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New and improved investor compensation arrangements

The new investor compensation scheme enhances the previous investor compensation arrangements and provides you with an added level of confidence and security.

What were the previous arrangements?

There were two compensation schemes - the Unified Exchange Compensation Fund (UECF) and the Commodity Exchange Compensation Fund (CECF). Both covered exchange participants only and provided a maximum level of compensation for each brokerage (HK$8 million per stock brokerage and HK$2 million per futures brokerage). This per-brokerage limit applied regardless of the size of the losses or the number of investors claiming compensation in respect of the default, giving an uncertain level of investor protection.

What are the new arrangements under the SFO?

A new single Investor Compensation Fund replaces the UECF and CECF. It is based on a per-investor compensation limit of HK$150,000 for trading securities and futures contracts respectively. This enables more transparency and allows you to know precisely what level of compensation will be available to you should your intermediary fail. The new regime applies for defaults occurring on or after 1 April 2003.

Coverage is now extended to a much broader range of intermediaries, including both exchange and non-exchange participants, banks and securities margin financiers. Presently, the compensation fund covers only exchange-traded products in Hong Kong. An independent Investor Compensation Company, recognized by the SFC under the SFO, will administer the scheme.

Who are eligible to make a claim for compensation?

Where a qualifying client of a specified intermediary sustains a loss as a result of the default committed by the intermediary, or an associated entity of the intermediary, in relation to specified securities and futures contracts, or related assets, he or she may claim compensation from the compensation fund. Institutional investors are not eligible to claim compensation in line with the objective of the compensation fund to provide a safety net for retail investors.

"Default" covers insolvency, bankruptcy or winding up, breach of trust, defalcation, fraud or misfeasance. The ICC will determine whether there has been a default and whether the claimant is entitled to compensation from the compensation fund.

How does the per-investor compensation limit work?

Example 1: If Mr A holds shares of HK$250,000 with Blue Company and has deposited HK$100,000 with the firm for trading futures contracts, what is the compensation limit for Mr A if Blue Company defaults?

Based on the per-investor compensation limit of HK$150,000 for trading securities and futures contracts respectively, the maximum payments for Mr A's claim would be HK$150,000 for shares and HK$100,000 for futures contracts, totalling HK$250,000.

Example 2: If Ms B has two accounts with White Company holding shares of HK$120,000 and HK$140,000 respectively, what is the maximum compensation for Ms B if White Company defaults?

Ms B would be entitled to a maximum payment of HK$150,000 as the compensation limit is applied on a per-investor basis regardless of how many accounts a person has at the defaulting brokerage.

Example 3: If Mr and Mrs C have a joint account with Red Company holding shares of HK$1 million, what is the maximum compensation for each of them if Red Company defaults?

Mr and Mrs C could each claim a maximum of HK$150,000 compensation as the compensation limit is applied on a per-investor, rather than per-account, basis.

Example 4: If Ms X has submitted a claim against the UECF arising out of a default by her brokerage before 1 April 2003 and is still waiting for the notice of determination after 1 April 2003, will the per-investor or per-brokerage compensation limit apply in her claim?

The deciding factor is the date of the default. If the date of default is before 1 April 2003, the old scheme based on a per-brokerage compensation limit will apply, while the new scheme based on a per-investor compensation limit will apply to cases where default occurs on or after 1 April 2003.

Where does the money for compensation come from?

The initial funding came from a transfer of assets in the UECF and the CECF leaving sufficient funds behind to cover outstanding claims. A 0.002% transaction levy on each side of securities transactions, and HK$0.5 per side of a futures contract (HK$0.1 per side of a mini-futures contract) will be paid into the new Investor Compensation Fund until it has reached an appropriate size.

How can I make a claim?

You can lodge your claim with the ICC by the deadline (usually 3 months from the date of the notice calling for claims) published by the ICC. If no such notice is issued, you may lodge your claim within 6 months after the day you first become aware of the default.

The ICC will issue a notice of determination to you. If the claim is disallowed, the reasons will be given in the notice.

What if I disagree with the determination of claim?

The previous legislation only allowed you to appeal to the court against the Exchange's decision to disallow your claim. Under the new law, you are able to appeal to the Securities and Futures Appeal Tribunal.

How can I find out more about the investor compensation arrangements?

You may visit the ICC website (http://www.hkicc.org.hk/).