives  as  being  a  significant  and  unjustified  extension  of  the  scope  of  the 
directive.  There  is  generally  no  contractual  relationship  between  investors  and 
depositaries and it is more appropriate that clear responsibilities should be placed on 
an  investment  firm  or  UCITS  regarding  the  appointment  and  monitoring  of  a 
depositary or sub-custodian. If a depositary or sub-custodian fails it should be for the 
investment  firm  or  the  UCITS  to  recover  monies  by  civil  action.  Further,  some 
responses  suggested  that,  due  to  the  differences  between  investment  services  and 
collective  portfolio  management,  tools  other  than  the  ICSD  would  address  more 
appropriately  the  issue  of  UCITS  unit  holders'  compensation  (e.g.  a  separate  and 
specially designed UCITS compensation scheme was mentioned).    

EN 

68 

   EN 

 
(cid:131)  Should the directive cover any breach of conduct of business rules? There was a 
divergence  of  views.  Especially  in  the  UK,  where  the  scheme  already  covers  any 
breach  of  conduct  of  business  rules,  respondents  were  prudently  supportive.  Most 
other respondents thought that this would be legally and administratively complicated 
and unworkable as it would be very difficult for schemes to judge if there was a valid 
claim in the event of a default by a firm. The issue of the significant increase in costs 
for the financial system was also raised. 

(cid:131)  Should  the  level  of  compensation  under  the  directive  be  aligned  with  the  level 
under the deposit guarantee scheme directive? There were a number of respondents 
who  thought  that  the  levels  should  be  aligned.  Many  suggested,  however,  that  the 
nature of the investments and risks addressed is quite different. Further, it was claimed 
a lack of evidence that existing levels under the ICSD were inadequate. For example, 
very few claims resulted from the financial crisis. Various respondents suggested that 
any increase should be subject to a thorough cost benefit analysis. In some cases, there 
was support for a level playing field as to maximum levels. 

(cid:131)  Should  general  principles  about  how  schemes  should  be  funded  be  introduced? 
The  majority  of  respondents  supported  details  of  funding  being  left  to  individual 
Member States. Others thought that at least some funding principles would be useful. 
Some  respondents  took  an  explicit  position  in  favour  of  pre  funding.  The  issue  of 
ensuring  consistency  between  the  ICSD  and  Deposit  Guarantee  Schemes  Directive 
was  mentioned,  also  in  the  light  of  the  joint  operation  of  the  two  schemes  in  some 
countries. Access to liquidity by such schemes (such as lending facilities) would also 
need to be addressed.  

(cid:131)  Should the process of recognizing the eligibility of the claim be regulated? Most 
responses  thought  that  the  process  should  not  be  regulated  at  Community  level  as  it 
would be much more complicated than for claims by depositors. The issue of existing 
huge differences between national laws and judiciary systems was underlined. 

(cid:131)  Should  provisional  partial  compensation  be  introduced?  There  were  mixed 
responses.  Some  believing  it  was  desirable  and  others  that  it  was  not  feasible  as  it 
would be difficult to quickly verify a claim and then complicated to recover amounts 
that were later found to have been unduly paid out. 

(cid:131)  Should  compensation  schemes  have  minimum  reserve  funds?  Responses  were 
divided. Many underlined that the need of compensation is not the same as for deposit 
guarantees, where funding is required more urgently, and that reserve funds would add 
complexity to the funding and to the management of the resulting funds. 

(cid:131)  Should special attention be given to money market funds? Most thought that they 
should  not  be  covered  as  the  rationale  was  entirely  different  (i.e.  to  encourage 
investment in money market funds for a public policy purpose) and that it would be 
compensating for 'investment risk' a risk that should not be covered by compensation 
funds. Other underlined that possible liquidity problems should be addressed through 
measures other that the ICSD, which has a completely different purpose.  

Other issues 

(cid:131)  Some  respondents  felt  that,  especially  in  cross  borders  situations,  there  needs  to  be 

clear disclosure to investors about the scope and coverage of schemes. 

(cid:131) 

It  was  also  suggested  that  more  co-operation  between  member  states  should  be 
provided for in the directive. 

EN 

69 

   EN 

 
(cid:131) 

In general, the need for more alignment between the ICSD and the Deposit Guarantee 
Schemes  Directive  was  also  mentioned  (for  example,  cancelling  the  co-insurance 
principle i.e. that a portion of losses should be borne by the investor). 

(cid:131)  Another  point  is  that  there  is  no  exclusion  of  coverage  for  claims  involving  a 
transaction  where  market  abuse  has  been  involved  (an  exemption  currently  only 
applies to money laundering). 

EN 

70 

   EN 

 
 
ANNEX II – QUESTIONS SENT TO INVESTOR COMPENSATION SCHEMES  

First set of questions sent in June 2009 

1.   Funding arrangements 

1.1. How is the compensation scheme funded? By pre- and/or post-funding? Up to what 
percentage?  

1.2.  In  the  case  of  pre-funding,  how  is  the  on-going  management  of  collected  funds 
regulated or supervised? 

1.3.  Are  funds  pooled/differentiated  across  industry  sectors  and  types  of  investment 
business?  

1.4.  On  what  basis  are  contributions  calculated  (e.g.  investment  and  cash  balances, 
number of clients, revenues or incomes, number of employees, capital, deposits of credit 
institutions, mix of fixed and variable contributions)?  

1.5. Are there limits on contributions? If yes, what limits? 

1.6. Are contributions annual or based on a different timeframe? 

1.7. Does the compensation scheme have power to borrow funds? 

1.8. If there are different compensation schemes, can they borrow between schemes? 

1.9. Is State funding envisaged? If yes, in which way? 

1.10.  Is  the  compensation  scheme  allowed  to  take  out  insurance  to  meet  their  funding 
requirements?  

1.11.  Is  the  compensation  scheme  able  to  recover  some  of  the  compensation  costs  after 
liquidation of firms in default? 

1.12. How many compensation cases has the compensation scheme dealt with since 2004? 

1.13. Are there any funding agreements with third countries? 

2.  Structure of compensation schemes 

2.1. How is the compensation scheme structured? What is the ownership?  

2.2.  How  many  firms  are  participating  in  the  compensation  scheme?  How  many  EEA 
branches are participating? 

EN 

71 

   EN 

 
 
 
 
 
3.  Rules on depositaries 

3.1. Are failures of a depositary appointed by an investment firm or of any sub-depositary 
used by the depositary covered by the compensation scheme?  

4.  Compensation limit/ claims / partial compensation 

4.1. What is the maximum amount of compensation? 

4.2. What is the time limit on making claims? 

4.3. What is the time limit on compensation payment? 

4.4. Are there preliminary partial compensations allowed? If yes, under which conditions? 

4.5.  Are  there  any  "carryover  mechanisms"  allowed  –  that  is  mechanisms  aimed  at 
preventing schemes from carrying their compensation debts over a certain period of time? 

4.6.  Based  on  any  available  information,  what  is  the  average  amount  invested  by  retail 
investors in your Member State? 

5.  Eligible claims and claimants 

5.1. Is the compensation scheme covering sources of loss beyond what is required in the 
ICSD (e.g. investment advice, conduct of business?) If yes, under what conditions? How 
many  cases  of  claims  due  to  breaches  of  conduct  of  business  obligations  have  you 
received?  

5.2. Is the compensation scheme covering claimants included in Annex I of the ICSD? If 
yes, which ones? 

6.  Exemption from the obligation to belong to a ICSD scheme 

6.1. Has any Member State exempt investment firms from the obligation to belong to an 
Investor Compensation Scheme (cfr Recital 10 & Article 2 (1))? If yes, what alternative 
arrangements have been put in place? 

Second set of questions sent in November 2009 

EN 

72 

   EN 

 
 
 
 
 
 
 
 
 
 
Method of funding 

1.  If your Investor Compensation Scheme (ICS) is ex-ante funded, do you have any ex 

ante target fund level? If yes, what is the level? 

€ million 

2006 

2007 

2008 

Fund size 

  How was this target fund level determined?  

If  you  have  ex-ante  funding  but  this  is  not  based  on  any  target  fund  level,  please 
explain  your  methodology  to  assess  the  appropriateness  of  the  level  of  ex  ante 
funding. 

2.  Have  you  recently  increased,  or  considering  increasing,  the  proportion  of  ex  ante 
funding versus ex post funding for your ICS? If yes, do you have any estimates of the 
cost  to  investment  firms  of  increasing  the  percentage  of  ex  ante  funding?  Please 
briefly  explain  the  conclusions  regarding  the  level  of  the  proposed  increase  and  the 
projected cost to firms. 

3.  If,  on  top  of  ex  ante  funding,  there  is  the  possibility  to  ask  for  exceptional/ex  post 

contributions, what is the proportion of ex post funding versus ex ante funding?  

Coverage of SME's 

4.  Does your ICS cover securities and monies held on behalf of Small and Medium size 

Enterprises (SME's) beyond what is specified in Annex I (8) of the Directive?  

If so, could you please specify how SMEs are defined in your country for the purposes 
of the application of the investor compensation scheme? 

EN 

73 

   EN 

 
 
 
 
           
           
           
 
 
 
           
 
 
 
 
 
 
Compensation cases 

5.  Following  our  first  questionnaire  you  kindly  provided  us  with  the  number  of 
compensation cases your scheme had to deal with since 2004. Could you in addition 
provide us with the following details for each of the cases?  

Name of failed investment firm 

Year  

Total number of 
claims 

Total payout (€ 
million) 

Estimate of securities and monies held by investment firms  

6.  What is the total amount of securities and monies held by investment firms on behalf 
of retail investors? If you do not have detailed figures please provide an estimate.  

7.  What is the total amount of covered securities and monies held by investment firms on 
behalf  of  retail  investors  (i.e.  amount  of  securities  and  monies  up  to  the  maximum 
compensation limit)? If you do not have detailed figures please provide an estimate. 

Total amount (€ millions) 

2006 

2007 

2008 

Securities  and  monies  held  on  behalf  of  retail 
investors 

Covered securities and monies held on behalf of 
retail investors 

Please  specify  the  level  of  coverage  applied  for 
calculations of covered securities and monies 

EN 

74 

   EN 

 
 
 
 
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
 
 
 
 
           
           
           
           
           
           
           
           
           
8.  Could  you  please  list  the  top  10  ICS  members  with  respect  to  respectively  (i)  the 
amount of securities and monies held on behalf of retail investors as of end 2008 and 
(ii) the amount of covered securities and monies held by investment firms on behalf of 
retail investors as of end 2008? 

Name of DGS member (*) 

Securities and monies  

Covered securities and monies  

1 

2 

3 

4 

6 

6 

7 

8 

9 

10 

(*) If you can not report the name of the DGS member (e.g. confidentiality reasons), please replace the name by X1, X2, X3, 
… 

If  you  are  providing  data  on  covered  securities,  please  specify  the  level  of  coverage 
you are using:  

9.  What is the total number of securities accounts held for retail clients in your Member 

State? 

EN 

75 

   EN 

 
 
 
 
 
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
 
 
 
           
 
 
Funds available 

10. For ex ante funded schemes, what is the total amount of readily available funds as of 
end 2008? Could you please provide us with the accumulated fund size as of end 2007 
and the contributions collected in 2008? 

(€ million) 

Accumulated fund size as of end 2007 

Contributions collected in 2008 

Total amount of readily available funds as of end 2008 

11. Have  you  calculated  the  maximum  amount  of  ex  post  contributions  your  scheme 
might  collect  if  needed  based  on  existing  regulation?  Please  take  into  account  any 
increase in the ordinary amount of ongoing contributions and any exceptional/surplus 
/ex post contributions which might be collected.  

(€ million) 

Increase 
in 
contributions 

the  ordinary  amount  of  ongoing 

Any exceptional or surplus contributions 

Any other ex post contributions 

Maximum amount of ex post contributions 

Compensation limit 

12. In your view is the minimum compensation amount of €20 000 in the Directive still 

appropriate? Please provide us with any available data to support your view. 

13. How  would  you  assess  and  what  would  be  the  impact  on  the  amount  of  ex  ante 
contributions  and/or  potential  ex-post  contributions  if  the  minimum  level  of 

EN 

76 

   EN 

 
 
 
 
 
           
           
           
 
 
 
           
           
 
           
 
 
 
 
compensation  (currently  €20  000)  would  be  increased?  Please  explain  your 
methodology based on the following scenarios. 

Scenario 1: 

Scenario 2: 

Level of coverage 

Level of coverage 

€ 50,000 

€ 100,000 

Increase 
covered securities 

in 

the  amount  of 

Increase  in  the  amount  of  ex 
ante contributions 

Increase  in  the  amount  of  ex 
post contributions 

Please specify the reference date (if different from 31/12/2008):            

Please specify the level of coverage applied by your DGS as of the reference date:            

Please add any comment on the data you provided:  

Establishing claims and payout delays 

14. Is  your  ICS  able  itself  to  determine  the  eligibility  and  amount  of  a  compensation 
claim? If so, please explain how this is done. If not, please explain who determines the 
eligibility and amount of each claim. 

15. How  many  months  from  the  trigger  event  (e.g.  failure  of  the  investment  firm)  were 

necessary to pay compensation to investors in the last 5 cases you dealt with?  

Name of failed investment firm 

Year  

Months needed 
to pay the first 
claim  

Months needed 
to pay the last 
claim 

EN 

77 

   EN 

 
 
 
           
           
           
           
           
           
 
 
 
 
           
 
 
 
 
Name of failed investment firm 

Year  

Months needed 
to pay the first 
claim  

Months needed 
to pay the last 
claim 

16. If  your  ICS  provides  for  the  possibility  to  pay  out  provisional  compensation  in  the 
case  of  long  delays,  what  are  the  specific  requirements  for  a  provisional  payout  and 
the mechanisms to claim back the amount of the provisional compensation if it is later 
determined that the compensation claim was not eligible? 

Note: in these questions: 

An "investment firm" is a firm to whom the Directive applies. 

A "security" is a financial instrument referred to in the Directive. 

The "Directive" is the Investor Compensation Schemes Directive. 

If  there  is  confidential  information,  please  feel  free  to  provide  any  data  and/or  information  on  an 
anonymous basis. 

EN 

78 

   EN 

 
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
           
 
   
 
 
 
 
 
 
 
ANNEX III – OPERATION OF COMPENSATION SCHEMES  

 Structure of schemes 

The structure and organisational set-up of the schemes varies between Member States. 

Some  Member  States  (Austria,  Cyprus,  Germany,  Greece,  Netherlands,  and  Spain)  have 
different  compensation  schemes  for  non-bank  investment  firms  and  credit  institutions.  In 
these  cases  the  role  of  investor  compensation  as  regards  credit  institutions  is  played  by  the 
deposit  guarantee  scheme.  In  Austria,  non-bank  investment  firms  fall  under  the  Austrian 
investor compensation scheme (AeW). Austrian banks are covered by five different schemes 
with  respect  to  investor  compensation125.  In  Cyprus  there  are  three  schemes:  one  scheme 
covers  banks,  the  second  covers  clients  of  investment  firms  and  the  third  scheme  covers 
clients of cooperatives. In Germany, there is also a split between bank and non-bank firms, as 
there are three Compensation Funds, one for investment firms (EdW), one for private banks 
and  one  for  public  banks.  In  addition,  separate  schemes  are  operated  by  the  association 
representing credit cooperatives and the regional associations of savings banks126. In the case 
of Greece, investor compensation is provided by the Athens Stock Exchange (ASE) Member's 
Guarantee Fund for members of the ASE and for non members of the ASE such as investment 
companies  and  mutual  funds  in  the  case  they  provide  portfolio  management  services.  In 
February 2009, the Hellenic Deposit & Investment Guarantee Fund (HDGIF) was established 
by  virtue  of  the  Greek  law  3746/2009  to  cover,  besides  deposits,  the  investment  services 
provided  by  credit  institutions  not  participating  in  the  Athens  Stock  Exchange  Member's 
Guarantee Fund. In Spain there is also a split between the ICS for non-bank investment firms 
and banks. 

