Last June, Minister of State at the Department of Finance, Mr Martin Cullen, recommended the Investor Compensation Bill to the Dail saying: "I hope this legislation will never be called upon to do what it provides for, that is, to pay compensation to clients of a failed investment or insurance intermediary. Realistically, that is a forlorn hope".
The recent case of BRK Financial Services, where investors have surely lost money and the investment broker has disappeared, underscores why Martin Cullen's hope was indeed forlorn.
It is doubly so, for the Central Bank has confirmed that Mr Brian Kilbane of BRK was not registered with it and was in breach of the applicable Investment Intermediaries Act. The Investor Compensation Act only provides for compensation to investors who lose money with authorised investment firms and insurance brokers. The unfortunate investors in BRK have no hope of benefiting from the £15,500 (€19,680) maximum provided for as compensation under the Investor Compensation Act.
The broader issues of financial regulation and consumers' interests are again highlighted. Fundamentally, there is the question of money itself. A cash note is a claim against the State or one of its organs. Once you give cash to a bank and convert it into a bank account, you no longer have a claim against the State, but against the bank and the bank only. You rely on its solvency.
For that reason, there is really no difference between the prudential regulation of banks by the State to ensure their solvency, and the protection of consumer interests. Prudential regulation is in the name of consumers or it is nothing. The same principle is applied to the regulation of investment intermediaries. They have to meet solvency tests, and the way they are permitted to hold customers' money is regulated.
It is plainly impossible to guarantee that fraud on customers will not be attempted, by regulated or unregulated investment or insurance brokers. The point is, are we doing as much as we possibly can, and should, be doing to protect consumers?
The Republic is still in the course of a change from a laissez-faire environment in relation to investment and insurance brokers. The investor protection legislation in relation to investment intermediaries has been driven by EU Directives.
The question of how a single regulator could work is being addressed by a committee chaired by Michael McDowell. The case for bringing insurance brokers under the regulatory wing of the Central Bank was accepted by the Government last year. There is a strong case for a one-stop-shop regulator, but institutional changes alone are unlikely to lessen radically the chances of losses to investors from negligent or fraudulent investment and insurance brokers.
More will need to be done. A sign of the times is that the Central Bank is about to set up a low-cost phone line for consumers to call and check if a broker or intermediary is actually regulated. It would be easy enough to make sure that consumers were also advised when not to make cheques payable to intermediaries or brokers, how to make sure they get receipts or policy documents, how to know they are getting the ongoing information to which they are entitled. This phone service should have a broad mandate and should be implemented to the highest standard of customer-friendliness. For the present, call 016716666.
This is part of a distinct change in the Bank's approach to PR and its services. Critics may put it down to the controversies over consumer protection in the NIB scandal last year. However the regulator is organised, it must take responsibility for fostering a culture of awareness of rights and protections among consumers. All up-to-date communications methods should be used for this purpose.
Under new legislation, the Bank has published adverts warning investors about unregulated companies offering investment services here. All 14 rogue companies have operated from outside the State inwards. A high profile intervention against a domestic rogue operator would be salutary.
Could the BRK situation have been prevented by anyone? Policing, monitoring and checking cost resources. The Bank and the Garda will say there have been checks on such firms. Investors who have lost out can ruefully say there was one check too few.
Alert and critical consumers will act if a strong civic, and open communications, culture is developed between a regulator and citizens. Given where we are, this culture needs to be stimulated. This is not the principle of "buyer beware", which implies the buyer is ultimately alone. In relation to fraud, negligence and proper regulation the buyer should never be alone.
Oliver O'Connor is an investment funds specialist
