Financial firms face 50% rise in compensation bill

The High Court decision to allow W&R Morrogh receiver Mr Tom Grace use client funds to pay the cost of putting the failed group's affairs in orders will increase the compensation bill by half, according to the Investor compensation Company Ltd (ICCL).

In its annual report, the ICCL says it made provision for €5.2 million in claims, costs and expenses last year relating to the collapse of the firm in 2001.

"Additional compensation costs for the ICCL, estimated... to fall in the range of €2 million to €3 million, arise from a recent High Court ruling relating to the receivership costs in the Morrogh case," it says.

The ICCL has received legal advice that costs incurred by the receiver and taken from client funds are compensatable. It made provision for €2.5 million to cover this in its accounts for the year to the end of July 2003.

The additional cost will only further antagonise the stockbrokers, investment firms and banks that fund such compensation. Stockbroking firms have demanded change as they bear the brunt of funding compensation. The ICCL is reviewing its current funding and compensation arrangements. At present, it operates two funds, one for investment firms, stockbrokers and banks, and the other for brokers and credit unions.

The first fund, Fund A, is causing concern. It had been targeted to build sufficient reserves to comfortably absorb company failures. However, the report notes that the failure of two relatively small firms - Morrogh and MMI Stockbrokers - has been sufficient not only to absorb all the €7 million raised by contributions from members in its first five years of operation but also to require a levy on members to raise an extra €5.2 million to cover liabilities.

Accounts for ICCL show that Fund A had reserves of just €463,249 at the end of July.

Fund B, which caters for failures by insurance and investment brokers and credit unions, had a surplus of €5,525,765.

While the Fund A surplus is small, supplementary levies on certain member firms during the year at least brought it back into the black. At the end of July 2002, Fund A had a deficit of €141,758.

A total of 152 firms had not paid their contributions by the end of the financial year and were reported to IFSRA, which has the power to suspend their business. ICCL covers 235 firms within Fund A and 3,350 in Fund B.

Costs rose 27 per cent to €567,734 during the year, with much of the difference attributable to the €84,198 spent on the review of the scheme.

No firms failed in the year to the end of July 2003 but it is still dealing with the bulk of the 2,600 applicants for compensation arising from the Morrogh failure. These can only be processed when receivership is completed.