The schemes are either set up as a public body or a private company. The public schemes are 
run as independent legal entity under public law (Belgium, Estonia, Portugal), or owned and 
operated  by  the  national  financial  regulators  (Latvia,  Slovenia),  or  are  administered  by  a 
separate public entity / company (Germany, Sweden's National Debt Office). In Germany, the 
ICS  is  a  special  federal  fund  without  legal  capacity  administered  by  the  public  bank  KfW. 
Although public bodies, these schemes may have some form of involvement or representation 
by the participating firms. The private schemes can take the form of either a limited company 
with participating firms and/or public authorities as shareholders (Austria, Ireland, Romania, 
Slovakia, Spain), either a private entity managed by the relevant trade association (Finland), 
either an independent legal entity (Denmark, France, Italy, Hungary, United Kingdom), either 
a private non-profit association (Luxembourg). In the case of Denmark the fund is a private 
independent body although it is operated by the Central Bank. The scheme in Cyprus is also 
operated  by  the  Central  Bank.  The  Dutch  scheme  operated  by  the  Dutch  Central  Bank  is  a 

125 
 There are five different schemes covering different banking sectors (savings banks, commercial banks, 
cooperatives,  etc.):  Österreichische  Raiffeisen-Einlagensicherung  eGen,  Einlagensicherung  der  Banken  & 
Bankiers,  Sparkassen-Haftungs  AG,  Schulze-Delitzsch  Haftungsgenossenschaft,  and  Hypo-Haftungs-
Gesellschaft mbH. 
126 
banks, 
Entschädigungseinrichtung  öffentlicher  Banken  for  public  deposit  banks.  Sicherungseinrichtung  des 
Bundesverband  der  Volksbanken  und  Raiffeisenbanken  for  the  association  representing  credit  kooperatives. 
Sicherungseinrichtungen der regionalen Sparkassen- und Giroverbände for the regional associations of savings 
banks 

 Entschädigungseinrichtung 

deutscher 

Banken 

deposit 

private 

(EdB) 

for 

EN 

79 

   EN 

 
                                                 
foundation  directed  by  a  Board  in  which  the  two  supervisors  for  the  financial  sector  in  the 
Netherlands (DNB and AFM), as well as the investment firms are represented. 

Although in most of the cases independent, the schemes maintain a close relationship with the 
financial regulator, and are accountable and subject to the oversight of that regulator. 

Funding of schemes 

Ex ante and ex post funding 

Schemes  are  principally  financed  by  contributions  levied  from  participating  firms.  These 
contributions can either be collected to build a reserve in anticipation of future losses (ex-ante 
funding) or when needed to cover compensation costs of failures that have occurred (ex-post 
funding).  

A  majority  of  the  investor-compensation  schemes  are  pre-funded  (e.g.  the  Austrian  scheme 
for investment firms (AeW), Belgium, Bulgaria, Cyprus, Czech Republic, France, Germany, 
Greece, Hungary, Ireland, Lithuania, Netherlands, Poland, Romania, Slovakia, Spain).  

In  addition  most  of  these  schemes  (e.g.Austria  (AeW),  Belgium,  France,  Germany,  Greece, 
Hungary,  Ireland,  Netherlands,  Poland,  Romania,  Slovakia,  Spain)  have  the  possibility  to 
request  exceptional/surplus  contributions  if  the  assets  held  by  the  investor-compensation 
scheme are not sufficient to cover the payment of the claims.  

In  the  case  of  Austria  (AeW),  it  is  worth  noting  that  legislation  was  recently  amended  to 
improve the funding of the scheme in light of the recent major claims (see Amis case). The ex 
post  funding  mechanism  was  replaced  by  ex  ante  funding  supplemented  by  surplus 
contributions in the case the funds available are insufficient to cover claims. 

Following  the  Phoenix  case,  the  contribution  system  of  the  German  ICS  for  non-bank 
investment firms (EdW) was reformed in 2009.  The annual contributions were increased to 
around  €10m  in  order  to  achieve  an  adequate  funding  level  of  €30-40m.  The  level  of 
contributions  per  firm  is  differentiated  taking  into  account  a  certain  number  of  risk  factors 
(see risk weighting paragraph below). 

A  few  schemes  are  funded  through  a  mix  of  ex  ante  and  ex  post  funding  (e.g.  Denmark, 
Estonia, Finland, Malta). The funding principles of the Danish and Finnish schemes are quite 
similar. Only part of the minimum capital of the fund has to be paid in cash. In Finland this 
minimum capital has been set at €12m, of which €4.2m needs to be provided in cash. The rest 
of  the  minimum  capital  may  be  covered  by  insurance  or  by  a  binding  commitment  from  a 
credit  institution  to  lend.  In  the  case  of  Denmark,  the  remaining  capital  takes  the  form  of 
pledges by member firms. The Estonian scheme is pre-funded but part of the payment can be 
deferred if the investment firm assumes the obligation to pay the deferred part upon request or 
even  suspended  if  the  assets  of  the  scheme  have  reached  a  certain  minimum  threshold.  In 
Malta, the annual variable contribution is not paid to the scheme but accounted for and held 
by  each  firm  until  such  time  that  the  scheme  makes  a  call  on  such  funds.  The  variable 
contribution is required to be held in a "reserve" and may be invested by the firm with a third 
party approved in writing by the scheme. Such third party shall hold the funds on pledge in 
favour of the scheme. 

EN 

80 

   EN 

 
These schemes with ex ante funding or funded through a mix of ex ante and ex post funding 
do not usually have any explicit ex ante target fund level except in the case of Greece (ASE 
Guarantee Fund), Estonia, Ireland and the Netherlands. In Greece this target fund level is re-
assessed annually taking into account general and individual risks. Estonia has a target fund 
level of € 2 million to be reached by 2020. Ireland undertakes a formal funding review every 
3  years  and  sets  target  fund  levels  to  be  reached  by  the  end  of  every  new  3-years  funding 
period. In the Netherlands the target fund was set at €11.3 million by law when the fund was 
established  in  1998.  The  Bulgarian  scheme  has  an  implicit  target  fund  level  whereby  the 
annual contributions are suspended when the funding available reaches a level equal to 5% of 
the client's assets eligible for compensation. 

In most Member States there is no formal methodology to assess the appropriateness of the 
level of ex ante funding. Contributions are collected based on pre-determined formulas.   

Schemes are post-funded in eight Member States (the five Austrian schemes for banks, Italy, 
Latvia, Luxembourg, Portugal, Slovenia, Sweden, United Kingdom). However some of these 
schemes levy ex-ante contributions to cover administrative costs. In Italy the scheme has an 
initial endowment (€7.7m) to face any pressing or unexpected need. In the case of Portugal, 
the ex post contributions are guaranteed by pledges on the financial instruments. In the case of 
Slovenia, the investment firms must hold a certain amount of liquid eligible assets. It should 
be noted that Luxembourg is planning to introduce ex ante funding. 

In 2006/2007 the UK Financial Services Compensation Scheme (FSCS) conducted a reform 
of  its  funding  arrangements.  The  reform  did  not  touch  upon  the  "pay-as-you-go"  model  in 
which contributions are paid to cover actual compensation costs and those known to arise in 
the  near  future  (12  months  extended  to  24  months  in  the  new  scheme).  At  the  time  of  the 
reform to introduce a pre-funding element was not considered appropriate because of the legal 
and practical difficulties involved. 

Pooling of assets and cross-subsidisation 

Countries  may  create  one  global  fund  to  cover  firms  across  industry  sectors  (deposit  and 
investment  activities)  or  across  investment  activities  or  create  several  sub-funds  per  type  of 
investment  activities.  In  the  first  case  the  funds  are  pooled  across  the  different  investment 
activities  with  explicit  cross-subsidisation  between  them.  In  the  second  case  funds  are 
differentiated by investment activity. 

As  explained  above  some  Member  States  (Austria,  Cyprus,  Germany,  Greece,  Netherlands, 
and  Spain)  have  different  compensation  schemes  for  non-bank  investment  firms  and  credit 
institutions.  Austrian  banks  are  covered  by  five  different  schemes  with  respect  to  investor 
compensation. If one scheme has insufficient funds to cover a failure, members of the other 
schemes are obliged to contribute up to a certain maximum (1,5% of risk-weighted assets). In 
the Netherlands, in the case the funding of the ICS for non-bank investment firms would be 
insufficient to cover compensation costs even after the payment of surplus contributions by its 
members, the banks and non-bank investment firms would have to compensate for the gap. In 
Spain, the ICS for non-bank investment firms had to cover compensation costs arising from 
failures  having  taken  place  prior  to  its  incorporation  date127.  As  the  newly  incorporated 

127 

 See Oxera report pages 56-59 

EN 

81 

   EN 

 
                                                 
scheme  had  nearly  no  reserves,  the  costs  were  mainly  borne  by  the  separate  deposit  and 
investment guarantee scheme for banks.  

In  a  few  Member  States  (e.g.  Belgium,  Denmark,  Estonia,  France,  Lithuania,  Luxembourg, 
United  Kingdom)  the  investor-compensation  scheme  and  any  other  guarantee  schemes  are 
operated and managed by the same fund. In Belgium there is a single pool of funds which can 
be used to cover  all liabilities, regardless of whether these liabilities arise on deposit-taking 
activities or investment business. In Denmark the fund is divided into 3 departments (credit 
institutions, mortgage banks, investment companies). In Estonia the Fund has 4 sectoral pools 
of  assets  (deposit  guarantee,  investor  protection,  pension  protection,  pension  insurance 
contract). But in none of these two examples are the assets pooled. However inter-borrowing 
is  possible  (see  additional  funding  arrangements).  In  France,  the  ICS  and  the  DGS  are  both 
owned and managed by the "Fonds de Garantie des Dépôts" but there is no pooling of assets 
between  both.  The  situation  is  the  same  in  Lithuania  where  the  ICS  and  the  DGS  are  both 
owned  and  managed  by  the  same  entity,  namely  the  "Deposit  and  Investment  Insurance". 
There is a separate pool of assets for each scheme, but inter-borrowing between the ICS and 
the DGS is possible. In Luxembourg the ICS and the DGS are both owned and managed by 
the "Association pour la Garantie des Dépôts", but there is a separate pool of assets for each 
scheme and no inter borrowing is possible. In  the  United  Kingdom  the  scheme  has  5  broad 
pools/classes  (deposit  taking,  investment,  life  and  pensions,  general  insurance  and  home 
finance) with two sub-classes each for provider and intermediation activities. There is explicit 
cross-subsidisation  between  and  within  the  classes.  This  cross-subsidisation  was  a  major 
change  introduced  by  the  reform  of  the  scheme's  funding  arrangements  conducted  in 
2006/2007. 

Before  the  reform,  the  UK  scheme  was  divided  into  12  contribution  groups,  each  of  which 
was completely insulated from the compensations costs born by the other groups. In addition 
the  relatively  small  numbers  of  firms  in  some  contribution  group  raised  concerns  about  the 
sustainability  of  the  group.  The  new  model  introduced  five  broad  classes  (deposit  taking, 
investment, life and pensions, general insurance and home finance) with two sub-classes each 
for provider and intermediation activities.  If a default occurs in a sub-class the firms in this 
sub-class will  bear the  compensation costs up  to the sub-class annual threshold. The annual 
threshold determines the maximum amount firms could be required to pay to cover defaults. If 
one  sub-class  has  reached  its  annual  threshold,  the  other  sub-class  will  be  required  to 
contribute to the compensation costs.  In addition there is a general retail pool above the five 
classes and their sub-classes to which all firms would contribute if there is a major failure. As 
a  result,  the  funding  capacity  of  the  scheme  was  reinforced  by  (i)  increasing  the  maximum 
annual thresholds and (ii) introducing explicit cross-subsidy arrangement within and between 
the classes.  The funding capacity of the scheme was designed in order to be able to meet the 
compensation  claims  arising  from  a  medium-sized  default  (or  a  series  of  smaller  defaults) 
with  cross-subsidy  being  only  used  as  a  contingency  plan  in  case  of  a  major  failure.  The 
borrowing group has to reimburse the lending group as soon as possible. 

The  other  countries  have  separate  deposit  and  investor  compensation  scheme.  Within  the 
investor compensation scheme the funds are generally pooled across all types of investment 
activities, the exception being Ireland.  

In  Ireland  the  investor-compensation  scheme  operates  two  separate  sub-funds  (fund  A  and 
fund B). The categories of investment firms and insurance intermediaries which contribute to 
each of these sub-funds are derived from the type of their regulatory authorisations. 

EN 

82 

   EN 

 
Calculation of contributions 

There  are  up  to  three  types  of  contributions:  entry/one-time  contributions,  ongoing 
contributions  on  a  yearly  or  quarterly  basis  and  exceptional/surplus/top-up  contributions. 
Entry contributions have to be paid by new members in Bulgaria, Cyprus, France, Germany, 
Greece,  Hungary,  Netherlands,  Romania  and  Slovakia.  All  ongoing  contributions,  except  in 
Estonia,  are  annual  although  the  payment  might  be  made  in  several  instalments  (two 
instalments  allowed  in  the  case  of  Spain  and  France,  quarterly  instalments  for  Bulgaria, 
Poland  and  Slovakia).  In  the  case  of  the  Estonian  fund  the  contributions  are  calculated  and 
paid  on  a  quarterly  basis.  Most  of  the  ex  ante  schemes  (Austria  (AeW),  Belgium,  France, 
Germany,  Greece,  Hungary,  Ireland,  Netherlands,  Poland,  Romania,  Slovakia,  Spain)  have 
the possibility to levy surplus contributions.  

The assessment basis used to calculate the amount of contributions varies between schemes. 
The basis used might also differ within a scheme depending on the type of contribution (entry 
or  ongoing  contribution)  or  it  can  be  a  mix  of  different  assessment  basis.  The  assessment 
bases used are the following:  

− 

− 

− 

− 

− 

− 

− 

the value of the covered monies and financial instruments held or managed; 

the number of clients; 

the revenues or income generated by investment businesses; 

the level of capital of an investment firm; 

the maximum amount of compensation per client; 

the average turnover of the securities sale and purchase transactions  

the number of approved persons or traders 

Maximum  limits  for  ongoing  contributions  exist  in  several  Member  States  (Belgium, 
Bulgaria, Cyprus, Denmark,  Estonia, Finland, Germany (EdW), Lithuania, Netherlands, and 
Poland). There might  also  be  maximum limits on the exceptional/surplus contributions (e.g. 
Austria  (AeW),  Germany  (EdW),  Greece  (the  Hellenic  Deposit  &  Investment  Guarantee 
Fund), Hungary, Romania). Ireland might introduce such a maximum limit which would be 
equal to twice the annual contribution rate. There is a cap on ex-post contributions in Latvia, 
Luxembourg, Portugal, Slovenia, and the UK. In the United Kingdom the annual thresholds 
per  sub-class  determine  the  maximum  amount  firms  could  be  required  to  pay  to  cover 
defaults. 

Risk weighting 

From  an  economic  rationale  it  might  make  sense  to  differentiate  the  calculation  of  the 
contributions according to the specific risks imposed  by each individual  investment firm on 
the scheme (i.e. risk-based approach). But such a risk-weighting calculation is very difficult to 
implement as there are no appropriate and objective criteria to define which investment firms 
would be more prone to fraud (unpredictable nature of claims).  

EN 

83 

   EN 

 
The French and the German (EdW) schemes are the only schemes that adopted an explicit risk 
weighting methodology. The French scheme takes into account the probability of default of a 
firm  when  calculating  its  annual  contribution.  The  assessment  base  (investor  assets  held  by 
the  firm)  is  multiplied  by  a  risk  indicator  that  reflects  the  capital  adequacy  and  operating 
profitability of the firm. Following the reform of its contribution system, the German scheme 
distinguishes  between  different  groups  of  institutions  and  assigns  differentiated  contribution 
rates to these groups taking into account the license, the actual contractual situation, and the 
risk of compensation of the institution.  

