What is the Investor Compensation Fund, and which firms must join it?

The statutory basis of the Investor Compensation Fund for CIF clients is in the Investment Services Law of 2007. When Law 87(I)/2017 replaced that law on 3 January 2018, it kept in force the provisions the Fund depends on. CySEC's Directive DI87-07, published as R.A.D. 76/2019 in March 2019, sets out how the Fund works. Directive DI87-07(A), R.A.D. 154/2020 of April 2020, amended it, mainly to let CySEC extend deadlines. Together they implement the EU Investor Compensation Schemes Directive 97/9/EC, which has not changed since 1997. The Fund therefore rests on its own directives rather than on MiFID II or MiFIR. When CySEC authorises a CIF, it checks that the firm meets its obligations under the 1997 directive.

The Fund exists to secure the claims of covered clients against its members by paying compensation when a member fails. It protects clients, not member firms, and all of its capital is available to compensate the covered clients of any member. Who counts as a covered client, and how much is paid, are explained in When does the ICF pay compensation, to whom, and how much?.

Membership is compulsory for CIFs and for branches of third-country investment firms authorised under Law 87 Article 40. It is also compulsory for managers of alternative investment funds that provide discretionary portfolio management, investment advice, safekeeping and administration of fund units, or reception and transmission of orders, and for UCITS management companies that provide portfolio management, investment advice, or safekeeping and administration of fund units. Branches of investment firms from other Member States are covered by their home scheme. They may join the Fund voluntarily to top up that cover where the Fund's level, scope or percentage of cover is higher, on objective conditions the Fund sets.

An applicant must apply to join immediately when CySEC asks, and may not provide any investment service or activity until it is a member. Members may state their membership factually, but may not use it in advertising. Investment firms operating in Cyprus that are exempt from membership must tell their clients so in writing.

If a member loses its licence for any reason, CySEC tells the Fund, which removes the member and informs CySEC; the removal is published on CySEC's website. The exam material says covered clients keep their rights until the member is removed. DI87-07, the directive issued in March 2019, goes further: losing membership does not take away covered clients' right to compensation for investment business done up to the loss of membership, and it does not stop a compensation process from starting later. The former member's debts to the Fund also survive. What happens to client assets when a licence is withdrawn is covered in When can CySEC suspend or withdraw a CIF's authorisation, and what happens to clients?.

The Fund can also expel a member that breaches its obligations. It needs CySEC's written consent and must give at least 12 months' notice. Business done during the notice period stays covered, and after removal the Fund remains liable for business done before it. The same idea runs through both cases: cover follows the business done while the firm was a member.