Legal and financial issues involved in setting up investor compensation schemes in Malta

Abstract

The local financial services sector is becoming increasingly aware that investor compensation schemes are a popular and efficient manner to achieve investor protection. Indeed, notwithstanding the various fit and proper tests which are carried out on licence holders in the area of financial services, there is still the possibility that an unscrupulous businessman may have access to investor funds. Moreover, Malta's proposed entry into the European Union (EU) has further evidenced the need to bring our financial services legislation in line with EU Directives on compensation schemes. The aim of this dissertation is to outline the main aspects and issues which are relevant when setting up such schemes. These consist mainly of the scope of compensation, the structure and governance arrangements for the scheme, investors' eligibility for compensation, the capping of claims and the funding aspect. These issues will be discussed vis-a-vis, the Compensation Fund found in the Malta Stock Exchange Act, 1990 and the Protection and Compensation Fund set out in the Insurance Business Act, 1998. Contrasts and comparisons with foreign schemes and set-ups will also be drawn. The study will also consider the particular aspects which relate to the possibility of having a single scheme to cover all the areas of financial services, as is presently being devised in the UK. The main legal and financial issues which are specific to setting up such a single scheme, will be analysed and the opinion of regulators, licence holders and interested parties will be considered. Finally, the study sets out some recommendations and conclusions on the individual investor compensation schemes and the single scheme, in particular.