Although  no  scheme,  except  the  French  and  the  German  (EdW)  schemes,  have  adopted  an 
explicit  risk  weighting  methodology,  the  criteria  used  to  calculate  the  ongoing  or  ex  post 
contributions might be differentiated. Ongoing or ex post contributions rates or amounts are 
differentiated  based  on  the  firm's  authorisation  or  the  types  of  investment  services  provided 
by the firm (Finland, Ireland, Italy, Slovakia, and United Kingdom). 

In the UK the structure of the different contribution groups/classes was redefined as part of 
the reform mentioned above. Under the previous structure the firms were grouped according 
to  their  FSA  authorisation.  There  were  12  contributions  groups  whose  small  number  of 
participants within each group rose concerned about the sustainability of the group in case of 
a  medium  or  large  failure.  The  reform  introduced  5  broader  classes  based  on  5  identifiable 
industry  sectors  (deposit  taking,  investment,  life  and  pensions,  general  insurance  and  home 
finance). Each class with the exception of the deposit class is divided between providers and 
intermediation  activities.  As  a  result  of  these  sub-classes,  contributions  are  differentiated 
based on the activity a firm undertakes. 

EN 

84 

   EN 

 
Ex  ante  or  ex 
post funding 

Different  pools  of  fund 
by type of business 

Calculation of contributions 

Maximum 
contributions 

limit  on 

Risk weighting 

Austria128 
(AeW fund) 

Ex  ante  (with 
ability  to  raise 
surplus 
contributions) 

No  (but  the  ICS  only 
covers 
non-bank 
investment firms) 

Austria  (funds 
for banks) 

Ex post 

have 

The  members  of  the 
bank 
five 
sectoral 
to 
schemes 
scheme 
the 
support 
which  needs  additional 
funds, up until a certain 
limit  (1.5%  of  risk-
weighted assets) 

As of 2010, investment firms have 
to  pay  annual  contributions  of 
the  number  of 
(depending  on 
customers)  1‰  –3‰  of  the  free 
license-requiring 
income 
business.  Half  of 
the  annual 
contributions  (at  most)  shall  be 
used  for  an  insurance  premium 
(“fidelity insurance”).  

on 

No 

Surplus 
contributions 
are  limited  to  2,5%  of 
fixed 
annual 
firm's 
costs  (maximum  to  be 
paid  two  times  in  five 
years)  

n.a. 

n.a. 

No 

Belgium 

Ex  ante  (with 
ability  to  raise 

No 
(but  one  single 
scheme with pooling of 

Annual  contributions  based  on 
turnover  and 
0.7%  of  annual 

Contributions 
for  an 
individual firm cease if 

No 

128 

EN 

 The Austrian government reviewed the efficiency of the existing scheme, especially in light of the major claims recently raised by investors. As a result the 
Austrian Securities Supervision Act 2007 has been amended to improve the funding of the scheme (changes effective as from 1 May 2009).  The ex post 
funding mechanism was replaced by a mix of ex ante and ex post funding. Investment firms are now required to pay annual contributions. In the case the 
funds available are insufficient to cover claims; the members will need to make surplus contributions.  

85 

EN 

 
  
 
 
                                                 
surplus 
contributions) 

assets  between  deposit-
taking  and  investment 
activity) 

0.001%  of  the  covered  financial 
instruments. 

the  "net  total  of  its 
contributions" since the 
inception  of  the  fund 
reached  an  amount  set 
at seven times the total 
of 
contributions 
paid over the last three 
years.  

its 

Yes,  contributions  are 
the 
suspended  when 
available 
funding 
reaches a level equal to 
the  client's 
5%  of 
assets 
for 
compensation 

eligible 

the 

total 
If 
Yes; 
contributions  of 
an 
investment firm exceed 
0.05%  of  the  previous 
year 
eligible 
funds,  no  contribution 
is being made 

total 

No 

No 

Two types of contributions: 
Entry contributions – calculated on 
the basis of the minimum required 
capital. 
Annual 
in 
quarterly  instalments  -  calculated 
on  the  basis  of  the  total  value  of 
covered  financial  instruments  (up 
to 0,1%) and cash (up to 0,5%)  

contributions  paid 

Two types of contributions: 
Entry contribution which is a fixed 
amount 

Annual  contributions  calculated  as 
0.1% of the eligible funds (monies 
+  financial  instruments)  held  by 
firms 

Two types of contributions 

n.a. 

No 

Entry contributions are fixed.  
annual 
Ordinary 

contributions 

86 

EN 

Bulgaria 

Ex ante 

No 

Ex-ante  

(fund 
Cyprus 
for  clients  of 
investment 
firms) 

No  (but  there  are  two 
ICS,  one 
for  credit 
institutions  and  one  for 
investment 
non-bank 
firms) 

Cyprus 
(fund 
for  clients  of 
banks) 

Ex ante 

No  (but  there  are  two 
ICS,  one 
for  credit 
institutions  and  one  for 
investment 
non-bank 

EN 

 
  
 
firms) 

amount  to  a  percentage  of  up  to 
one  per  mile  (1‰)  of  the  eligible 
funds  and  financial  instruments  of 
the members’ clients. 

Czech republic  Ex-ante 

No 

No 

No 

of 

fees 

volume 

Securities  dealers  make  an  annual 
contribution  amounting  to  2%  of 
the 
and 
commissions  generated  by  their 
investment 
activities. 
services 
Management  companies  providing 
asset management services are also 
required 
annual 
contributions. 

pay 

to 

Denmark  

Estonia 

EN 

One  single  fund  for 
deposit  guarantee  and 
protection 
investor 
divided 
3 
into 
departments  by  type  of 
firm (credit institutions, 
mortgage 
banks, 
investment  companies), 
but  no  separation  by 
activity.  

No 

Mix of ex ante 
and  ex  post 
funding  (25% 
of 
the 
minimum 
capital  has  to 
be 
in 
paid 
cash,  the  rest 
takes  the  form 
of  pledges  by 
member firms)  

Mix of ex ante 
and  ex  post 
funding  (right 
to defer part of 
the  payment  if 

The  contribution  payments  for 
investment  firms  are  calculated  on 
a  prorata  basis:  at  least  55%  is 
based  on  the  value  of  the  clients' 
securities  and  cash  balances  held 
by a firm, and the remaining share 
is  based  on 
the  number  of 
employees of the firm. 

No 

new 
Yes; 
contributions  as 
the 
funds  available  exceed 
the required minimum. 

No 

Quarterly  contributions  based  on 
the  average  turnover  of  securities 
transactions  and  the  market  value 
of  the  cash  and  securities  held  or 
managed by the firm  

Yes;  Contributions  are 
the 
suspended  when 
the 
assets 
exceeds 
required 
minimum 
capital 

No 

87 

EN 

 
  
Finland 

France 

commitment 
from  the  firm 
to  pay  upon 
request) 

Mix of ex ante 
and  ex  post 
funding  (only 
the 
part  of 
minimum 
capital  of  the 
fund  has  to  be 
paid  in  cash, 
the  rest  being 
covered 
by 
or 
insurance 
by  a  binding 
commitment 
from  a  credit 
institution 
to 
lend.) 

Ex  ante  (with 
ability  to  raise 
surplus 
contributions) 

No 

No 

of 

Contributions  are  differentiated  by 
type 
activity 
investment 
(transmission  and  execution  of 
orders,  asset  management,  placing 
of  financial  instruments,  custodial 
and management services, etc.). 

10%  of  contributions  is  fixed  and 
90%  variable.  The  variable  part  is 
calculated based on the number of 
customers covered. 

No 

new 
Yes; 
contributions  as 
the 
funds  available  exceed 
the  minimum  capital 
raised 
(contributions 
the 
just 
to 
costs 
administrative 
the 
arising 
insurance 
the 
lending 
commitment 
from the bank) 

from 
and 

cover 

Two types of contributions: 
 Entry contributions (certificates of 
association) 

No 

Annual  contributions  calculated 
the  value  of 
based  on  half 
securities,  and 
for  non  bank 
investment  firms,  on  all  cash 
balances,  weighted by a risk factor

Implicit 
weighting 
contributions 
differentiated 
investment 
or activity. 

risk 
as 
are 
by 
service 

the 

Yes; 
contribution 
into 
probability 
default of a firm 

level  of 
takes 
the 
of 

account 

EN 

88 

EN 

 
  
Germany 
(EdW) 

Ex  ante  (with 
ability  to  raise 
surplus 
contributions) 

No  (but  the  ICS  only 
covers 
non-bank 
investment firms) 

contributions 
Surplus 
can be raised, but must 
not  exceed  5  times  the 
last annual contribution 
due. The overall charge 
from 
types  of 
contributions  must  not 
exceed  45%  of  annual 
net income.                      

all 

contributions 
Yes, 
are based on the type 
of 
/ 
licensed 
authorised 
investment  business, 
and  on  the  risk  of 
compensation  of  the 
institutions. 

Two types of contributions: 

of 

 Entry  contributions  0.35%  or 
3.5% 
capital 
depending  on  the  scope  of  the 
licence.  

liable 

the 

contributions 

0.1%  or  1%  of  the  liable  capital 
depending on licence 
Annual 
are 
determined by scope of the licence 
for rendering financial services and 
amounts  to  1.23%,  2.46%,  3.85% 
or  7.7%  of  gross  commission 
income  and  of  gross  earnings  on 
transactions,  however, 
financial 
not more than 10% of net income. 
so trade on their own account            

(ASE 

Greece 
Guarantee 
Fund) 

Ex-ante  (with 
the  ability  to 
raise 
surplus 
contributions) 

Ex  ante  (with 
the  ability  to 
surplus 
raise 
contributions) 

& 

No 

No 

Entry  contributions  and  annual 
contributions  comprising  a  fixed 
and a variable element 

No 

Decision  of  calculation  of  annual 
contributions is still pending. 

Supplementary 
contributions  may  be 
up  to  three  times  the 
annual contributions. 

No 

No 

Ex 
ante 
funding  (with 

No 

Two types of contributions: 
Entry 

contributions  with 

Surplus 
cannot 

contributions 
the 
exceed 

a 

No 

89 

EN 

Greece 
(Hellenic 
Deposit 
Investment 
Guarantee 
Fund) 

Hungary 

EN 

 
  
 
ability  to  raise 
surplus 
contributions) 

Ireland 

Ex 
ante 
funding  (with 
ability  to  raise 
surplus 
contributions) 

two 

Yes;  The  ICS  consists 
sub-funds 
of 
designated  as  Fund  A 
and  Fund  B.  The 
categories 
firms 
to 
which 
each of these sub-funds 
are  derived  directly 
of 
from 
Financial  Regulator's 
authorisations.   

of 
contribute 

type 

the 

Italy 

Ex post 

No 

The 
scheme 
has  an  initial 
reserve 
(€7.7m) 
face 
pressing 
unexpected 

to 
any 
or 

preceding year's annual 
contributions  

maximum of €11 000 
Annual contributions calculated on 
the basis of the average value of all 
funds  deposited  by  investors  with 
the  Fund  member  in  the  form  of 
liquid assets or securities to which 
the Fund’s protection applies, with 
a  maximum  of  3‰  of  the  base 
amount 

Fund  A  firms  pay  a  fixed  rate  of 
variable 
plus 
contribution 
contribution  which  is  determined 
by  the  band  of  eligible  client 
numbers into which they fall.  

a 

No 

firms  pay  a 

Fund  B 
fixed 
contribution,  the  amount  of  which 
depends on the income band of the 
firm. 

risk 
as 

Implicit 
weighting 
contributions 
calculations 
are 
based on  the type of 
authorised 
investment  business 
(fund A or fund B) 

Fixed  annual  contributions 
cover administrative costs. 

to 

businesses, 

Ex  post  contributions  collected  on 
the  basis  of  income  generated  by 
with 
investment 
different 
on 
services/activities and the situation 
already 
of 
members  of  a  deposit  guarantee 

institutions 

credit 

based 

rates 

No  maximum  limit  for 
ex  post  contributions 
(minimum limit: €260). 

risk 
Implicit 
weighting as ex post 
are 
contributions 
differentiated 
for 
some 
services/activities 

EN 

90 

EN 

 
  
 
need. 

scheme. 

Latvia 

Ex post 

No 

Value  of  the  financial  instruments 
held or managed by the firm 

Maximum  4%  of  the 
aggregate  portfolio  of 
instruments 
financial 
the 
at 
capped 
of 
level 
maximum 
compensation 

Lithuania 

Ex ante 

No 

Luxembourg 

Ex post 

No 

Annual  contributions  calculated  as 
0.01%  of 
the 
transactions carried out  

the  value  of 

Yes;  maximum  annual 
contribution  is  LTL  20 
000 

Ex  post  contributions  to  cover 
costs 
compensation 
allocated 
according 
the  amount  of 
to 
protected investment balances  

Ex  post  contributions 
cannot 
per 
calendar  year  5%  of  a 
firm's equity capital 

exceed 

Malta 

Ex ante and ex 
post funding  

No 

Annual  contributions  consist  of  a 
fix and a variable part: 

No 

-  a  fix  contribution  whose  amount 
depends  on 
the  category  of 
investment firm 

No 

No 

No 

No 

- a variable contribution calculated 
as  a  0.1%  of  the  total  revenue  of 
the 
variable 
contribution  is  not  paid  to  the 
scheme  (held  by  the  firm  in  a 

firm 

this 

but 

EN 

91 

EN 

 
  
 
Netherlands 

Ex  ante  (with 
ability  to  raise 
surplus 
contributions) 

No  (but  the  ICS  only 
non-bank 
covers 
investment firms) 

Poland 

No 

Ex  ante  (with 
ability  to  raise 
surplus 
contributions) 

Portugal 

Romania 

Ex  post  (with 
ex 
ante 
pledges)  

No 

No 

Ex  ante  (with 
ability  to  raise 
surplus 
contributions) 

reserve  until  the  scheme  makes  a 
call for these funds)  

Two types of contributions: 
Entry contribution  

Annual  contributions  consisting  of 
a  fixed  and  a  variable  part,  the 
latter  depending  on  the  number  of 
non-professional 
per 
investment firm 

clients 

Annual  contributions  calculated  as 
a % of the value of the cash (0.4%) 
and  of 
instruments 
financial 
(0.01%) held on investor's account 

to 

In case the funds available are not 
sufficient 
the 
compensation  claims,  the  annual 
contributions  can  be  increased  by 
an amount not greater than 1.8% 

cover 

Fixed  annual  contributions  of  €2 
500  to  cover  administrative  costs; 
Ex  post  contributions  collected  in 
the form of binding pledges 

Total 
annual 
contribution  per  firm 
limited to 3% of its net 
worth  Besides, 
the 
variable  contribution  is 
capped  at  a  maximum 
of  nearly  Є  113.000 
(2009). 

Annual 
Yes; 
are 
contributions 
suspended  when 
the 
member's  participation 
in  the  scheme  is  ten 
times the amount of the 
defined rate 

year 

Yes;  maximum  0,2% 
total 
per 
protected 
funds  and 
securities of a firm 

of 

Two types of contributions: 
Entry 
which 
contribution 
represents  1%  of  the  minimum 
initial capital required according to 

No maximum limits on 
annual 
contributions, 
surplus 
but 
contribution  may  not 

the 

No 

No 

No 

No 

EN 

92 

EN 

 
  
Slovakia 

No 

Ex  ante  (with 
ability  to  raise 
surplus 
contributions) 

Slovenia 

Ex post 

No 

the business activity authorised 
Annual contributions calculated by 
applying  a  %  (1,80%  for  2008 
contributions)  on  the  income/fees  
investment 
from 
activities 

the  different 

twice 

the 
exceed 
the  most 
amount  of 
recent 
annual 
contribution  levied  for 
a member. 

