Two years on, the State's investor compensation scheme is having teething trouble.

The Investor Compensation Company Limited was set up in summer 1998 to protect private clients of investment companies. Under the provisions of the Investor Compensation Act, customers of failed authorised investment firms are entitled to payment from the Investor Compensation Company of €20,000 (£15,751) or 90 per cent of the net loss, whichever is the lesser.

To date, customers of two companies - Money Markets International Stockbrokers and Andrew Casey Life and Pensions - have made claims.

Eligibility issues: Investors may be eligible for partial payment of losses if the Investor Compensation Company has been advised by the Central Bank that an authorised firm has been the subject of a court ruling that prevents the firm from returning money or investment to clients.

Compensation may also be granted if the Central Bank determines that a firm is unable to meets its obligations arising from claims by clients.

The scheme covers all investment firms, stockbrokers, banks and building societies regulated or certified by the Central Bank. Insurance brokers, agents and tied agents, restricted activity investment product intermediaries and some accountants also fall within the scheme.

Certification delays: Under the Act, payment should be made to eligible claimants within three months of the administrator's certification of their claim.

Some 300 MMI Stockbrokers clients filed for compensation more than a year ago and are still out of pocket because the administrator, Mr Tom Kavanagh, only recently started certifying their claims.

In March last, Mr Kavanagh, after hotly contested proceedings, discontinued a High Court action against seven former directors of MMI Stockbrokers alleging fraud. The allegations were strongly denied.

Since then, the High Court has approved an interim statement in relation to customers' claims for cash, says the Investor Compensation Company's chief operations officer Mr Bernard Sheridan. "Some people have claims solely for cash, cash in shares, or shares. It was only that element of the claim in cash lost that the administrator has certified," he said.

Since July, 85 of these individuals' files have been certified by the administrator but some of them may also have an outstanding claim for shares.

Based on the number of claims received concerning MMI Stockbrokers, the compensation body made a payment provision of £640,000 in its recent accounts.

Legislative gaps: Although eight clients of Andrew Casey Life and Pensions in Cork have made claims, less than half will be eligible for payment says the Investor Compensation Company.

As a life insurance intermediary, Andrew Casey Life and Pensions was not an "investment firm" under the European directive on which the Act was based. Therefore, investors who purchased life insurance from the Cork-based company before August 1st, 1998, are unlikely to be eligible for compensation from the Investor Compensation Company.

When the compensation laws were introduced two years ago, previous statutory bonding for investment firms was removed, leaving a hole in protection for losses before the summer of 1998.

The Irish Brokers Association (IBA) introduced bonding on August 1st last year and - even though claims against Mr Casey were made before this date - the IBA says that, where appropriate, it will ensure Mr Casey's clients are eligible for payment under its bonding scheme.

Andrew Casey Life and Pensions was a member of the IBA. Currently, each IBA member firm must be bonded for £100,000 per broker with a £50,000 limit per client.

A major problem will occur if an insurance agent, who is not a member of the IBA and therefore not within a bonding scheme, fails.

Funding difficulties: The compensation scheme is funded through contributions from firms which are authorised to conduct investment services.

According to Mr Sheridan, many of the £1.8 million worth of invoices in the first year were not paid. "It's an annual contribution and there were problems initially," he said.

Since the annual report was issued earlier this year, "quite a significant number have contributed or cancelled their agencies and we've gotten down to the last couple of hundred that are outstanding," says Mr Sheridan.

The Central Bank is deciding what action can be taken against those who are refusing to pay under the Act.

"It's all being done for the first time but the main thing is that people accept that the compensation scheme is necessary and that they contribute to it," says Mr Sheridan.

The future: Irish Brokers' Association chief executive, Mr Paul Carty, believes the Investor Compensation Company is a success story. In a recent issue of Irish Broker magazine, he wrote that its success was due to the collective effort of all the participants in the financial services industry whose contributions had made this possible. "I have no doubt that it will go from strength to strength and, as a result, it will be able to enhance the level of protection which it provides to investors," he said.

Mr Dermot Jewell, chairman of the Consumers' Association of Ireland, is less enthusiastic. "If the scheme is not efficient then it has to be reviewed. It was set up to protect and serve individuals and if it's not doing that, it's a problem," he says.

Mr Jewell believes undue payment delays and insufficient funding are benefiting neither the consumer nor the industry. "There is a need for new methods and penalties to be introduced to ensure that it becomes effective," he said.

Teething troubles work themselves out naturally and it appears that, despite some problems, the Investor Compensation Company may soon have all its teeth. "Perhaps as our experience grows, precedents will be set in these cases," says Mr Sheridan.