Investor Compensation Scheme


Holders of a Category 2 or Category 3 Investment Services licence issued by the Malta Financial Services Authority which service retail investors are required to participate in and contribute to the Investor Compensation Scheme established in terms of the Investor Compensation Scheme Regulations (the “Regulations”). The Scheme is based on the EU Directive 97/9 on investor-compensation Schemes.

This Investment Services Act (Licence and Other Fees) Regulations provide that the obligation for such contributions is triggered off by the issue of a Category 2 or Category 3 Investment Service Licence, as the case may be, independently of whether or not investment services activities are actually being provided by the licence holder. A branch of a licence holder operating in Malta which is licenced in a non-EEA[1] state, must also participate in and contribute to the Scheme unless the home state offers a similar Scheme which is equal to or exceeds the level of cover in Malta. In the latter scenario, the licence holder must contribute towards the particular Scheme offered in its home state, that is the state where it is licensed.

If a Category 2 or Category 3 licence holder provides investment services solely and exclusively to persons who do not fall within the Regulations’ definition of “investor“, then there is no obligation on the licence holder to participate in and contribute to the Scheme.  An “investor” is defined in the Regulations as “any person who has entrusted money or instruments to a licence holder in connection with licensed business, to the exclusion of persons listed in the First Schedule”. The First Schedule lists specific categories of investors that may be broadly described as professional, sophisticated investors, and on this basis, such persons are excluded from the definition of “investors” as they would not require the same level of protection as non-sophisticated investors. Essentially, “investors” for the purposes of the regulations are non-sophisticated retail clients.

The Scheme is intended to serve as a protection fund for customers of failed investment services licensees, and compensation is paid only if a licensed investment services firm is unable or likely to be unable to pay claims against it. This would happen if the licensee ceases to conduct its business due to financial difficulty or insolvency.

Contributions

Licence holders handling business from such non-sophisticated retail clients are obliged to contribute to the Scheme each year (i) a Fixed Contribution and (ii) a Variable Contribution. Contributions are not refundable. Besides, participants may be requested to pay to the Scheme such reasonable administrative fees as may be determined by the Management Committee from time to time.

When a licence holder first starts contributing to the Scheme, contributions are pro-rated on an annualised basis. This also applies to situations where a licence holder upgrades its licence from one category to another. Nevertheless, a licence holder which has ceased to be a participant of the Scheme or which has downgraded its licence at any time during a calendar year shall not be entitled to a refund of any contributions paid to the Scheme.

The Fixed Contribution shall be paid to the Scheme annually in every calendar year, either by the 30th April of each year or within 30 days from the date when the licence holder becomes liable to participate and contribute towards the Scheme. The fixed Contribution is set at:

  1. €2,911.72 in the case of Category 2 Investment Services Licence Holders ; and
  2. €17,470.30 in the case of Category 3 Investment Services Licence Holders.

The Variable Contribution is calculated by applying a percentage rate of 0.1 per centum to the total revenue of the licence holder on an annual basis. The Variable Contribution is not paid to the Scheme but is accounted for in the financial year when the Fixed Contribution is paid, and held by each firm until such time that the Committee makes a call on such funds. The funds are required to be made available within 30 calendar days from the time when the Scheme makes a call on such funds.

The Variable Contribution is required to be held in a reserve (the Investor Compensation Scheme Reserve) and may be invested by the firm with a third partyapproved in writing by the Committee having regard to the need for prudence. Such third party is required to hold the funds on pledge in favour of the Scheme and shall specifically acknowledge the rights of the Scheme as pledgee, and shall notify the Scheme in writing accordingly. Alternatively, the participating licence holder may choose to pay the amount of the Variable Contribution directly to the Scheme, rather than hold the amount in a Reserve. In such circumstances, no interest shall be payable by the Scheme to the licence holder

The Second Schedule to the Regulations provides further technical details relating to the on-going management and maintenance by the licence holder of the Variable Contribution to the Scheme.

Licence holders will be required to contribute to their Investor Compensation Scheme Reserve each year until such time that aggregate fixed contributionspaid to the Scheme and accumulated reserves held by licence holders by way of the Variable Contribution amount to €2,329,373.40.

Claims

The total amount of compensation that may be paid out to an investor is calculated at the lesser of:

  1. ninety per cent (90%) of all claims which have been made by such investor, or;
  2. up to €20,000.

All computations and payments of compensation are made in the same currency as the investor’s investment. An investor may only submit one claim in respect of all his investments, taken in aggregate, with the licence holder concerned.

The Scheme shall provide for the payment of compensation in respect of claims arising out of a licence holder’s inability to:

  1. repay money owed to or belonging to investors and held on their behalf in connection with licensed business; or
  2. return to investors any instruments belonging to them and held, administered or managed on their behalf in connection with licensed business or, where this is not possible, their monetary equivalent or value.

The amount of an investor’s claim is to be calculated by the Management Committee after taking into account any or all of the following factors, namely (a) legal and contractual conditions; (b) counterclaims; (c) market value; and (d) surrender value.

Where the Scheme has made a payment to a claimant, the Scheme is subrogated to the rights and remedies of that claimant against the licence holder. This right enables the Management Committee to recover any amounts which have been paid to the investor from the licence holder concerned, in the event that the failed licence holder has any money or assets left.

A website containing information about the Scheme and various frequently asked questions is available at www.compensationschemes.org.mt

Licence Holder’s Duty to Provide Information

Licence holders shall make available to actual and prospective investors adequate and clear information concerning the applicability of the Scheme together with any other particulars as may be required by the MFSA. However, the Regulations specifically restrain licence holders from advertising or causing to advertise the fact that money or instruments placed with a licence holder are protected by or through the Scheme except with the prior written consent of the competent authority.

The Management Committee may request participants, either directly or through the MFSA, to provide any information that it may require for the proper administration of the Scheme. The request may be addressed to the participant or to any of its directors or officials who are in possession of such information. Any default in complying with such request may render the defaulting party liable to an administrative penalty not exceeding € 2,329.37.

Where a licence holder fails to comply with its obligations as set out in the Regulations, the Management Committee shall notify and consult with the MFSA and shall agree on the appropriate measures to be taken by the MFSA in this regard, including the imposition of penalties. If such measures fail to secure compliance on the part of the licence holder, the Management Committee shall report the matter to the MFSA once again for any further measure to be taken at law, including the possible restriction or withdrawal of the licence holder’s licence. After the restriction or withdrawal of a licence, cover shall continue to be provided in respect of licensed business undertaken by the licensee in question up to the date of restriction or withdrawal of the licence.

NOTE: The information contained in this document is for general reference and information purposes only, and is not to be relied upon as legal advice. Specific legal advice should be sought on the application, interpretation and applicable derogations to the above rules.

[1] Non-EEA States signify those States who are not contracting parties to the agreement on the European Economic Area (1992).