Vigilance is vital when making an investment

There are a range of bodies regulating the investment sector but the most important rule for private investors is that they themselves should be vigilant and never be shy about asking questions.

The introduction in August of the Investor Compensation Scheme offers some succour in a climate soured by scandals such as the disappearance of investment broker, Tony Taylor. But investors must still do their best to ensure that the person or business they are trusting with their money, is all he, she or it claims to be.

Receipts should be demanded for any funds handed over, and agents or intermediaries offering above average returns should be treated warily. Investors who find that the broker or intermediary they are dealing with has not got the required authorisation displayed in his or her place of business, should consider going elsewhere. The various regulatory agencies maintain public registers of authorised persons or businesses, and are happy to deal with investor queries over the telephone.

Individuals and companies authorised to take in funds range from tied agents and authorised intermediaries to licensed banks, building societies, credit unions and insurance companies. Banks and building societies are regulated by the Central Bank, and credit unions by the Registrar of Friendly Societies.

Tied agents represent particular financial institutions which have authorised the agent to act on its behalf, and deposits and investments handed over to the agents are as fully protected as if they had been handed to the institution itself. Of course, money will only be repaid if an investor can produce a receipt to prove the transaction occurred.

The most common types of tied agents are those authorised to act for insurance and mortgage lending institutions, and the regulatory body overseeing an agent's activities depends on the sector the agent is working in.

Tied agents normally advertise their status on a sign on their business premises and if a customer is in any doubt he or she should ask to see the agent's letter of appointment. If an agent acting for a financial institution takes in deposits and fails to lodge them with the institution, the customer will be reimbursed by the institution - providing the customer has the appropriate receipt.

Mortgage brokers are not authorised to take in savings and investment funds. Mortgage brokers must have authorisation to carry on their business from the office of the Director of Consumer Affairs (tel 01-4025500) and cannot take in savings or investments unless they have separate authorisation to do so from the relevant regulatory authority. Mortgage brokers are required to display their authorisation in their offices. The document lists the institutions from which they are authorised to act as broker.

The Central Bank (01 6716666) maintains a register of investment intermediaries and potential customers can contact the bank to check if a particular intermediary is authorised. Customers can further protect themselves by making out all cheques to the institution in which the funds are to be invested, rather than to the intermediary.

The Irish Brokers' Association (IBA) and the Insurance Intermediaries Compliance Bureau (IICB) both act as regulatory authorities for insurance intermediaries. The IBA, which represents the bulk of the business written by brokers though not the majority of intermediaries, is recognised under statute.

A Bill is being drafted which would transfer the responsibility for regulating insurance intermediaries to the Central Bank.

Small investors now have protection where they lose their funds as a result of defaulting insurance and investment companies. The Investment Compensation Act came into law on July 2nd. The Investor Compensation Company (ICC) it provides for has not yet been established but the provisions of the law are in effect since August 1st.

The ICC will organise a levy on the industry and investors who qualify will have their funds protected up to a limit of 20,000 ecus (£15,700) or 90 per cent of their investment, whichever is the lesser. The law was introduced following an EU directive and the financial limits are the minimum required. There has been criticism of the decision to set the limit so low but the Minister of State for Finance, Mr Martin Cullen, who was responsible for introducing the act, said a higher amount would have made the scheme unworkable. He also said that 80 per cent of small investors have investments which would be fully covered by the scheme's financial limit.

Savers with deposits in credit institutions authorised by the Central Bank to take deposits are protected to some extent if an institution fails. Under the Deposit Guarantee Scheme the maximum protection is 90 per cent of the aggregate of deposits held by the depositor, up to a maximum of 15,000 ecus. Depositors should not be at a loss where they are defrauded by a bank or one of its employees.

Savers with credit unions are covered by the Savings Protection Scheme under which the maximum payout is £10,000. There is also a bonding scheme whereby customers who are defrauded by credit union staff will be compensated.

Investors dealing with stock brokers are protected under a scheme which offers compensation of up to 20,000 ecus where a stock broker absconds with money given by a customer to buy shares. The stock exchange and its members are regulated by the Central Bank.

The Joint Oireachtas Committee on Finance and the Public Service produced a report during the summer entitled, Regulation and Supervision of Financial Institutions. It recommended the establishment of a new independent financial services authority which would regulate building societies, friendly societies, insurance companies, investment management and retail investment management companies and the securities and underwriting business, as well as the banking and stock exchange sectors.