Two types of contributions: 

No 

Entry contribution 

Annual  contributions  calculated  as 
(a)  a  %  of  the  amount  of  fees 
charged  to  clients  for  investment 
services and ancillary services and 
as  (b)  a  %  of  the  value  of  client 
assets and as (c) a fix contribution 
increased  per  each  client  which  is 
entitled  to  compensation  from  the 
fund ranging from 1 to 20 euros 

there 

Although 
is  no  ex  ante 
funding,  investment  firms  must 
hold  a  certain  amount  of  liquid 
eligible  assets  calculated  based  on 
the number of clients 

hold 

Every  investment  firm 
eligible 
must 
assets in the amount of 
€50  per  client  but  not 
less  than  €50  000  and 
than  €300 
not  more 
000 

Spain (Fogain)  Ex  ante  (with 
ability  to  raise 
surplus 

No  (but  the  ICS  only 
non-bank 
covers 
investment firms) 

Annual  contributions  consist  of  a 
fix and a variable part: 

No 

risk 
Implicit 
as 
weighting 
are 
contributions 
differentiated 
by 
type  of  investment 
business 

No 

No 

EN 

93 

EN 

 
  
contributions) 

-  a  fix  contribution  whose  amount 
depends  on  the  income  band  the 
firm belongs to  

- a variable contribution calculated 
as a % of the value of the financial 
instruments  held  or  managed,  as  a 
%  of  the  investment  monies  held, 
and as % of the maximum amount 
of  coverage  provided  by 
the 
scheme for each covered client. 

Sweden 

Ex post 

No 

Yearly fees to cover administrative 
costs of the fund 

No 

No 

United 
Kingdom 

Ex post 

Yes. The UK scheme is 
divided  into  5  classes 
taking, 
(deposit 
life  and 
investment, 
pensions, 
general 
insurance  and  home 
finance),  with 
sub-
for  providers 
classes 
intermediation 
and 
is 
activities.  There 
cross-
explicit 
subsidisation  between 
and within the classes. 

to  cover 

Annual  contributions 
management expenses. 
Ex  post  contributions  in  different 
contribution  groups  are  allocated 
based  on  multiple  criteria.  In  the 
case  of  the  Class  D  "Investment", 
the  criteria  used 
to  calculate 
contributions are:  
-  the  income  for  the  sub-class  D1 
"Fund management" 
-  the  number  of  approved  persons 
or  traders  for  the  sub-class  D2 
"Investment intermediation" 

Annual  threshold  per 
sub-class 
determines 
the  maximum  amount 
all  firms  in  that  sub-
class  could  be  required 
to 
cover 
pay 
defaults. 

to 

risk 
Implicit 
as 
weighting 
contributions 
are 
differentiated  based 
on the firms' activity 
(provider 
or 
intermediation) 

EN 

94 

EN 

 
  
Additional funding arrangements 

Schemes  need  back-up  sources  of  funding  in  case  the  funding  available  and  any  surplus 
contributions are insufficient to cover compensation claims. 

Borrowing 

All the schemes except Italy, the Netherlands, Poland, and Slovenia have the power to borrow 
funds when its funds are insufficient to pay compensation claims. In the Netherlands however, 
since the Central Bank is operating the ICS and pre-finances the scheme in case of insufficient 
funding, the scheme in effect borrows the funds from Central Bank. In France, the scheme can 
only  borrow  from  participating  firms.  Some  funds  (e.g.  Czech  Republic,  Ireland,  and 
Romania) stressed the fact that there is a commercial limit on the scheme's ability to borrow. 
A state guarantee might be necessary for commercial borrowing.  

Borrowing  between  the  different  compensation  schemes  is  usually  not  allowed.  The  only 
exceptions are Slovakia, where the investor-compensation scheme and the deposit protection 
scheme can borrow funds from each other, but only for compensation payments purposes. In 
Belgium  there  is  only  one  Fund  covering  deposits  and  securities.  The  funds  are  pooled  and 
can  be  used  for  compensation  purposes  whether  it  is  to  cover  deposits  or  securities.  In 
Denmark,  Estonia,  and  Lithuania  where  the  investor-compensation  scheme  and  other 
guarantee schemes are managed and operated by the same Fund, intra-borrowing between the 
different  departments  or  the  different  pools  of  assets  is  allowed.  In  Ireland  the  investor-
compensation  scheme  operates  two  separate  sub-funds  (fund  A  and  fund  B)  and  borrowing 
between these two sub-funds is allowed. 

State funding 

State  support  might  be  envisaged  in  the  form  of  a  guarantee  granted  by  the  state  for  a  loan 
made  to  the  fund  in  the  following  countries:  Austria,  Denmark,  Estonia,  and  Hungary.  In 
Estonia the fund  may also apply for a state loan. In Czech Republic and Slovakia, the fund 
may  also  ask  for  a  state  loan  and  in  addition  ask  for  government  subsidies.  In  the  case  of 
Spain  the  scheme  may  borrow  funds  from  the  Spanish  securities  supervisor  but  on  a 
commercial basis. In Germany, following the Phoenix case129, an urgent measure of last resort 
giving public funds to the national investor-compensation scheme was introduced in order to 
avoid the fund being unable to payout partial compensation payments after the affiliated firms 
contested the legality of special contributions and refused payments. In Lithuania the "Deposit 
and  Insurance  Fund"  is  a  state  undertaking.  In  Sweden  and  in  the  United  Kingdom  the 
schemes can borrow from their National Debt Management Office. 

Insurance 

Taking  out  insurance  is  allowed  for  a  number  of  investor-compensation  schemes:  Austria, 
Belgium, Cyprus, Czech Republic, Finland, Greece, Hungary, Ireland, Italy, Malta, Portugal, 
and United Kingdom. In the case of the Austrian scheme (AeW), it is not only allowed but 
obliged  to  take  out  insurance.  The  Czech  scheme  has  been  unable  up  to  now  to  find  an 
insurance  company  ready  to  cover  this  type  of  risk.  The  Irish  fund  has  also  analysed  this 

129 

 http://www.e-d-w.de/en/Phoenix-Stand.html  

EN 

95 

   EN 

 
                                                 
option  on  various  occasions.  Their  conclusion  is  that  it  would  be  costly  and  require  the 
collection and analysis of a significant quantity of data.  

Borrowing 
power 

Borrowing  between 
schemes or pools 

State funding  

Insurance 

Austria (AeW)   Yes 

No 

Yes; fund can borrow 
with state guarantee 

Obliged to 
take out 
insurance, 
but no 
insurance 
contracted 
yet 

Austria 
for banks) 

(fund 

Yes 

Belgium 

Yes 

If one scheme needs 
additional funds, 
other schemes need 
to contribute up to a 
certain limit (1.5% 
of risk-weighted 
assets) 

Single fund covering 
deposits and 
securities 

Bulgaria 

(fund 
Cyprus 
for  investment 
firms) 

Yes 

Yes 

No 

No 

Czech republic  Yes 

No 

Yes; fund can borrow 
with state guarantee 

n.a. 

No 

No 

No 

Yes; fund can borrow 
from the state  

Allowed but 
no insurance 
taken out 

No 

Allowed but 
no insurance 
taken out 

Allowed but 
no insurance 
taken out 

Denmark 

Yes 

Estonia 

Yes 

Yes, inter-borrowing 
possible between the 
different departments 

Yes; fund can borrow 
with state guarantee 

No 

Yes; borrowing 
possible between 
sectoral funds 

Yes; fund can borrow 
from the state or with 
state guarantee 

No 

Finland 

Yes 

No 

No 

Allowed but 
no insurance 
taken out 

EN 

96 

   EN 

 
 
 
France 

Germany 
(EdW) 

No 

Yes but 
only from 
participating 
firms 

Yes 

No 

No 

No 

No 

Last resort measure in 
the Phoenix case (the 
financing for the 
partial compensation 
payments has been 
assured by a loan 
granted to EdW by the 
German Government) 

(ASE 

Greece 
Guarantee 
Fund) 

Yes 

No 

No 

Hungary 

Yes 

No 

Yes; fund can borrow 
with state guarantee 

Ireland 

Yes 

Yes; inter-borrowing 
allowed between the 
two sub-funds of the 
ICS  

Italy 

No 

No 

No 

No 

No 

Latvia 

Lithuania 

Yes 

Yes 

Luxembourg 

Yes 

Malta 

Yes 

Netherlands 

No  

Poland 

Portugal 

No 

Yes 

No 

Yes; inter-borrowing 
allowed between the 
ICS and the DGS 

Yes; the Fund is a 
state undertaking 

No 

No 

No 

No 

No 

No 

Such funding would 
always be envisaged 
in a worse case 
scenario 

No 

No 

No 

Allowed but 
no insurance 
taken out 

Allowed but 
no insurance 
taken out 

Allowed but 
no insurance 
taken out 

Allowed but 
no insurance 
taken out 

No 

No 

No 

Allowed but 
no insurance 
taken out 
(not 
feasible) 

No 

No 

Allowed but 

EN 

97 

   EN 

 
no insurance 
taken out 

No 

No 

No 

No 

No 

Romania 

Slovakia 

Yes 

Yes 

Slovenia 

No; the 
scheme is 
not a legal 
entity 

No 

No 

Yes; inter-borrowing 
possible between the 
ICS and the DGS 

Yes; fund can borrow 
from the state 

No 

No 

Spain (Fogain)  Yes 

No 

Yes, the fund can 
borrow from the 
financial regulator but 
on a commercial basis 

Yes, the fund can 
borrow from the 
National Debt Office 

No 

Yes, via the 
National 
Debt Office 

Sweden 

United 
Kingdom 

Yes (credit 
facility in 
place) 

There is explicit 
cross-subsidisation 
between and within 
the 5 pools/classes. 

Yes, the fund can 
borrow from the Debt 
Management Office 

Allowed but 
no insurance 
taken out 

Estimate of securities and monies held by investment firms 

A  small  minority  of  schemes  have  detailed  information  on  the  amount  of  securities  and 
monies  held  by  investment  firms  and  on  the  number  of  securities  accounts  held  for  retail 
clients. 

As  of  2008 
(in  €  million 
for  absolute 
figures  and 
in 
for 
€ 
averages) 

Securities 
and  monies 
on 
held 
behalf 
of 
retail 
investors  

Covered 
securities 
and  monies 
on 
held 
behalf 
of 
retail 
investors 

of 

Number 
securities 
accounts 
held 
for 
retail clients 

Average 
securities 
and  monies 
held 
per 
securities 
account 

Average 
covered 
securities 
and 
monies held per 
securities 
account 

Bulgaria 

Cyprus 
(fund 
investment 
firms) 

for 

1.029 

122 

n.a. 

n.a. 

n.a. 

n.a. 

514 

n.a. 

n.a. 

n.a. 

EN 

98 

   EN 

 
 
Cyprus 
(fund 
banks) 

for 

Denmark 

Estonia 

Greece 
(ASE 
Guarantee 
Fund) 

Hungary 

Latvia 

Luxembourg 

Netherlands1 

Poland 

Portugal 

Romania 

Spain 
(Fogain) 

n.a. 

n.a. 

170 

109 

48 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

16.500 

10.279 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

427 

n.a. 

n.a. 

22.399 

6.360 

847.725 

26.422 

7.502 

491 

n.a. 

n.a. 

n.a. 

58.902 

8.336 

1.820 

n.a. 

3.400 

170.000 

n.a. 

n.a. 

75.362 

n.a. 

1.750.000 

43.064 

103.205 

18.179 

2.343.372 

44.041 

839 

200 

92.800 

9.041 

n.a. 

n.a. 

20.000 

n.a. 

7.757 

2.152 

18.497 

3.065 

n.a. 

n.a. 

n.a. 

1 Statistics relating to non-bank investment firms only 

Funds available 

With respect to the ex ante schemes we have tried to assess the coverage ratio, i.e. the ratio 
between the readily available funding and the total monies and securities held by investment 
firms  on  behalf  of  retail  investors.  Due  to  limited  data  available  we  have  only  been  able  to 
calculate this coverage ratio for a few schemes. 

Accumulated 
fund size as 
of end 2007 
(€ mln) 

Contributions 
collected in 
2008 (€ mln) 

Total amount 
of readily 
available funds 
as of end 2008 
(€ mln) 

Coverage ratio 
based on total 
monies and 
securities (%) 

Coverage 
ratio based on 
covered 
monies and 
securities (%) 

Austria (AeW) 

n.a. 

Belgium 

Bulgaria 

n.a. 

1,21 

n.a. 

50,9 

1,06 

n.a. 

802,7 

2,32 

n.a. 

n.a. 

n.a. 

n.a. 

0,23% 

1,90% 

EN 

99 

   EN 

 
 
Cyprus  (fund  for 
investment firms)  5,1 

Cyprus  (fund  for 
banks) 

Czech republic 

1,0 

0,9 

0,7 

0,19 

4,4 

5,8 

1,2 

5,3 

Denmark 

Mix of ex ante and ex post funding 

Mix of ex ante and ex post funding 

Estonia 

Finland 

France 

5.3 

n.a. 

n.a. 

5,0 

19,4 

Germany (EdW) 

n.a. 

Greece 
Guarantee fund) 

(ASE 

Hungary 

Ireland 

Italy 

Latvia 

Ex post funding 

Ex post funding 

0.17 

n.a. 

3,34 

n.a. 

4,0 

4,8 

12 * 

n.a. 

8,52 

n.a. 

9,0 

24,5 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

1,13% 

1,11% 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

0,04% 

0,14% 

n.a. 

n.a. 

Lithuania 

n.a. 

0,07 

1,5 

n.a. 

n.a. 

Luxembourg 

Ex post funding 

Malta 

Netherlands 

Poland 

1.09 

9,1 

13,95 

n.a. 

1,8 

3,4 

Portugal 

Ex post funding 

1.13 

10,9 

n.a 

n.a. 

n.a 

0,32% 

16,35 

0,02% 

n.a. 

Romania 

Slovakia 

1,17 

1.64 

1,45 

0.30 

2,62 

1.87 

0,31% 

0.32% 

1,31% 

2,01% 

Slovenia 

Ex post funding 

Spain (Fogain) 

38,5 

7,0 

45,5 

0,25% 

1,48% 

Sweden 

Ex post funding 

EN 

100 

   EN 

 
United Kingdom  Ex post funding 

(*) In Finland, the minimum capital for the compensation scheme of €12m is provided in cash 
up  until  a  certain  threshold,  the  remainder  may  be  covered  by  insurance  or  by  a  binding 
commitment to lend. 

Level of compensation& co-insurance principle 

In most Member States the maximum amount of compensation is €20 000 (Austria, Belgium, 
Bulgaria  as  from  1st  of  January  2010,  Cyprus,  Czech  Republic,  Denmark,  Estonia,  Finland, 
Germany,  Hungary,  Ireland,  Italy,  Latvia,  Lithuania,  Luxembourg,  Malta,  Netherlands, 
Romania as from 2012). A few Member States (Greece up to € 30 000, Poland up to €22 000, 
Portugal  up  to  €25  000,  Slovenia  up  to  €22  000,  Sweden  up  to  SEK  250  000)  provide 
compensation slightly in excess of the compensation level foreseen in the ICSD. France and 
the UK offer significantly higher compensation levels. Spain has increased, as a result of the 
financial  crisis,  the  level  of  investor-compensation  from  €20  000  to  €100  000  in  October 
2008. The Slovakian scheme is the only scheme to compensate for 100% of the value of the 
client's assets. 

