The Commonwealth Treasury


COMPENSATION FOR LOSS IN THE FINANCIAL SERVICES SECTOR ISSUES AND OPTIONS September 2002

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Attachment D: Comparison of international compensation schemes

 

UK

Canada

USA

Australia

Name

The Financial Services Compensation Scheme Ltd, which is accountable to the Financial Services Authority, replaced 8 existing schemes in December 2001.

Canadian Investor Protection Fund - a trust established by the Bourse de Montreal, the Toronto Stock Exchange, the Canadian Venture Exchange and the Investment Dealers Assn of Canada in 1969.

Securities Investor Protection Corporation (SIPC) established by the Securities Investor Protection Act 1970. (There is no requirement for compensation schemes in futures markets but some have funds.)

The Corporations Act provides for
1. National Guarantee Fund (NGF) - the ASX
2. Other exchanges to have compensation arrangements, for example, fidelity funds.

Transactions covered

Investments - that is, stocks and shares, unit trusts, futures and options, personal pension plans and long-term policies. (Other subschemes address deposit-taking and insurance.)

Covers losses of stocks, mutual funds, options, futures bonds, treasury bills, cash balances and certain other property in connection with securities or futures business.

Generally, broker-dealers registered with the SEC must be members of the scheme.

Depending on the head of claim, exchange-related or property held in connection with the member's securities/futures business.

Claimants

Retail and small business.

Not restricted to retail customers.

Retail and wholesale.

Retail and wholesale.

Losses covered

Return of investments and money, and loss arising from bad investment advice or poor investment management but only where the authorised firm is unable to meet claims.

Only losses arising from insolvency of a scheme member.

Provides for return of securities or cash lodged with a member firm on insolvency.

NGF: contract guarantee; unauthorised transfer; certificate cancellation; insolvency.
Other: defalcation or fraud.

Cap; fund size

Cap: In investment business, 100 per cent of the first £30,000 is paid and 90 per cent of the next £20,000 to a cap of £48,000.
Fund size: there is no reserve fund.

Cap: Maximum claim of C$1m (reduced to the extent that any deposit insurance entitlements are available).
Fund size: C$190 million (2001).

Cap: $500,000 per customer, but cash claims are limited to $100,000.
Fund size: over US$1.18 billion (2001).

NGF cap: the only limit is 14 per cent of the minimum fund size per insolvency.
NGF Fund size: A$160 million
Other cap: $500,000 per participant
SFE Fidelity Funds: A$18.5 million (2001).

 

UK

Canada

USA

Australia

Source of funds

Compulsory levies on the relevant group of authorised firms on a `pay as you go' basis.

Assessment of members (on gross revenue and capital deficiencies), interest earned and lines of credit with 2 major Canadian banks.

Member assessments and income from investments in government bonds, bank lines of credit and, if necessary, a loan through the SEC.

NGF: state exchange fidelity funds, plus earnings; provision for levies and borrowing.
Other: member contributions, provision for levies.

Claims experience

£44.9 million was paid to investors in 2001-02 (largely in relation to pension review cases).

Defined losses covered by the Fund over 33 years have been C$36 million.

Over 31 years, 433,000 claimants paid using available assets of failed brokerage firms of over US$13.6 billion, and US$370 million from the Fund.

NGF: 5,554 claims ($21.37 million paid and $13.37 million recovered) since 1988, mainly in 1988-91. Since 1993, one insolvency but more unauthorised transfer claims.

SFE: 3 claims.

 

Hong Kong

Singapore

Ireland

European Community
Directive 97/9/EC

Name

Investor Compensation Fund, administered by the Securities and Futures Commission, is replacing 3 previous schemes. (The material below is taken from consultation papers.)

Part XI of the Securities and Futures Act 2001 requires each securities exchange and each futures exchange to establish, keep and administer a fidelity fund.

Investor Compensation Company Limited administers the scheme that commenced in 1998. (The Irish Stock Exchange is one of three shareholders.)

Not applicable.

Transactions covered

All securities, commodity dealers and margin financiers who receive and hold client securities and/or money whether or not they are exchange participants. However, the cause of action must relate to securities listed or traded on the stock exchange or futures contracts traded on the futures exchange.

Dealing in securities or trading of a futures contract.

Shares, units in collective schemes, futures and options, and life and general insurance policies. The scheme only relates to firms authorised to provide investment services, such as regulated investment firms, stockbrokers, insurance brokers and agents.

Those carrying on `investment services business', defined to include execution of orders, managing portfolios of investments on a client by client basis and underwriting. Instruments covered: securities, units in collective investment schemes, financial futures contracts, FRAs, interest rate, currency and equity swaps, options and money market instruments.

Claimants

Retail.

Retail.

Private persons and smaller companies.

Member States may exclude wholesale investors and those with certain connections with the investment firm.

Losses covered

On bankruptcy or winding up of the covered intermediary, or any breach of trust, defalcation, fraud or misfeasance committed by the intermediary or any person employed by it.

Loss because of defalcation committed by members of the exchanges and bankruptcy of such members.

Return of investments and money when a firm is unable to meet its obligations due to its financial circumstances.

Return of investments and money when a firm is unable to meet its obligations due to its financial circumstances.

Cap; fund size

Cap: HK$150,000.
Fund size: to be HK$1 billion.

Cap: `prescribed amount'.
Fund size: securities exchange fund S$30.6 million; futures exchange fund S$20 million (2001).

Cap: The lesser of 20,000 ECU or 90 per cent of the loss.

The minimum is the lesser of 20,000 ECU or 90 per cent of the loss.

 

Hong Kong

Singapore

Ireland

European Community
Directive 97/9/EC

Source of funds

Transfer of assets from existing compensation funds and levies on stock and futures exchange transactions.

Levies.

Levies on authorised firms.

Not addressed.

Claims experience

Varied with level of defaults. In 1998, one of the previous funds made payments of over HK$450 million to 6,419 claimants (after a cap per investor had been imposed).

Not available.

About 2,900 claims arising from three failures.

Not applicable.