Faster payouts for investors in failed firms

Investors who put money into investment firms which later fail will receive compensation for their losses much quicker than at present, under new rules recommended in a Government-commissioned report.

The report, published yesterday by Minister for Finance Brian Cowen, investigated the fallout of the collapse of stockbroking firm W&R Morrogh and has recommended that where there is a shortfall in clients' assets held by the firm, the distribution of the assets should follow a set pattern.

The Irish Financial Services Regulatory Authority and the Investor Compensation Company Limited (ICCL) should also develop a set of principles to guide the administrator of the failed firm in how to certify claims for compensation "on a speedier basis", according to the report by the working group investigating the Morrogh affair.

The Cork firm collapsed in April 2001 with losses of €7 million after a fraud by junior partner Stephen Pearson was uncovered. However, some of the firm's clients had to wait five years before they received compensation for their losses.

The ICCL received a total of 2,625 compensation claims from Morrogh clients. However, by last December less than 900 of these claims had been paid because the level of financial irregularities at the firm made it difficult for the administrator, Tom Grace of PricewaterhouseCoopers, to certify the claims. Because of the complexities involved, Mr Grace applied to the High Court for directions on how the remaining assets should be distributed, pushing up the costs of the receivership.

Morrogh investors faced further losses of around €3 million after the High Court later ruled that Mr Grace could use funds from shares held by the brokerage in nominee accounts on their behalf to meet his costs.

Some 2,372 of investors' claims have now been certified by Mr Grace and paid by the ICCL and more than €7.1 million has been paid in compensation.

The Morrogh working group has also recommended an amendment to the Stock Exchange Act that clarifies that receivers and liquidators will not be able to gain access to accounts held by the client with third-party custodians over which the failed investment firm may have had some degree of control. This was perceived by some to be an unintended consequence of the High Court ruling.

Dermott Jewell, the chief executive of the Consumers' Association of Ireland and a member of the ICCL board, said it was important that procedures were now put in place so that people who suffer losses in the event of a liquidation receive compensation at an earlier stage.

"It sounds quite extraordinary to say it, but the only good thing to come out of the Morrogh case was lessons on how not to do it," he said.