Only  7  Member  States  (Finland,  Germany,  Hungary,  Ireland,  Latvia,  Malta,  Poland)  have 
adopted and/or maintained the co-insurance principle and cover 90% of the claim up to €20 
000.  The  UK  scheme  has  beginning  of  2009  removed  the  co-insurance  principle  and  as  a 
result,  increased  the  compensation  limit  for  investments  to  £50  000.  The  objective  was  to 
match the compensation limit for deposits. The deposit limit was increased in October from 
100% of €35 000 to 100% of £50 000. 

Maximum compensation (€) 

Level of coverage (%) 

Austria 

Belgium 

Bulgaria 

€20 000 

€20 000 

Equivalent  amount  of  €15  339  in  2009 
with  transitional  arrangement  to  increase 
the  compensation  limit  to  the  equivalent 
of  €20  000  as  from  the  1st  of  January 
2010. 

Cyprus 

€20 000 

Czech republic 

€20 000 

Denmark 

€20 000 

Estonia 

Finland 

€20 000 

€20 000 

100% 

100% 

90% 

100% 

100% 

100% 

100% 

90% 

EN 

101 

   EN 

 
 
 
France 

€70 000 on financial instruments, €70 000 
on investment monies 

100% 

Germany (EdW) 

€20 000 

Greece 
(ASE 
Guarantee  Fund 
& HDIGF) 

€30 000 

90% 

100% 

Hungary 

€20 000 as from 1st November 2009 

100%  of  claims  up  to  HUF1 
million; 90% of claims above 
HUF1 million 

Ireland 

Italy 

Latvia 

€20 000 

€20 000 

€20 000 

Lithuania 

€20 000 

Luxembourg 

€20 000 

Malta 

€20 000 

Netherlands 

€20 000 

Poland 

€22 000 

Portugal 

€25 000 

Romania 

Transitional arrangement in order to reach 
the  compensation  limit  of  €20  000  in 
2012. 

Slovakia 

100% of the value of client's assets 

Slovenia 

€22 000 

Spain 

€100 000 since October 2008 

Sweden 

SEK 250 000 (€24 000) 

90% 

100% 

90% 

100% 

100% 

90% 

100% 

100% of claims up to €3 000, 
90% of claims above €3 000  

100% 

100% 

100% 

100% 

100% 

100% 

United Kingdom  £48  000;  will be increased to  £50 000 as 
from 1 January 2010 

100% of the first £30 000 and 
90%  of  the  next  £20  000; 
100% as from 1 January 2010 

EN 

102 

   EN 

 
 
The impact of an increase of the compensation limit in terms of compensation amounts and/ 
or investors coverage has been assessed by three schemes.  

Based on the Phoenix case in Germany, an increase of the compensation limit 

• to € 50 000 would result in the compensation costs rising by 23% 

• to € 100 000 would result in the compensation costs rising by 37% 

An increase in the maximum compensation to EUR 50,000 in this compensation case would 
benefit  approximately  4.5%  of  the  investors  and  an  increase  to  EUR  100,000  an  additional 
1.5%. 

Based on data collected by the Irish scheme in relation to the W&R Morrogh case, an increase 
of the compensation limit 

• to € 50 000 would result in the compensation costs rising between 15% and 31% 

• to € 100 000 would result in the compensation costs rising between 46% and 73% 

An increase of the compensation limit to € 50 000 would have benefit approximately 2.9% of 
the investors and an increase to EUR 100,000 an additional 1.5%. 

According to the Portuguese scheme, with the current level of coverage € 25 000, in average, 
82.6%  of  covered  investors  would  be  fully  compensated  if  the  ICS  was  triggered.  The 
increase in the level of coverage to € 50 000 and to €100 000 would lead to an increase in the 
proportion of investors that would be fully compensated to respectively 91.4% and 96.1%.  

Time limits and right to partial compensation 

The time limit on compensation payment generally ranges from 3 months to 6 months. It is 
important to note that this time limit usually applies after the establishment of the eligibility 
and  the  amount  of  the  claim.  But  the  time  between  the  case's  trigger  event  and  the 
establishment of eligibility and the amount of the claim can be very long: 

Months needed to pay the first claim  Months needed to pay the last claim 

Germany 
(EdW) 

Between  7  months  and  37  months 
for the Phoenix case 

Between 28 months and 45 months; the 
Phoenix  case  is  still  open  since  2005 
which is more than 4 years. 

Hungary 

Between 1 month and 4 months 

Between 4 months and 21 months 

Ireland 

24 months 

120  months  in  the  case  of  MMI;  the 
W&R Morrogh case is still open after 8 
years  with  1%  of  the  claims  remaining 
to be certified 

EN 

103 

   EN 

 
 
 
 
Lithuania 

2 months 

2 months 

Netherlands  Within 3 months 

Within 3 months 

Poland 

20 months 

Sweden 

n.a. 

33 months 

24 months 

There are a few Member States where the time limit of 3 to 6 months starts to run from the 
date  the  financial  regulator  has  ascertained  the  scheme's  payment  obligation  (Finland, 
France), from when an  investor has submitted  a  compensation  claim  (Netherlands), or  from 
the date the inaccessibility of the funds has been ascertained (Slovakia). This might in practice 
reduce the payout delays. 

Another option to reduce delays in payments is partial compensation. Partial compensation is 
never  allowed  except  in  Belgium,  Czech  Republic,  Germany,  Slovenia  and  the  United 
Kingdom.  In  Czech  Republic,  partial  compensation  has  been  used  by  the  fund  because  of 
insufficient funds to cover the entirety of the claims. In Germany the scheme has started since 
February 2009 to pay partial compensation to investors in the Phoenix case.  

"Carry-over mechanisms" are usually not allowed – that is mechanisms aimed at preventing 
schemes  from  carrying  their  compensation  debts  over  a  certain  period  of  time.  The  only 
exception is the Czech Republic where compensation rights expire after 5 years. But the fund 
has never encountered any problem to make compensation payments within this period of 5 
years. 

Compensation cases 

According to Oxera, the number and size of the compensation cases between 1999 and 2004 
suggests  that  "many  schemes  have  had  no  or  limited  experience  of  the  actual  operation  of 
their  schemes".  Six  Member  States  (Austria,  Finland,  France,  Luxembourg,  Portugal  and 
Sweden) had not experienced any failures between 1999 and 2004 that would have triggered 
the  operation  of  the  compensation  scheme.  In  all  other  EU-15  Member  States  failures  had 
occurred but only infrequently (except in the UK).  Most of the compensation cases generated 
a  small  number  of  claims  except  in  the  case  of  Spain  and  Ireland.  Among  the  EU-10  new 
Member  States  only  the  Czech  Republic  and  Hungary  had  experienced  compensation  cases 
over this period.  

The higher number of claims in the UK can be attributed to the inclusion within the scope of 
the UK scheme of claims relating to poor investment management and negligent investment 
advice. According to the Oxera report (page 40): "only 1-2% are due to losses resulting from 
embezzlement  or  theft  of  client  assets".    The  most  frequent  case  of  misselling  relate  to 
pensions. According to the Oxera report (page 27): "in the financial year 2002/2003, 88% of 
the activity of the UK scheme related to claims resulting from cases of pension mis-selling".  

There  are  a  few  schemes  which  have  dealt  with  compensation  cases  since  2004:  9  cases  in 
Czech republic, 3 cases in Germany (among which the Phoenix case), 4 cases in Greece out of 
which only 2 cases have required compensation action, 5 cases in Italy, 1 case in Lithuania, 4 

EN 

104 

   EN 

 
 
cases in the Netherlands, 1 case in Poland, and 1 case in Sweden. The most important case in 
Germany is the Phoenix case. This failure involves such a large number of investors and huge 
amounts of compensation claims that the German fund was unable to even start to pay partial 
compensation without the German government support. 

In Austria there is a case before the courts (see AMIS case) as to whether amounts need to be 
paid out of the fund.  

EN 

105 

   EN 

 
Compensation  cases  between  1999  and  2004  (source: 
Oxera report pg 41 & 130) 

Compensation cases since 2004 

Number 
of failures 

Total 
claims 

Highest 
number of 
claims for 
a failure 

Highest total 
payout for a 
failure 

Number of 
failures 

Total claims 

Highest 
number of 
claims for a 
failure 

Highest total 
payout for a 
failure 

Austria (AeW) 

0 

-

-

Belgium 

Bulgaria 

Cyprus 

Czech republic 

Denmark 

Estonia 

Finland 

France 

1 

n.a. 

0 

6 

1 

0 

0 

0 

750

n.a.

-

n.a.

204

-

-

-

400

n.a.

-

n.a.

204

-

-

-

EN 

-

Legal 
proceedings 
pending in 1 
case (Amis 
case)

11 000

11 000

Still to be 
determined 

-

-

-

9

-

-

-

-

-

-

-

-

-

- 

- 

- 

23 166

19 070

€56m 

-

-

-

-

-

-

- 

- 

- 

n.a.

n.a.

n.a.

n.a. 

€2.6m

n.a.

-

n.a.

€1.6m

-

-

-

106 

EN 

 
  
 
 
 
Germany 
(EdW) 

(ASE 

Greece 
Guarantee 
Fund) 

Hungary 

Ireland 

Italy 

Latvia 

Lithuania 

Luxembourg 

Malta 

Netherlands 

Poland 

Portugal 

Romania 

Slovakia 

EN 

15 

2 411

5 

n.a.

723

n.a.

13 

3 

n.a.

n.a.

2 954

2 362

Expected to be 
under €7m

n.a.

n.a.

Expected to be 
under €8.5m

10 

606

394

€5.7m

0 

0 

0 

0 

2 

0 

0 

-

-

-

-

245

-

0

n.a. 

n.a.

0 

-

-

-

-

-

n.a.

-

n.a.

-

-

-

-

-

n.a.

-

n.a.

-

107 

3

4

-

-

5

-

1

-

-

3 1 

1

-

-

-

29 441

29 427 Current estimate 
of €46m 

5 013

1 948

€2.2m 

-

-

396

-

16

-

-

9

-

-

231

-

16

-

-

5

1 125

1 125

-

-

-

-

-

-

- 

- 

€0.8m 

- 

€0.06m 

- 

- 

€0.1m 

€7.6m 

- 

- 

- 

EN 

 
  
Slovenia 

Spain 

Sweden 

United 
Kingdom 

0 

0 

0 

1999   661 
2000   360 
2001   284 
2002   139 
2003   164 

-

-

-

8 818

6 852

€31.8m in one 
case

-

2 623

-

€23m

- 

8 077
6 913
7 482
7 598
12 851

-

-

1

n.a.

-

-

n.a.

81 305 
investment 
claims from 
2004/05 to 
2008/09; on 
average 95% 
of these claims 
relate to 
misselling

1 The number of claims and the payout amounts has not yet been determined for the most recent compensation case in 2009

-

-

n.a.

n.a.

- 

- 

n.a. 

n.a. 

EN 

108 

EN 

 
  
Eligible claims and claimants 

The  investor-compensation  schemes  do  not  usually  cover  sources  of  losses  beyond  what  is 
required in the ICSD except in the UK. The UK scheme is the only one to cover claims for 
compensation  resulting  from  poor  investment  management  or  bad  investment  advice  in  the 
event of default of the investment firm. 

The  ICS  generally  cover  retail  investors  only.  Non-retail  investors  are  excluded  from 
coverage  unless  the  national  scheme  elects  to  cover  losses  of  such  clients.  Several  schemes 
have  extended  the  coverage  to  cover  claimants  included  in  Annex  I  of  the  ICSD  (Czech 
Republic,  Denmark,  Finland,  France,  Germany,  Hungary, Italy, Lithuania, Poland, Portugal, 
Spain  and  Sweden).  The  United  Kingdom  has  extended  the  coverage  only  to  some  pension 
funds.  Finland  and  Germany  cover  all  categories  except  professional  and  institutional 
investors.  Four  Member  States  (Denmark,  Finland,  Germany,  and  Lithuania)  cover  national 
and  local  authorities  (categories  (2)  and  (3)  of  Annex  I).  In  addition  one  Member  States 
(Czech  Republic)  covers  only  national  authorities.  Eleven  schemes  have  elected  to  cover 
medium-sized and large companies (category (8) of Annex I). Czech Republic and Lithuania 
cover  professional  and  institutional  investors.  Denmark  also  covers  professional  and 
institutional  investors  except  when  they  are  affiliated  to  the  scheme.  Sweden  covers  also 
professional  investors  to  a  certain  extent,  i.e.  insurance  undertakings  and  collective-
investment undertakings. 

Coverage of claimants included in Annex I 

Yes. Category (8) of Annex I is covered. 

(AeW 
Austria 
and  schemes  for 
banks) 

Czech Republic  Yes. The Fund covers the claimants listed in points (1), (2), (6) and (8) of 

Annex I. 

Denmark 

Finland 

Yes.  The  Fund  covers  the  claimants  listed  in  points  (1)  apart  from 
deposits, funds and securities made by or belonging to institutions which 
are affiliated with the Fund, (2), (3), (5), (7) and (8) of Annex I. 

Yes. Categories (2), (3), (4), (5), (6) and (8) of Annex I are covered. Many 
of  these  will,  however,  inevitably  fall  into  the  category  of  professional 
investors and be thus excluded. 

France 

Yes. Category (8) of Annex I is covered. 

Germany 

Yes.  The  vast  majority  of  claimants  included  in  Annex  I  are  covered, 
investors  (incl.  pension  and 
except  professional  and 
retirement funds). 

institutional 

Hungary 

Yes. Categories (4), (7), and (8) are covered. 

Italy 

Yes. Category (8) is covered. 

EN 

109 

   EN 

 
 
 
Lithuania 

Yes. Categories (1), (2), (3), and (8) of Annex I are covered. 

Poland 

Yes; Pension fund management companies are covered. 

Portugal 

Yes. Category (8) of Annex I is covered. 

Spain 

Sweden 

Yes. Professional investors (according to the MiFID concept) that are not 
expressly stated in Annex I are covered as well as category (8). 

Yes.  The  Scheme  also  covers  insurance  undertakings  and  certain 
collective-investment undertakings. 

United Kingdom  Yes. Some pension funds are covered. 

[1st questionnaire: no answers received yet from France 

2nd questionnaire: no answers received yet from France, Slovenia] 

EN 

110 

   EN 

 
 
 
ANNEX  IV  –  SUMMARY  OF  THE  VIEWS  EXPRESSED  BY  INDUSTRY  AND 
INVESTOR ASSOCIATIONS AT THE MEETING HELD ON 3RD SEPTEMBER 2009  

1. Updating compensation limits 

The  compensation  limit  set  when  the  Investor  Compensation  Scheme  Directive  was 
introduced  in  1997  was  a  minimum  of  €20  000  for  each  client.  Is  that  minimum  level  still 
adequate or should it be increased? If it is increased, what is a suitable level and what is the 
basis for suggesting that new level? 

Is  there  merit  in  aligning  the  limit  to  the  Deposit  Guarantee  Scheme  Directive  level  (i.e.  at 
least €50 000 per client per firm increasing to  a fixed level of €100 000 by December 2010)? 

Most industry participants were of the view that there should not be any automatic alignment 
with the DGS compensation level. In their view the nature of the risks addressed are different. 
One  participant  suggested  that  the  minimum  level  of  €20  000  should  be  maintained  as  the 
Member States have the option to go beyond this level if needed. Another respondent thought 
it  would  make  sense  to  increase  this  minimum  amount  if  the  economics  show  that  the 
investors are not anymore adequately protected.  

A few industry participants were in favour of aligning the compensation level with the DGS 
level in order to maintain investor confidence and to maintain a level playing field between 
investment and banking products. 

Investor  representatives  supported  an  alignment  of  compensation  level  with  the  Deposit 
Guarantee Scheme. 

2. Deletion of the co-insurance principle 

The directive currently allows Member States to introduce a co-insurance principle (that is, to 
require clients to bear a proportion of any loss). Should the option of co-insurance be deleted 
so that clients cannot be required to bear any proportion of the loss (within the compensation 
limits)? 

