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C/O Financial Services Commission
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E-Mail:gicb@fsc.gi

Investor Compensation Scheme - Eligibility

Eligible investments

The Scheme only covers eligible investments. Eligible investments are defined as follows:

• Transferable securities
• Units in collective investment undertakings
• Money market instruments
• Financial-futures contracts (including equivalent cash-settled instruments)
• Forward interest-rate agreements (FRAs)
• Interest-rate swaps
• Currency swaps
• Equity swaps
• Options to acquire or dispose of any of the above instruments (including equivalent cash-settled instruments) e.g. currency options and interest-rate options. Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash
• Options, futures, swaps, forward rate agreements and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event)
• Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market and/or a multilateral trading facility (MTF)
• Options, futures, swaps, forwards and any other derivative contract relating to commodities, that can be physically settled not otherwise mentioned in C.6 and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognised clearing houses or are subject to regular margin calls
• Derivative instruments for the transfer of credit risk
• Financial contract for differences
• Options, futures, swaps, forward rate agreements and any other derivative contract relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contract relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Section, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognised clearing houses or are subject to regular margin calls.

The following investments therefore are amongst those not covered by the scheme:

• Investment instruments falling outside the definition in the Investment Services Directive;
• Life assurance products;
• Pension products;
• Investments arising out of transactions in connection with which there has been a conviction under the anti money-laundering legislation;
• Investments eligible for compensation under the Deposit Guarantee Scheme Act1997;

Eligible investors

The scheme is only available for certain types of investor. Such investors are often referred to as "private" investors or "ordinary" investors.

Investments by professional and institutional investors are not covered by the scheme. Professional investors are those who may be deemed to possess the experience, knowledge and expertise to make their own investment decisions and properly assess the risks they incur.

Under the Markets in Financial Instruments Directive (MiFID), there is a third category of client - 'eligible counterparties'. For the purposes of GICS these are deemed to be equivalent to professional clients and are therefore outside the scope of the scheme.

Categories of investors who are considered to be professionals

(a) Firms which are required to be authorised or regulated to operate in the financial markets. The list below should be understood as including all authorised entities carrying out the characteristic activities of the entities mentioned: entities authorised by a Member State under a Directive, entities authorised or regulated by a Member State without reference to a Directive, and entities authorised or regulated by a non-Member State−

These are:

• Credit institutions
• Investment firms
• Other authorised or regulated financial institutions
• Insurance companies
• Collective investment schemes and management companies of such schemes
• Pension funds and management companies of such funds
• Commodity and commodity derivative dealers
• Locals - A firm dealing for its own account on markets in financial futures or options or other derivatives and on cash markets for the sole purpose of hedging positions on derivatives markets, or dealing for the accounts of other members of those markets and being guaranteed by clearing members of the same markets, where responsibility for ensuring the performance of contracts entered into by such a firm is assumed by clearing members of the same markets.
• Other institutional investors

(b) Large undertakings meeting 2 of the following size requirements on a company basis: balance sheet total: EUR 20.000.000, net turnover : EUR 40.000.000, own funds: EUR 2.000.000.

(c) National and regional governments, public bodies that manage public debt, the Gibraltar Savings Bank, Central Banks, international and supranational institutions such as the World Bank, the IMF, the ECB, the EIB and other similar international organisations.

(d) Other institutional investors whose main activity is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions.

(e) Investors with similar status in other firms within the same group and close relatives and third parties acting on behalf of these investors.

(f) Other firms in the same group.

(g) Investors who have any responsibility for or have taken advantage of certain facts relating to an investment firm which gave rise to the firm's financial difficulties or contributed to the deterioration of its financial situation.

(h) Persons responsible for carrying out the statutory audits of investment firms' accounting documents.

(i) Investors who have any responsibility for or have taken advantage of certain facts relating to an investment firm which gave rise to the firm's financial difficulties or contributed to the deterioration of its financial situation.

Other investors may be treated as professionals on request provided that an adequate assessment of the expertise, experience and knowledge of the client, undertaken by the investment firm, gives reasonable assurance, in light of the nature of the transactions or services envisaged, that the client is capable of making his own investment decisions and understanding the risks involved. As part of this assessment the following criteria and procedure must be fulfilled.

Where the client of an investment firm is an undertaking referred to above, the investment firm must inform it prior to any provision of services that, on the basis of the information available to the firm, the client is deemed to be a professional client, and will be treated as such unless the firm and the client agree otherwise.

As a minimum, two of the following criteria should be satisfied:

a. The investor has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters;

b. The size of the investor's financial instrument portfolio, defined as including cash deposits and financial instruments exceeds 0,5 million Euro;

c. The investor works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged.

And;

(1) The investor must state in writing to the investment firm that they wish to be treated as a professional investor;

(2) The investment firm must give the investor a clear written warning of the protections and investor compensation rights they will lose;

(3) The investor must state in writing, in a separate document from the contract, that they are aware of the consequences of losing such protections.

Before deciding to accept any request, investment firms must be required to take all reasonable steps to ensure that the client requesting to be treated as a professional client meets the relevant requirements stated above.

Firms must have appropriate written internal policies and procedures to categorise investors.

For the purposes of calculating the number of eligible clients under the scheme, if the investor can be deemed professional in respect of any service or instrument at any point in time, then they would be deemed as professional investors for the purposes of GICS and therefore not afforded any of the protections.  Firms will therefore be obliged to inform clients of this. 

Under MiFID, a firm may agree to a request from a professional investor to be categorised as a retail investor, or such a re-categorisation occurs as a result of the firm’s assessment of that client’s suitability or appropriateness i.e. where a professional client ‘opts down’ to the retail category, such a client would not be eligible for compensation under the scheme, by virtue of having been considered a professional investor at some other point.   These clients would need to be advised by the firm that their re-categorisation as a retail client would not change their treatment under the scheme i.e. this type of client would continue to be excluded from the scope of the scheme.  

Firms opting to categorise all their investors as retail investors for the purposes of MiFID, should continue to classify investors as eligible or professional for the purposes of GICS, and these classifications should not change irrespective of the client’s ‘new’ and ‘temporary’ treatment under MiFID.  For example, when a participant of the scheme has historically reported 20 eligible clients and 25 professional clients but now under MiFID will be categorising all investors as retail investors for those purposes, the number of eligible clients reported in the GICS quarterly return would still be 20 clients and not 45.

If investors have already been categorised as professionals under parameters and procedures similar to those above, it is not intended that their relationships with investment firms should be affected by any new rules adopted by firms.

Firms opting to categorise all their investors as retail investors for the purposes of MiFID, should continue to classify investors as eligible or professional for the purposes of GICS, and these classifications should not change irrespective of the client’s ‘new’ and ‘temporary’ treatment under MiFID. For example, when a participant of the scheme has historically reported 20 eligible clients and 25 professional clients but now under MiFID will be categorising all investors as retail investors for those purposes, the number of eligible clients reported in the GICS quarterly return would still be 20 clients and not 45.