Confidence in the financial services sector will be bolstered by the Investor Compensation Bill, according to the Minister of State for Finance, Mr Martin Cullen, who introduced the legislation in the Dail.
He said its purpose was twofold: to protect investors and to promote confidence in the financial system. It would benefit the clients of investment and insurance intermediaries and it would add to the statute book "by ensuring that when a default occurs, investors will not lose everything as a result".
The Bill will implement the EU directive on investor compensation which required that all investment firms which have a "passport" to sell their services throughout the EU will be covered by minimum compensation arrangements. "This means that an investor will be able to entrust money to an investment firm located anywhere in the EU, knowing that compensation arrangements are in place to safeguard the funds involved."
Part of the Bill includes the establishment of the Investor Compensation Company, which will oversee compensation arrangements for the majority of investment firms, including insurance intermediaries.
One group is excepted. "Accountants who provide investment services only as an incidental part of their professional activities as accountants can be regulated by their professional body," he said. Solicitors are exempt from regulation under the Investment Intermediaries ACT if they provide only investments services which are incidental to their professional activities.
The legislation allows for compensation equivalent to 20,000 ecus, about £15,500 or 90 per cent of the amount lost, whichever is less.
The Minister stressed that "no regulatory system can guarantee that a regulated entity will not fail. What we can do is put in place a system of regulation which is comparable with the best standards internationally and this is what we have done in the retail sector with the Stock Exchange and Investment Intermediaries Acts in particular."
He added: "Now it is time to look at the question of compensation for investors who lose money because an investment intermediary is unable to meet its liabilities. "The provision of a system of investor compensation should help to reduce the systemic risk that a single failure of an investment firm will trigger a wider loss of confidence in the rest of the financial sector."
Fine Gael's finance spokesman, Mr Michael Noonan, said his party did not oppose the Bill but it was a minimal measure and he criticised some of the provisions, including the £15,500 ceiling on compensation. However, the Minister said 80 per cent of investors would have less than that amount invested.
Mr Noonan was concerned about the contributions which investment firms would make to the company to create a fund for the pay-out of compensation. How much would companies pay and would it be "weighted" based on the number of clients or level of investment?
Mr Derek McDowell, Labour's finance spokesman, said he supported the broad principle of the Bill but investors needed to know under exactly what circumstances the entitlement to compensation would arise. He agreed with Mr Noonan that the maximum compensation of 20,000 ecus was too low.
Democratic Left's finance spokesman, Mr Pat Rabbitte, said the role of senior advisers in National Irish Bank "actually soliciting clients to evade tax is something not addressed in this Bill". This highlighted the need for "a strong core of independent financial advisers".
He also called for a comprehensive statutory framework for the provision of financial advice on the basis of independence, transparency and comparability of information.