There was a great consensus, both from industry and investors' associations, to remove the co-
insurance principle.  Investors cannot be reasonably expected to be able to assess the risk of 
the  investment  firm  they  choose  to  deal  with.  In  addition  it  is  a  confusing  message  for  the 

EN 

111 

   EN 

 
 
 
 
 
 
 
investor. In the case the co-insurance principle is maintained it should at least be harmonised 
across Member States to avoid any competition issue. 

3. Default of a third party depositary or custodian 

Should  compensation  be  payable  under  the  Directive  where  the  default  is  not  by  the 
investment  firm  itself  but  by  a  third  party  depositary  or  custodian  appointed  by  the  firm  to 
hold client assets (i.e. where the default of a third party results in the firm not being able to 
return assets to the client)? If so, what third parties and what situations should be covered? If 
not, do you believe it is justifiable that the client's position should differ according to whether 
the firm holds client assets itself or chooses a third party to hold the assets? 

There was a clear consensus that the investor should be protected in case of failure of a third 
party  custodian,  but  there  were  divergent  views  on  how  to  achieve  this  or  whether  it  was 
possible to do so. A number of participants pointed out that this raises very difficult technical 
and policy issues. For several participants the implications for investment firms of the specific 
MiFID requirements relating to the use of a third party depositary were not completely clear. 
In the event the scope  of  the schemes  would  be extended to cover failure of  the third party 
custodian,  everyone  agreed  that  the  custodians  should  be  required  to  contribute  to  the 
schemes.  

On the issue of compensation for failure of a UCITS depositary, a few participants advised to 
wait for the outcome of the UCITS depositaries consultation and the Alternative Investment 
Fund regulatory framework before moving forward on this topic. 

4. Money market funds 

Apart  from  bank  deposits,  are  there  any  other  types  of  investments  (for  example  money 
market funds) for which an investor should be entitled to compensation if the investment is not 
repaid? If so, why do they deserve special treatment and could this create an unlevel playing 
field with other types of investments?  

All  participants  agreed  that  money  market  funds  should  not  be  covered  by  the  ICSD.  This 
would  imply  covering  investment  risk  which  is  inherent  to  any  investment  product.  The 
funding  of  such  a  scheme  would  also  not  be  feasible  in  view  of  the  extent  of  the  losses  to 
cover.  Different  options  were  put  forward  such  as  improved  disclosure,  clear  definition  of 
money market funds, etc. 

EN 

112 

   EN 

 
 
 
 
 
 
 
There  was  one  caveat  from  the  investor  side  in  the  case  the  investment  firm  deposits  the 
client's investment monies in "qualified money market funds" as it is allowed by article 18 of 
the MiFID Implementing Directive. In case the money market fund would decrease in value, 
the investor should be compensated by the scheme. 

5. Funding of schemes 

Should  a  level  of  pre-funding  be  required  for  all  schemes?  If  so,  on  what  basis  would  the 
amount required to be pre-funded be assessed? 

Most participants agreed that the schemes need to be at least partially pre-funded if they want 
to  be  credible  towards  the  investors.  Some  of  the  participants  suggested  that  the  funding 
principles (ex ante or ex post) of Investor Compensation schemes should be linked to the ones 
of  the  Deposit  Guarantee  Scheme.  One  of  the  investors'  associations  was  in  favour  of  total 
pre-funding. 

Some  of  the  participants  underlined  the  fact  that  no  ex  ante  funding  can  be  designed  to 
overcome a worst case scenario. Complementary funding measures should be foreseen. 

With  respect  to  the  basis  on  which  to  assess  the  pre-funding,  the  participants  had  either  no 
views or thought that it was a technical matter to be dealt with at the level of each scheme.  

6. Provisional payouts 

Investor compensation schemes are required under the directive to reimburse investors within 
three months of "the establishment of the eligibility and the amount of the claim". But, as the 
eligibility  and  the  amount  of  the  claim  are  determined  by  national  law  (notably  insolvency 
law),  the  waiting  period  for  investors  can  be  considerable  (in  some  cases  several  years  if 
there  are  court  proceedings  related  to  insolvency).  Should  investors  be  entitled  to  a  partial 
provisional payment?  If so, how could this work in practice? 

Some  participants  raised  doubts  about  the  possibility  to  make  provisional  payout  while  the 
eligibility  of  the  claim  has  not  yet  been  ascertained  due  to  the  fact  that  in  case  of 
establishment of non-eligibility the investor should pay-back the amount received to the fund.  

Several  of  the  participants  thought  there  was  no  need  to  adapt  the  rules  to  the  Deposit 
Guarantee Scheme. There was not the same need in the case of investments that the investor 

EN 

113 

   EN 

 
 
 
 
 
 
 
 
gets compensated within days as it is necessary for deposits which investors use for day-to-
day living expenses. 

One of the participants underlined the importance to set realistic deadlines. If the schemes can 
not  meet  the  shortened  payout  delays,  this  would  be  damaging  for  the  credibility  of  the 
schemes.   

Investors'  associations  were  of  the  view  that  investors  should  be  compensated  within  days. 
They  also  put  forward  the  idea  to  link  the  payout  delay  to  the  trigger  event,  meaning  the 
default of the investment firm. Moreover, they put forward the idea to create a special scheme 
to  cover  the  cases  of  investors  not  paying  back  to  the  fund  the  money  received  as  a 
provisional payout when the non-eligibility of the claim was established.  

7. Information to clients about the directive 

Is  the  scope  and  coverage  of  the  Investor  Compensation  Schemes  Directive  generally 
understood by investors? Should firms provide more information upfront to clients about the 
scope and level of compensation provided for under the directive? Specifically, should more 
information be provided about what the scheme does and does not cover? 

There  was  a  large  consensus  that  disclosure  requirements  should  be  strengthened.  But  the 
information  disclosed  should  be  in  a  non-technical  language  and  explicit  about  the  risks 
which are and are not covered by the scheme. 

According to one of the participants, due to the crisis, public awareness of the existence of the 
schemes  has  improved.  One  of  the  investors'  associations  suggested  improving  investor 
education via for example public campaigns. He also mentioned that misleading information 
about scheme coverage had been circulated in some Member States. 

8. Coverage of non-retail investors 

Should  some  of  the  non-retail  investors  listed  in  Annex  I  of  the  Directive  be  covered  by 
investor compensation schemes? 

The  participants  had  not  clear  views  on  an  extension  of  the  scope  of  coverage.  Several  of 
them  agreed  that  it  would  make  sense  to  align  retail  investor  definitions  across  directives 
(ICSD, MiFID, Prospectus) and to take into account the "opt-ins" allowed by MiFID. 

EN 

114 

   EN 

 
 
 
 
 
 
 
 
9. Other issues 

Are  you  aware  of  any  other  practical  issues  concerning  the  functioning  of  the  Investor 
Compensation Schemes Directive that may have caused difficulties for investors or firms? 

The  European  Commission  asked  whether  civil  claims  for  breach  of  conduct  of  business 
obligations should be covered. There was little comment on this issue. 

One  of  the  participants  wanted  to  draw  the  attention  on  the  scope  of  the  ICSD.  If  an 
investment firm is not allowed to hold client's assets, it should not be covered by the scheme. 

EN 

115 

   EN 

 
 
 
 
 
ANNEX  V  –  THE  AVERAGE  AMOUNT  HELD  BY  INVESTMENT  FIRMS  ON 
BEHALF OF RETAIL INVESTORS  

Total securities held per household 

 As there is very limited data available at the national investor compensation schemes about 
the average amount held by investment firms on behalf of retail investors, the average amount 
of securities held by household was used a proxy. This proxy was calculated by dividing the 
amount of securities held by households by the number of households.  

The amount of securities held by households was based on the "Financial accounts – balance 
sheets – households; non profit institutions" published by Eurostat (ESA-95 methodology130). 
The categories of financial assets usually held in a securities account by investment firms on 
behalf of the investor were taken into account: securities other than shares (f3), quoted shares 
(f511), and mutual funds shares (f52).    

As there is no data available on the number of securities accounts owned by retail investors, 
the number of households was used as a proxy131. 

Table: Average amount of securities held per household in 2007 – in Euro 

130 
131 

 http://circa.europa.eu/irc/dsis/nfaccount/info/data/esa95/esa95-new.htm  
 Source Eurostat: 
http://epp.eurostat.ec.europa.eu/portal/page/portal/living_conditions_and_social_protection/data/main_t
ables   

EN 

116 

   EN 

 
 
 
 
 
                                                 
Securities 
other than 
shares

Quoted 
shares

Mutual 
fund 
shares

Total 
securities 

Austria
Belgium
Bulgaria
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembpourg
Malta
Netherlands
Poland
Portugal
Romania
Slovakia
Slovenia
Spain
Sweden
United Kingdom
Average EU-27
Average EU-15
Median EU-27
Median EU-15

10.877
15.053
36
n.a.
n.a.
11.324
847
1.783
2.089
8.974
7.224
1.239
75
30.899
8
392
n.a.
n.a.
6.927
95
5.170
38
258
669
3.442
3.369
1.508
4.882
7.765
1.783
6.049

7.187
21.657
578
n.a.
n.a.
13.918
901
14.219
4.890
5.186
12.192
354
12.409
8.578
n.a.
673
n.a.
n.a.
14.295
1.264
3.433
1.902
n.a.
7.038
9.585
15.900
9.436
7.886
10.920
7.187
10.889

14.056
29.258
17
n.a.
n.a.
16.390
403
8.920
12.247
13.886
3.969
2.503
n.a.
11.158
n.a.
199
n.a.
n.a.
7.425
2.216
7.164
188
1.183
4.617
12.658
13.248
8.574
8.109
12.227
7.425
12.247

32.119
65.967
631
n.a.
n.a.
41.633
2.150
24.922
19.226
28.047
23.385
4.096
n.a.
42.056
n.a.
1.264
n.a.
n.a.
28.647
3.576
15.768
2.128
n.a.
12.324
25.685
32.517
19.518
21.283
30.730
21.451
28.047  

Source: Eurostat; Data for quoted shares were not provided by Eurostat for the UK and Italy. 

Related to the UK we have used information provided by the UK Office National Statistics -
Financial 
No. 
http://www.statistics.gov.uk/STATBASE/Product.asp?vlnk=376 

Statistics 

October 

(Table 

2009 

570 

12.1N);   

Related to Italy we have used information provided by Banca d'Italia – Statistical Appendix – 
Abridged 
2007: 
http://www.bancaditalia.it/pubblicazioni/relann/rel07/encf07/stat_app_07.pdf  

report 

information 

The number of households for Ireland and Sweden were not provided by Eurostat. We used 
Ireland 
by 
respectively 
(http://www.cso.ie/px/pxeirestat/database/eirestat/Census%20of%20Population/Census%20of
%20Population.asp) 
Sweden 
(http://www.scb.se/Pages/TableAndChart____146284.aspx). 

Statistics  Office 

published 

Statistics 

Central 

and 

EN 

117 

   EN 

 
 
ANNEX VI – DESCRIPTION OF SIGNIFICANT COMPENSATION CASES 

The Amis case 

The  AMIS  group  consisted  of  two  companies:  Asset  Management  Investment  service  AG 
(AMIS) and AMIS Financial Consulting AG (AFC) which are both commonly referred to as 
the "AMIS case". Both companies were not allowed to hold clients' assets and, for this reason, 
pursuant to Austrian law were not obliged to participate in the investor compensation scheme 
for  non-bank  investment  firms  (AeW).  Client's  money  was  transferred  directly  to 
Luxembourg depositary banks and invested in two UCITS funds. 

AMIS became insolvent in 2005 subsequent to a fraud. Out of 16 000 investors, 12 000 have 
filed a claim with the Austrian compensation scheme for a total amount of €145 million. The 
Austrian  ICS  has  refused  to  compensate  investors  and  referred  them  to  the  Luxembourg 
depositary  banks.  This  scheme  position  was  challenged  before  an  Austrian  Court  which 
obliged  the  scheme  to  compensate  investors  since  "AMIS  held  the  funds  indirectly".  The 
Austrian scheme has appealed against this judgment. 

In the case the Austrian scheme would have to compensate the AMIS investors, it could only 
meet payment up to € 5,5 million. The amount of additional ex-post contributions would be 
too important in order to be sustainable for (some of) its participating members. 

In  light  of  these  events  the  Austrian  Securities  Supervision  Act  2007  has  been  amended  in 
order to satisfy medium and large claims as well as mitigating the risks of such claims as well. 
Additional disclosure obligations have been introduced. For example, investment firms have 
to clearly inform investors that they are prohibited from holding clients' assets under Austrian 
requirements. The funding of the scheme has been strongly reinforced by requiring members 
to  pay  an  annual  fee  and  by  including  the  option  for  the  fund  to  be  backed  by  a  state 
guarantee. These changes became effective as from 1 May 2009. 

The Phoenix case132 

In  Germany,  the  investment  firm  Phoenix  Kapitaldienst  Gmbh  (Phoenix)  became  insolvent 
because of illegalities in its activities. On March 15, 2005 the German Financial Supervisory 
Authority  (BaFin)  ascertained  and  notified  the  occurrence  of  an  event  of  claim  at  Phoenix 
Kapitaldienst  GmbH.  Investors  had  to  file  their  claim  for  compensation  within  one  year 
starting  from  the  notification  date.  The  German  ICS  for  investment  firms,  EdW,  received 
more than 30,000 compensation claims for a total amount of € 674 millions. The insolvency 
assets amounted to circa €230 million which could cover a little more than 30% of the claims. 
The  compensation  payments  were  initially  planned  to  be  made  after  the  disbursement  from 
the  insolvency  assets.  This  implied  that  the  start  of  the  compensation  payments  could  only 

132 

 http://www.e-d-w.de/en/Phoenix-Stand.html 

EN 

118 

   EN 

 
 
 
 
                                                 
start  once  the  insolvency  plan  was  confirmed  by  the  insolvency  administrator  and  the 
creditors.  But  this  plan  was  challenged  before  the  Court  by  one  of  the  largest  creditors 
(creditor "X"). "X" argued that a large portion of the insolvency assets were not part of the 
Phoenix  asset  pool  (approx.  EUR  162  million  of  a  total  of  approx.  EUR  230  million)  and 
therefore  may  not  be  distributed  to  investors  under  the  insolvency  plan.  End  October  2007, 
the  Court's  ruling  was  in  favour  of  "X".  EdW  informed  via  its  website  that  "as  a  result,  no 
payments to creditors are to be expected from the insolvency estate in the foreseeable future". 
The insolvency administrator has introduced an appeal against this ruling. 

In  order  to  be  able  to  compensate  investors,  however,  the  EdW  started  preparing  partial 
compensation  payments.  EdW's  requested  special  contributions  from  participating  members 
to finance the partial compensation payments.  Many institutions affiliated to EdW appealed 
against the contribution requests and refused payments. In September 2008 the administrative 
court  of  Berlin  suspended  the  obligation  of  the  affiliated  institutions  to  pay  special 
contributions owing to "doubts about the legitimacy of the legal regulations pertaining to the 
collection of special contributions". EdW has introduced an appeal. 

The data collection and analysis to enable the calculation of partial compensation payments 
was completed in December 2008. As result EdW has started paying partial compensation as 
from  February  2009.  EdW  has  assessed  the  time  required  to  review  and  disburse  the 
individual claims to about 2 1/2 years (approx. EUR 128 million over the next 2.5 years). The 
financing for the compensation payments has been assured by a loan granted to EdW by the 
German Government. 

EN 

119 

   EN 

 
 
ANNEX VII – DATA ON COMPLAINTS ABOUT INVESTMENT ADVICE 

The  Commission  has  asked  FIN-NET  members  to  fill  out  a  questionnaire  concerning 
complaints  on  financial  services.  Seven  Member  States  have  provided  detailed  data 
concerning  complaints  in  the  field  of  investment  services,  more  specifically  concerning 
investment advice.  

