The Investor Compensation Act, 1998 ('the Act') came into force on 1 August 1998. The Act's main aim is to protect certain clients of investment firms by maintaining an effective compensation scheme and by ensuring the proper and orderly regulation and supervision of investment firms and financial markets. The Central Bank is designated as the authorised supervisory authority under the Act.

The Act establishes the Investor Compensation Company Limited ('the Company') whose principle purpose is the establishment and maintenance of compensation arrangements for the benefit of certain clients of investment firms. Authorised investment firms (with limited exceptions) must make such contribution to the funds of the Company as the Company may specify. A failure to pay such monies can result in revocation of authorisation.

The effect of the compensation scheme is to entitle clients of investment firms (other than certain excluded clients such as professional persons and institutions) to compensation in an amount equal to the lower of 90% of their net loss or 20,000 ECUs. The Act sets out in some detail the circumstances in which the Company may make payments to clients.

There is also now a greater onus on 'Product Producers' to be satisfied generally with the status of investment firms which they appoint. Under the Act, it is an offence for a Product Producer to make a written appointment of an investment firm, unless to the best of its knowledge and belief and having caused reasonable enquiries to have been made, not an investment business firm which has had its authorisation revoked under section 16 of the Investment Intermediaries Act,1995 (and has not been reinstated) or, if the firm is an insurance intermediary, it must not be one which has failed to comply with the Act.

Furthermore, where a payment has been made by the Company to clients of restricted intermediaries, then any Product Producer which gave to that entity a valid written appointment will be liable to pay to the Company a proportion of the monies paid out by the Company. Product Producers cannot contract out of this obligation.

The Act also amends the Insurance Intermediaries Act, 1995, the Insurance Act, 1989 and the Stock Exchange Act,1995. In particular, it repeals certain sections of those Acts insofar as they impose an obligation on entities to hold a bond. In addition, section 41 of the Act provides that the Central Bank may require authorised investment firms to effect policies of professional indemnity insurance in a form specified by the Central Bank.

Whilst the main purpose of the Act is to establish a compensation scheme for certain types of investors, its effect is also to reinforce the responsibility of Product Producers in relation to their choice of intermediaries and it will be increasingly important for Product Producers to put in place procedures which enable them to access and review the status of their intermediaries.

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