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Incentives to strengthen the Investor Compensation Scheme

Investment firms providing discretionary portfolio management services and/or the reception and transmission of orders in relation to financial instruments in Austria are obliged to be members of an investor compensation scheme that operates as a liability company. The scheme compensates investors for eligible claims up to a limit of €20,000. Investors are entitled to compensation, if their claims were caused by an investment firm's inability (i) to repay funds owed to investors or (ii) to return instruments to investors that are their property and have been managed on the investors' account in connection with investment services.

The Austrian government reviewed the current scheme in light of its overall efficiency, especially on major claims recently raised by investors. As a result the Austrian Securities Supervision Act 2007 (Wertpapieraufsichtsgesetz 2007; WAG 2007) has been amended to improve the ability to satisfy medium and large claims as well as mitigating the risk of claims as such. The amendment became effective as from May 1 2009 onwards.

Changes to the former regime have been made in respect of specific additional information to be provided to investors, the set-up of an early warning system and the stabilisation of funding including the option of the scheme being backed by a state guarantee.

Under the new regime investment firms shall advise investors as to whether they are distributing own products (Eigenprodukte). Such own products are regarded as investments generating a benefit exceeding the market standard fee for the provision of a particular service. Moreover, investment firms shall expressly inform investors about the prohibition on the acceptance of client money applicable to Austrian investment firms.

These additional obligations have been introduced because distribution of own products and acceptance of client money by investment firms were indentified as a substantial risk factor in relation to the protection of investors' interests. For a better comparison of fees charged and to promote investors' risk awareness, the Austrian Financial Market Authority (Finanzmarktaufsichtsbehörde; the FMA) shall also publish the range of customary fees charged for the provision of the above described services on its homepage.

Similar to the banking sector, the investor compensation scheme has now been assigned duties to act as an early warning system (Früherkennungssystem) for investment firms. For these purposes the investment firms' annual auditors shall cooperate with the scheme and certain data shall be provided by the scheme members. Furthermore the FMA has been authorised to liaise with the scheme, allowing the early warning system to operate efficiently.

In contrast to the former scheme, where members only had to contribute a pro rata payment once compensation payments were effected to investors, all scheme members are now required to pay an annual fee. In addition members will need to make further contributions in the form of a special fee if funds should be insufficient to cover claims. This new way of funding will improve the scheme's financial capacity as well as mitigate the risk of claims causing excessive demands on the scheme.

While these new measures aim to help cover medium-sized claims, the funding of large claims shall be supported by the scheme taking loans or alternatively by the issuance of bonds. Furthermore, the obligations corresponding to the issuance of bonds may be backed by an optional state guarantee in order to guarantee investors' full compensation.

Roswitha Wutschl

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