Table X: Complaints on advice concerning investment products by Member State 

2007 

2009 

2009* – data limited 
to first 6 months 

France 

Belgium 

Italy 

Portugal 

Germany 

United Kingdom 

Ireland 

78

62

95

8

384

46 176

384

294

100

63

12

1 325

22 890

1 039

234

103

81

5

n.a.

6 908

860

Source: FIN-NET members, September 2009 

EN 

120 

   EN 

 
  
 
 
ANNEX VIII – ICSD PROBLEM TREE 

Drivers 

Problems 

Effects 

Investor protection issues 

Investor detriment 

  Investor protection 

might be compromised 
in case: 
- the scheme is not 
working in an efficient 
way  
- there is a gap in the  
coverage 

  Uneven degree of 

investor protection  
between Member States 
depending on differences 
in the level and scope of 
coverage. 

Industry 

  Unlevel playing field 
between investment 
firms across EU Member 
States 

in 

Problems 
the 
practical  functioning 
of the ICSD: 

-  Funding  of 
schemes  

the 

- Payout delays 

- 
Inadequate 
awareness of investors

due 

the 
Inadequacy  of 
to 
ICSD 
subsequent 
changes 
in  the  EU  regulatory 
framework and in the 
financial 
services 
industry: 

-  (Non-)  coverage  of 
mis-selling  or  poor 
advice 

-  (Non-)  coverage  of 
non-retail clients  

Gaps 
regulatory system: 

in 

the 

-  (Non-)  coverage  of 
failure  of  a  third-party 
custodian

Amendment  of 
the 
minimum coverage of 
the DGS: 

- 
of 
Level 
compensation  &  co-

EN 

121 

-  Unpaid  claims  in  case  of 
insufficient  funding  at  the 
level of the scheme 

-  Very  long  and  uncertain 
payout delays  

right 

-  No 
to  scheme 
compensation  in  case  of 
failure  of  a 
third  party 
custodian  or  a  UCITS 
depositary or sub-custodian 

-  Different  level  and  scope 
between 
protection 
of 
Member States 

confidence 
Undermined 
in 
the 
the  operation  of 
schemes  and  in  the  level 
and  scope  of  coverage  and 
as  a  result  in  the  operation 
of the investment firms

Industry 

  Distortion of 

competition across the 
EU affecting the 
proper functioning of a 
single market for 
investment services 
(differences in terms 
of the functioning of 
the schemes and the 
level and scope of 
coverage) 

  Distortion of 

competition within 
Member States 
between different 
investments: cash 
deposits vs. financial 
instruments held as 
investments leading to 
competitive

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ANNEX  IX  –  SUMMARY  OF  THE  MEETING  WITH  NATIONAL  INVESTOR 
COMPENSATION SCHEMES ON 9TH FEBRUARY 2010 

The  Commission  services  organised  a  hearing  on  the  review  of  the  Investor  Compensation 
Schemes Directive on Tuesday 9 February. Only the compensation schemes were invited, as 
discussions with Member States are taking place in the ESC and a hearing with industry and 
investors took place in September 2009.  

The purpose of the meeting was to discuss technical issues concerning the funding, the level 
of  compensation  and  the  payout  delays  in  order  to  further  complement  the  information 
gathered  via  the  two  questionnaires  we  sent  to  the  schemes  in  June  and  November  2009. 
Moreover,  as  no  meeting  of  the  compensation  schemes  at  European  level  had  ever  been 
organised, the hearing gave an opportunity to the schemes to know about the practices of the 
other schemes. 

Funding 

How  to  assess  the  probability  of  firm  defaults  and  the  related  potential  liabilities  for  the 
scheme? 

All of the schemes did agree that it is nearly impossible to assess the probability of defaults 
and the related potential liabilities. There are too many uncertainties at stake: type of failed 
investment firm, causes of the insolvency, difficulty in gathering the necessary data, etc. As 
an example,  bankruptcy does not necessary lead  to a  case for compensation. An investment 
firm  can  indeed  go  bankrupt  without  harm  to  the  investors.  In  the  view  of  most  of  the 
schemes, they can only try to make forecasts of the short to medium term liabilities relating to 
known compensation cases.  

In  terms  of  the  data  collected  by  the  schemes,  there  are  two  approaches.  In  some  Member 
States, the schemes do act simply as a payout box and do not collect any data on the client's 
assets held by investment firms. In other Member States, the schemes collect such data from 
the investment firms themselves and/or their national regulator provides them with such data. 

 How to assess the adequacy of your funding arrangements in light of potential liabilities? 
What methodologies are used to calculate funding? What is the appropriate level of pre and 
post funding?  

EN 

122 

   EN 

 
 
 
 
 
 
 
 
It is nearly impossible to assess the adequacy of the funding levels in light of the difficulties 
explained above. 

Most of the schemes support the introduction of pre-funding principles and more transparent 
systems.  Some  of  the  schemes  stressed  the  importance  of  pre-funding  to  enhance  investor 
confidence.  One  of  the  schemes  disagreed  by  saying  that  an  explicit  backing  by  the 
government would be more efficient in tackling investor confidence. In addition the matter of 
pre- and/or post-funding is nevertheless not as important as in the case of the DGS as having 
enough  liquidity  readily  available is  less  critical.  Another  argument  raised  in  favour  of  pre-
funding by one of the schemes was that it might also contribute to market discipline, although 
this was disputed by another scheme saying this would not solve the problem of fraud. 

Several schemes underline the importance of having different sources of funding. Pre-funding 
can  serve  as  a  first  protection  layer  but  will  not  be  sufficient  in  case  of  failure  of  a  major 
investment  firm.  Ex  post  funding  can  help  to  handle  major  failures.  On  top  of  that,  the 
schemes  should  have  access  to  additional  sources  of  liquidity  such  as  commercial  loans, 
insurance  and  finally  government  support.  Some  of  the  schemes  reacted  by  saying  that  in 
practice commercial loans and insurance contracts are not a viable option. 

What  are  the  most  appropriate  criteria  to  calculate  contributions?  Should  it  be 
differentiated by investment business? How to differentiate the calculation according to the 
risks each firm imposes on the scheme (i.e.: risk-based approach)? 

Although it seems difficult to have a general rule to calculate contributions, several schemes 
mentioned  that  the  contributions  should  be  proportional  to  the  size  of  the  business.  The 
volume of the assets eligible for compensation was given as an example as it is directly linked 
to the risks posed by the firm to the scheme. It was also stressed that the contributions should 
take into account the financial capability of the firms.  

A  few  schemes  have  in  place  monitoring  tools  enabling  them  to  check  the  accuracy  and 
completeness of the data reported by the firms, and the related contributions paid.  

When  there  are  limits  on  ongoing  and/  or  exceptional  contributions,  how  to  assess  the 
adequacy of these limits?  

EN 

123 

   EN 

 
 
 
 
 
 
 
 
 
There  were  two  examples  given.  One  of  the  scheme  stated  that  the  limits  are  calculated 
according to the affordability of the industry, in order to avoid putting the sector in jeopardy. 
Another scheme explained that the limits are determined by the scheme's own assessment of 
the firm on a discretionary basis. 

Do schemes currently publish details of how they calculate potential liabilities? 

Do schemes currently publish details of the funds immediately available to meet claims? 

The  transparency  level  differs  a  lot  from  one  scheme  to  the  other.  In  some  countries  the 
scheme's  annual  report  is  made  publicly  available,  in  others  not.  The  level  of  information 
disclosed in the annual report differs too. 

Minimum level of compensation 

How to assess whether the minimum level of compensation is still sufficient to protect the 
investment of retail investors? 

How to assess the impact of any change in the minimum compensation level on the funding 
arrangements? 

Have you ever seen any evidence of distortion of competition as a result of different levels 
of compensation between Member States, and/or between the deposit guarantee scheme and 
the investor compensation scheme? 

Most of them are not in favour of raising the compensation limit. A few schemes mentioned 
that an increase of the compensation level would mean a significant increase of compensation 
costs although only a small percentage of additional investors would be covered.  

The issue of distortion of competition as a result of different compensation levels between the 
ICS and the DGS was controversial.  

Payout delays 

EN 

124 

   EN 

 
 
 
 
 
 
 
 
 
 
What are the main obstacles to a prompt pay out of compensation to investors?  

How could the situation be improved within the current framework? What do you believe is 
a reasonable period for a payout to be made to an investor? 

The schemes do not support a reduction of the payout delays. In their view the best solution to 
reduce the payout delays would be to introduce in the Directive some principles to oblige the 
insolvency  authorities  to  provide  information  to  the  relevant  compensation  scheme  when 
examining an insolvency case or even to involve them in the insolvency procedure. 

For those schemes where partial compensation payment is allowed, how do you ensure that 
no undue money is paid to the investors and is there any means to recover money unduly 
paid out? 

In case of too large partial compensation payments, reclaiming money from investors is a very 
proceedings).
process 
sensitive 

expensive 

court 

(e.g. 

and 

EN 

125 

   EN 

 
 
 
 
 
 
ANNEX X – IMPACT OF THE INTRODUCTION OF GENERAL FUNDING PRINCIPLES UPON INVESTMENT FIRMS 

Two scenarios were developed: 

Scenario 1: target fund level of 0.50% of the covered securities and monies held by investment firms on behalf of retail clients, and 
target fund level is 100% ex ante funded 

EN 

126 

EN 

 
  
Scenario 1

0,50%

100%

Securities 
and monies 
held on 
behalf of 
retail 
investors

Covered 
securities 
and monies 
held on 
behalf of 
retail 
investors

Total 
amount of 
readily 
available 
funds as of 
end 2008

Coverage 
ratio based 
on total 
securities 
and monies

Coverage 
ratio 
based on 
covered 
securities 
and 
monies

Target fund 
level = 0,50% 
of covered 
securities 
and monies

Increase in ex 
ante funding 
needs if target 
fund is 100% ex 
ante funded

# participating 
firms

average costs 
increase per 
member (in €)

# securities 
accounts 
held for retail 
clients

average 
costs 
increase per 
retail client 
(in €) if 100% 
pass on

n.a.
n.a.
1.029
n.a.
n.a.
n.a.
n.a.
170
n.a.
n.a.
n.a.
n.a.
22.399
n.a.
n.a.
491
n.a.
n.a.
n.a.
n.a.
75.362
103.205
839
584
n.a.
18.497
n.a.
n.a.
-

n.a.
n.a.
122
109
515
n.a.
48
n.a.
n.a.
n.a.
n.a.
n.a.
6.360
n.a.
n.a.
n.a.
n.a.
1.820
n.a.
3.400
n.a.
18.179
200
93
n.a.
3.065
n.a.
n.a.
-

n.a.
803
2,32
1,20
5,80
5,30
166,10
0,40
12,00
n.a.
8,52
n.a.
9,00
24,50
13,90
n.a.
1,50
n.a.
1,13
10,90
16,35
n.a.
2,62
1,87
n.a.
45,50
n.a.
8,80
-

n.a.
n.a.
0,23%
n.a.
n.a.
n.a.
n.a.
0,24%
n.a.
n.a.
n.a.
n.a.
0,04%
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
0,02%
n.a.
0,31%
0,32%
n.a.
0,25%
n.a.
n.a.
0,20%

-

-

-

0,23%

n.a.
n.a.
1,90%
1,11%
1,13%
n.a.
346,76%
n.a.
n.a.
n.a.
n.a.
n.a.
0,14%
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
0,32%
n.a.
n.a.
1,31%
2,01%
n.a.
1,48%
n.a.
n.a.
39,57%
1,18%
1,40%
1,22%

n.a.
n.a.
0,61
0,54
2,57
n.a.
0,24
n.a.
n.a.
n.a.
n.a.
n.a.
31,80
n.a.
n.a.
n.a.
n.a.
9,10
n.a.
17,00
n.a.
90,89
1,00
0,47
n.a.
15,33
n.a.
n.a.
-

-

n.a.
n.a.
-1,71
-0,66
-3,23
n.a.
-165,86
n.a.
n.a.
n.a.
n.a.
n.a.
22,80
n.a.
n.a.
n.a.
n.a.
9,10
n.a.
6,10
n.a.
90,89
-1,62
-1,40
n.a.
-30,18
n.a.
n.a.
-

119
112
126
n.a.
71
54
203
24
151
n.a.
790
84
57
5370
926
39
33
239
38
346
79
74
101
38
24
146
235
10.104
-

n.a.
n.a.
-13.571
n.a.
-45.451
n.a.
-817.047
n.a.
n.a.
n.a.
n.a.
n.a.
400.000
n.a.
n.a.
n.a.
n.a.
38.075
n.a.
17.630
n.a.
1.228.284
-16.052
-36.969
n.a.
-206.678
n.a.
n.a.
-

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
16.500
n.a.
n.a.
n.a.
427
847.725
n.a.
n.a.
58.902
n.a.
n.a.
n.a.
170.000
1.750.000
2.343.372
92.800
n.a.
n.a.
n.a.
n.a.
n.a.
-

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
26,90
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
35,88
n.a.
38,79
-17,47
n.a.
n.a.
n.a.
n.a.
n.a.
-

-

-

-

-

-

Amounts in € 
millions

Austria 
Belgium
Bulgaria
Cyprus (banks)
Cyprus (IF)
Czech republic
Denmark (1)
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg (2)
Malta
Netherlands
Poland
Portugal (2)
Romania
Slovakia
Slovenia
Spain
Sweden
United Kingdom
Average
Average excl. DK
Median
Median excl. DK

(1) Does not take into account the amounts pledged by investment firms of €333m
(2) Being ex post funded schemes we assumed that these schemes have no funds readily available

EN 

127 

EN 

 
  
 
Scenario 2: target fund level of 1.00% of the covered securities and monies held by investment firms on behalf of retail clients, and 
target fund level is 100% ex ante funded 

EN 

128 

EN 

 
  
Securities 
and monies 
held on 
behalf of 
retail 
investors

Covered 
securities 
and monies 
held on 
behalf of 
retail 
investors

Total 
amount of 
readily 
available 
funds as of 
end 2008

Coverage 
ratio based 
on total 
securities 
and monies

Coverage 
ratio 
based on 
covered 
securities 
and 
monies

Target fund 
level = 1,00% 
of covered 
securities 
and monies

Increase in ex 
ante funding 
needs if target 
fund is 100% ex 
ante funded

# participating 
firms

average costs 
increase per 
member (in €)

# securities 
accounts 
held for retail 
clients

average 
costs 
increase per 
retail client 
(in €) if 100% 
pass on

n.a.
n.a.
1.029
n.a.
n.a.
n.a.
n.a.
170
n.a.
n.a.
n.a.
n.a.
22.399
n.a.
n.a.
491
n.a.
n.a.
n.a.
n.a.
75.362
103.205
839
584
n.a.
18.497
n.a.
n.a.
-

n.a.
n.a.
122
109
515
n.a.
48
n.a.
n.a.
n.a.
n.a.
n.a.
6.360
n.a.
n.a.
n.a.
n.a.
1.820
n.a.
3.400
n.a.
18.179
200
93
n.a.
3.065
n.a.
n.a.
-

n.a.
803
2,32
1,20
5,80
5,30
166,10
0,40
12,00
n.a.
8,52
n.a.
9,00
24,50
13,90
n.a.
1,50
n.a.
1,13
10,90
16,35
n.a.
2,62
1,87
n.a.
45,50
n.a.
8,80
-

n.a.
n.a.
0,23%
n.a.
n.a.
n.a.
n.a.
0,24%
n.a.
n.a.
n.a.
n.a.
0,04%
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
0,02%
n.a.
0,31%
0,32%
n.a.
0,25%
n.a.
n.a.
0,20%

-

-

-

0,23%

n.a.
n.a.
1,90%
1,11%
1,13%
n.a.
346,76%
n.a.
n.a.
n.a.
n.a.
n.a.
0,14%
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
0,32%
n.a.
n.a.
1,31%
2,01%
n.a.
1,48%
n.a.
n.a.
39,57%
1,18%
1,40%
1,22%

n.a.
n.a.
1,22
1,09
5,15
n.a.
0,48
n.a.
n.a.
n.a.
n.a.
n.a.
63,60
n.a.
n.a.
n.a.
n.a.
18,20
n.a.
34,00
n.a.
181,79
2,00
0,93
n.a.
30,65
n.a.
n.a.
-

-

n.a.
n.a.
-1,10
-0,12
-0,65
n.a.
-165,62
n.a.
n.a.
n.a.
n.a.
n.a.
54,60
n.a.
n.a.
n.a.
n.a.
18,20
n.a.
23,10
n.a.
181,79
-0,62
-0,94
n.a.
-14,85
n.a.
n.a.
-

119
112
126
n.a.
71
54
203
24
151
n.a.
790
84
57
5370
926
39
33
239
38
346
79
74
101
38
24
146
235
10.104
-

n.a.
n.a.
-8.730
n.a.
-9.211
n.a.
-815.867
n.a.
n.a.
n.a.
n.a.
n.a.
957.895
n.a.
n.a.
n.a.
n.a.
76.151
n.a.
66.763
n.a.
2.456.568
-6.164
-24.728
n.a.
-101.712
n.a.
n.a.
-

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
16.500
n.a.
n.a.
n.a.
427
847.725
n.a.
n.a.
58.902
n.a.
n.a.
n.a.
170.000
1.750.000
2.343.372
92.800
n.a.
n.a.
n.a.
n.a.
n.a.
-

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
64,41
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
135,88
n.a.
77,57
-6,71
n.a.
n.a.
n.a.
n.a.
n.a.
-

-

-

-

-

-

Amounts in € 
millions

Austria 
Belgium
Bulgaria
Cyprus (banks)
Cyprus (IF)
Czech republic
Denmark (1)
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg (2)
Malta
Netherlands
Poland
Portugal (2)
Romania
Slovakia
Slovenia
Spain
Sweden
United Kingdom
Average
Average excl. DK
Median
Median excl. DK

(1) Does not take into account the amounts pledged by investment firms of €333m
(2) Being ex post funded schemes we assumed that these schemes have no funds readily available

EN 

129 

EN 

 
  
 
The  countries  underlined  are  countries  where  the  compensation  scheme  is  funded  with  a  mix  of  ex  ante  and  ex  post  funding.  The 
countries highlighted in grey are schemes with ex post funding. 

EN 

130 

EN 

 
  
 
ANNEX XI – GLOSSARY OF ACRONYMS 

AES: Athens Stock Exchange Members Guarantee Fund 

AeW:  Anlegerentschädigung  von  Wertpapierdienstleistungsunternehmen  GmbH 
(Austrian Investor Compensation Scheme for non-bank investment firms) 

CESR: Committee of European Securities Regulators 

DGS: Deposit Guarantee Scheme 

DGSD: Deposit Guarantee Scheme Directive 

ECB: European Central Bank 

EdW:  Entschädigungseinrichtung  der  Wertpapierhandelsunternehmen  (German 
Investor Compensation Scheme for non-bank investment firms) 

EFAMA: European Fund and Asset Management Association 

ESC: European Securities Committee 

ESMA: European Securities and Markets Authority 

ESME: European Securities Markets Group 

FOGAIN:  Fondo  General  de  Garantia  de 
Compensation Scheme) 

Inversiones 

(Spanish 

Investor 

FSCS: UK Financial Services Compensation Scheme 

HDIGF: Hellenic Deposit and Investment Guarantee Fund  

ICCL:    Investor  Compensation  Company  Limited  (Irish  Investor  Compensation 
Scheme) 

ICS: Investor Compensation Scheme 

ICSD: Investor Compensation Scheme Directive 

IMMFA: Institutional Money Market Funds Association 

ISD: Investment Services Directive 

MTF: Multilateral Trading Facility 

MiFID: Markets in Financial Instruments Directive 

SEC: Securities and Exchange Commission 

TFEU: Treaty on the Functioning of the European Union 

EN 

131 

   EN 

 
UCITS: Undertakings for Collective Investment in Securities 

EN 

132 

   EN 

 
ANNEX XII – ESTIMATION OF ADMINISTRATIVE BURDEN 

Currently  only  investment  firms  are  obliged  to  disclose  information  to  actual  and  intending 
investors about the investor compensation scheme coverage (amount and scope). 

The Directive is to be amended to include: 

i.  For  investment  firms  the  requirements  that  the  information  provided  shall  be  fair, 
clear and not misleading and in particular shall explain what is covered by the relevant 
compensation scheme and what is not covered under the scheme and how it applies in 
cross border situations. 

ii.  The full set of disclosure obligations on UCITS similar to that on investment firms; 
iii.  Annual publication of details about the level of funding and the target funding level by 
national  investor  compensation  schemes  (draft  technical  standards  will  be 
developed by ESMA to ensure ease of implementation). 

1. Administrative burden for investment firms 

The administrative burden from the planned amendment of the ICSD can be broken down into 
the costs of preparation of the required information, and costs of its publication. The latter is 
estimated to be marginal, since publication of other compensation scheme related information 
is  already  a  legal  requirement,  so  that  the  amendment  will  be  integrated  in  the  document 
already to be published.  

As  for  the  costs  of  preparing  the  information,  this  is  considered  as  a  one-off  cost,  and  the 
number  of  investment  firms  and  branches  abroad  are  taken  as  a  basis,  since  it  is  the 
investment firm (or branch) that will have to prepare the additional information once, as it is 
the same for all investment products that are offered.  

We estimate that preparing this information will imply 2.5 hours of work of a professional.133  

Table 1: Estimation of costs of preparation and publication of information requirements on 
investment firms 

burden 
investment 
and 

Admin 
on 
firms 
branches 

Professional 
(hours) 

Extra 
('000) 

costs 

Drafting 

1.5 

0 

133 This estimation is based on a comparison with UCITS disclosure costs, as measured by CSES: Study on the 
Costs and Benefits of the proposed UCITS Key Investor Information Final report December 2009 

EN 

133 

   EN 

 
 
 
 
 
 
                                                 
Translation 

Regulatory 
approval 

0.5 

0.3 

Printing 
dissemination 

and 

0.2 

Total 

2.5 

0 

0 

0.0 

0.0 

The table below shows the number of firms and branches abroad for each Member State, the 
hourly  rate  for  a  professional  in  the  given  country,  and  the  overall  administrative  burden 
within each Member State (counting 2.5 hours of work). 

EN 

134 

   EN 

 
 
 
Table 2: Calculation of administrative burden on investment firms, credit institutions and 
their non-domestic branches 

Member 
State 

hourly 
wage 
of 
managers 

total costs 

number  of 
investment 
firms, 
credit 
institutions 
authorised 
providing 
investment 
services 
and foreign 
branches  

Austria 

Belgium 

Bulgaria 

Cyprus 

Czech 
Republic 

51.53 

50.63 

3.30 

31.64 

11.52 

975 

125,601 

132 

N/A 

97 

57 

16,707 

N/A 

7,673 

1,641 

Denmark 

51.99 

671 

87,215 

Estonia 

Finland 

France 

8.10 

44.75 

51.14 

26 

382 

490 

526 

42,732 

62,641 

Germany 

46.40 

2,687 

311,667 

Greece 

Hungary 

Ireland 

Italy 

Latvia 

Lithuania 

26.98 

11.66 

49.56 

61.50 

5.86 

7.38 

116 

N/A 

235 

7,826 

N/A 

29,117 

881 

135,452 

N/A 

26 

N/A 

480 

Luxembourg 

56.63 

199 

28,173 

Malta 

16.67 

Netherlands 

36.88 

Poland 

Portugal 

Romania 

13.02 

31.00 

9.73 

91 

N/A 

80 

76 

85 

3,793 

N/A 

2,603 

5,891 

2,067 

EN 

135 

   EN 

 
Slovakia 

Slovenia 

Spain 

Sweden 

United 
Kingdom 

total: 

7.83 

18.34 

37.11 

50.80 

41 

26 

434 

271 

803 

1,192 

40,269 

34,416 

52.81 

3,921 

517,635 

1,466,120 

We  estimate  that  there  will  be  approximately  1,500,000  euros  of  one  off  administrative 
burden on investment firms and credit institutions providing investment services. 

2. Administrative burden for UCITS 

UCITS  funds  will  provide  disclosure  within  the  KID  and  they  will  have  the  possibility  to 
provide disclosure at the same time with the issuing of the KID (i.e. the timelines of the KID 
and ICSD proposals will be aligned, or a period of compliance  will be envisaged, as KIDs 
need to be updated once a year). 

The preparation of the information is calculated in terms of man-hours and counts as a one-off 
cost, as the information will remain the same over years. The basis of the calculation is the 
number of fund managers, assuming that the information to be compiled will be the same over 
the various funds under their management. It is also expected that trade bodies will be able to 
provide  assistance  in  terms  of  information  or  even  templates  that  can  reduce  the 
administrative burden on individual fund managers. 

The  publication  costs  are  calculated  in  euros,  and  they  constitute  on-going  administrative 
burden.  The  basis  for  those  publication  costs  is  the  number  of  Key  Information  Documents 
(KIDs) produced. 

2.1. One-off costs: preparation of information 

We estimate that for the disclosure of compensation scheme coverage to investors, on average 
4  hours  will  be  spent  by  a  fund  manager  on  drafting  (to  simplify  we  do  not  distinguish 
between  professional  and  other  staff).  This  estimation  is  based  on  a  CSES  survey  of  fund 
managers  that  identifies  the  following  cost  elements  in  drawing  up  the  KID,  indicating  the 
hours spent on the different elements by professional and other staff: 

EN 

136 

   EN 

 
  
  
 
 
 
 
 
Table 3: The costs of the KID drafting 

The  information  on  investor  compensation  schemes  to  be  provided  is  comparable  to  the 
"practical information" requirements of the KID, and would take about half the time to draft 
as all other practical information items. According to the CSES study, the drafting of practical 
information requires 1.8 hours of a professional and a further 3.1 hours of other staff, in total 
4.9 hours, that is about one-seventh of the time required for the entire KID drafting. The ICSD 
amendment  would  thus  require  about  half  of  that  time,  2.5  hours,  which  we  count  here  as 
professional time. 

Besides  the  costs  of  drafting,  some  costs  of  translation  and  dissemination  can  also  be 
expected. Drafting, translation and dissemination costs of the entire KID is displayed in the 
table below (column to the left), with proportionate cost estimates134 indicated for the ICSD 
amendment (column to the right). 

Table 4: The costs of drafting and additional costs of the ICSD amendment 

134 As drafting is estimated to take half the time of KID practical information items, and practical information 
items  require  about  one-seventh  of  the  time  required  for  the  drafting  of  the  entire  KID,  the  time 
necessary for translation and dissemination is counted proportionately to be one-fourteenth of the KID 
drafting times. 

EN 

137 

   EN 

 
 
 
 
                                                 
Entire KID 

Professional 
(# hours) 

Other 
staff 
(# 
hours) 

Extra 
costs 
('000) 

ICSD amendment 

Professional 
hours) 

(# 

Drafting 

13.2 

13.7 

1.8 

10.6 

1.6 

2.5 

1.3 

Translation 

Regulatory 
approval 

Printing 
dissemination 

and 

7.7 

4.0 

1.9 

3.0 

5.4 

Not applicable 

1.8 

3.2 

0.2 

Total 

26.8 

29.1 

12 

4.0 

Extra 
costs 
('000) 

0.1 

0.1 

Not 
applicable 

0.2 

0.4 

Overall 4 hours can be expected to be spent on drafting the ICSD information item. 

For  the  costing  (hourly  wage  of  fund  managers/professional  staff)  we  do  not  have  figures 
about  the  distribution  of  across  Member  States,  therefore  we  use  an  average  of  the  EU27 
hourly wage of managers, taking account of the fact that most fund managers are likely to be 
located  in  higher  wage  countries.  The  European  average  hourly  rate  of  managers  is  31.29 
euros; here the calculations are done with an hourly rate of 40 euros. Per fund manager the 
costs will be approximately EUR 160 (€40/hour * 4 hours). 

There are approximately 1 500135 fund managers in the EU, leading to a cost of 1 500 * Eur 
160 = Eur 240 000 

As a result the on-off costs on UCITS are estimated at EUR 240 000. 

2.2. On-going costs (publication costs): 

The CSES study on UCITS costing136 reveals the number of UCITS funds, and the number of 
KID disclosure documents prepared for those funds in a given year.137 Based on their survey,  

135 The Zentrum für Europäische Wirtschaftsforschung GmbH (ZEW) / Observatoire de l'Epargne Européenne 
(OEE) database includes information on the number of AMs in each country. It is estimated that 1441 
asset managers of UCITS existed in the EU in 2005. 

136  CSES:  Study  on  the  Costs  and  Benefits  of  the  proposed  UCITS  Key  Investor  Information  Final  report 

December 2009 

137 "Fund managers were asked to provide information on the number of funds they have and hence the number 
KIDs which they might have to prepare, showing KIDs for sub funds and different share classes separately. Fund 

EN 

138 

   EN 

 
 
 
 
 
                                                 
2402 KIDs are prepared for 1936 funds, which on average means 1.24 KIDs/fund. In Europe 
there are 37,643 funds,138 producing therefore around 46,677 KIDs (in the calculation we use 
47000 KIDs, to round the figure which is only an estimate).  

Table  3  above  shows  that  printing  and  dissemination  costs  are  estimated  at  200  euros  per 
KID. The on-going burden then is estimated at 9,400,000 euros. 

3. Administrative burden for schemes: 

The Schemes will have to disclose information every year about their target funding level and 
actual level of funding. The number of investor compensation schemes across the 27 member 
States is 39139. The administrative burden flowing from this obligation will largely depend on 
schemes'  internal  management  and  record  keeping  practices  as  well  as  the  standards  that 
ESMA would set. As some schemes are already publishing information, not all of them would 
face an equal increase of administrative burden. 

Even  in  the  most  convenient  case  there  would  be  a  yearly  burden  of  transferring  the 
information already collected on a business as usual basis into the format required by ESMA 
(that will try to find the most cost-effective solution) of 12 hours of an official. Assuming this 
for  the  39  compensation  schemes  would  result  in  approximately  15  000  Euros  as  recurring 
administrative  burden.  A  maximum  estimate  figure,  counting  with  24  hours  per  scheme 
arrives to approximately 30 000 Euros per year. 

EU average hourly rate for senior official=31.29 

31.29*12=375.48 

375.48*39=14 643 

EU average hourly rate for senior official=31.29 

31.29*24=750.96 

750.96*39=29 287 

managers  were  asked  to  include  just  UCITS  funds.  In  total,  respondents  managed  a  total  of  1936  funds  and 
expected to prepare 2402 KIDs; the higher number of KIDs reflects, for example, the preparation of 288 KIDs 
for individual share classes." 
138 The number of UCITS funds on 31 December 2008 was 37 643. 
139 The number of investor compensation schemes is higher than the number of Member States as some Member 
States  (Austria,  Cyprus,  Germany,  Greece,  Netherlands,  and  Spain)  have  different  compensation 
schemes for non-bank investment firms and credit institutions. 

EN 

139 

   EN 

 
 
 
 
 
                                                                                                                                                         
It  may  be  reasonable  to  calculate  a  relatively  higher  one-off  cost  for  adjusting  national 
systems  to  the  data  gathering  requirements,  but  the  costs  of  this  cannot  be  reasonable 
estimated at this stage. 

For  all  the  national  investor  compensation  schemes  together  we  estimate  a  recurring 
administrative burden between 215 000and 30 000 Euros per year. 

EN 

140 

   EN