For investors

Information about compensation proceedings

In the meaning of the Investor Compensation Act (AnlEntG - Anlegerentschädigungsgesetz; formerly EAEG - Einlagensicherungs- und Anlegerentschädigungsgesetz), EdW gives eligible claimants financial compensation in the event that the "Federal Financial Supervisory Authority" (BaFin - Bundesanstalt für Finanzdienstleistungsaufsicht) determines that an institution is unable for reasons directly related to its financial position to repay deposits or to meet obligations from securities transactions and that there are no prospects for later repayment or performance.

Securities transactions in the meaning of the AnlEntG are bank operations or financial services in the meaning of section 1 (1) sentence 2 no. 4 (financial commission operations), no. 5 (deposit transactions), no. 10 (issuing operations) or section 1 (1a) sentence 2 nos. 1 to 4 (investment brokerage, arrangement of transactions, financial portfolio administration, trading for own account) of the Banking Act (KWG – Kreditwesengesetz).

Obligations from securities transactions as defined in the AnlEntG are obligations of an enterprise under securities transactions to procure for a customer ownership or property of moneys or financial instruments or rights from financial instruments in the meaning of section 1 (11) of the KWG.

The BaFin establishes the event of loss and immediately informs the Compensatory Fund. The event of loss is published in the Federal Bulletin.

The Compensation Fund informs all investors known to it of the event of loss. Investors have to file their written application for compensation with the Compensation Fund within one year of receiving the notice of the event of loss. After this period, claims for compensation are generally excluded. After five years the claim of the party entitled to compensation is extinguished by limitation. Any disputes regarding the grounds for and the level of the compensation claim are to be settled in courts of civil jurisdiction.

Pursuant to section 3 (2) of the AnlEntG certain groups of persons and institutions are not entitled to claims for compensation.

The claim for compensation of the creditor is based on the amount of the creditor's claims from securities transactions in consideration of any offsetting or retention rights of the securities trading firm. A claim for compensation shall exist only to the extent that moneys are denominated in the currency of a member state of the European Union or in EUR. Thus, moneys denominated USD or CHF will not be compensated. In addition, no claim for compensation exists if your claim is based on faulty advice or collusive investment within the framework of property management.

The claim for compensation is limited to 90% of the liabilities from securities transactions and the equivalent of EUR 20,000.

In the calculation of the claim for compensation the amount of the moneys and the market value of the financial instruments shall be the basis for determining the occurrence of the event of claim. The admissible limit of compensation refers to the total claims of the creditor against the securities trading firm irrespective of the number of accounts, the currency and the location at which the accounts are kept and the financial instruments held in custody.

For joint accounts the share of each individual account holder is relevant for determining the upper limit. In the absence of any particular regulations, the moneys or financial instruments will be apportioned to the account holders in equal shares. If the creditor has acted for account of a third party the upper limit will be determined on the basis of such third party amounts.

To the extent that EdW fulfils the claim for compensation of an eligible claimant, the claimants' claims against the institution will devolve on EdW.

On what legal basis does the EdW operate?

The EdW operates in accordance with the Investor Compensation Act (AnlEntG- Anlegerentschädigungsgesetz).

Since when have compensation cases been regulated by law?

Investors are entitled to claim compensation under the provisions of the AnlEntG for compensation cases that have been established by the German Financial Supervisory Authority (or the former German Federal Banking Supervisory Office) after 25 September 1998.

From what source does the Compensatory Fund of EdW receive its funds?

The EdW collects annual contributions from the institutions assigned to it. These funds flow into a special fund from which EdW pays out compensation to eligible aggrieved investors. Details on the collection of these contributions are regulated in the Contribution Regulation of EdW (EdWBeitrV).

How is the compensation amount calculated?

The calculation of the amount of compensation is based on the market value of the financial instruments at the time the claim has occurred or on the amount of funds resulting from it. Premiums (agios) and trading losses are generally deducted from the investor's repayment claims.

The compensation claim is limited to 90% of the investor's claim from securities transactions against the institution but not more than EUR 20,000 per investor irrespective of the number of accounts held. In the case of joint accounts, individual investors receive compensation in accordance with their contractually stipulated share. In cases where relevant details are not provided, compensation will be in equal parts. A claim for compensation exists only if funds are denominated in a currency of an EU member state or in euro.

Who is entitled to compensation?

Private individuals and partnerships as well as small corporations (in the meaning of the German Commercial Code).

Credit institutions and financial services institutions, insurance companies, investment companies, medium-sized and large corporations (in the meaning of the German Commercial Code) and the public sector are not entitled to compensation (section 3 (2) of the AnlEntG).

How is an investor notified of the decision on the claim?
When does an investor receive compensation?

The EdW examines the claims filed without delay and usually satisfies them within a period of three months after assessing the legitimacy and establishing the amount of the claim.

After completing the assessment the EdW sends every investor a written decision on the claim.

If a claim for compensation has been established, the amount is transferred to the account previously nominated by the investor within the period mentioned above. Cashless transfer is the only possible form of payment.

How long does it take the EdW to complete a compensation proceeding?

The duration of a proceeding depends on the complexity of the compensation case and may vary.

Before the EdW can disburse compensation it must identify the investors of the institution and verify the amount of their claims from securities transactions.

This means that the EdW usually cannot make an immediate decision on an application because it requires a reasonable period of time to establish the facts of the case (institution business model, discovered data such as clients lists, contracts, deposit/disbursement slips, accout statements for clients`/trade accounts and securities accounts), to process the application and prepare an appropriate decision. A reasonable period of time may be of varying duration depending on what additional investigations/clarifications are necessary for the EdW to arrive at a decision on the application.

What damages does the compensation cover? For example, are damages resulting from faulty advice given by the institution or its agents eligible for compensation?

The AnlEntG covers only obligations from securities transactions that form part of the institution's cardinal obligations (primary obligations).

Main claims that are eligible for compensation are claims for payment of actually existing deposits or release of securities kept in safe custody for the investor.

Under section 1 (3) sentence 1 of the AnlEntG, liabilities from securities transactions are obligations of an institution to pay back funds owed to or belonging to investors and which are held for their account in connection with securities transactions.

Entitlements to the procurement of rights, ownership or property of monies or securities are protected to the extent they were frustrated through misappropriation or embezzlement.

However, claims for damages (secondary claims) are not covered and are generally not eligible for compensation, particularly claims resulting from faulty advice or flawed investment.

The substitution of (effectively) lost profits or offsetting of losses resulting from a faulty investment strategy does not fall under the protection provided by the AnlEntG. Disclosed fictitious profits are not eligible for compensation as well.

Does the compensation also cover obligations to investors under securities transactions conducted at a branch of a German institution outside Germany?

Obligations to investors resulting from securities transactions conducted at a branch belonging to a German institution in another EU member state or EEA country are covered within the German protection limits ("European passport"). The investor's nationality has no relevance.

If, in addition to establishing the compensation case, an insolvency proceeding was also opened against the institution, is there a "linkage" between the two proceedings?

The compensation proceeding (managed by the EdW) and an insolvency proceeding (managed by the insolvency administrator) are legally separate proceedings. In addition to filing an application for compensation with the EdW, the investor may also file his or her claims separately with the insolvency administrator. The claim may be registered there in its full amount.

EdW does not await the outcome of an insolvency proceeding before deciding on compensation. To the extent that EdW satisfies a legitimate claimant's claim for compensation, that claimant’s claims against the institution devolve on EdW in the amount of the compensation paid (section 5 (7) of the AnlEntG).

Does protection under the AnlEntG cover all of an investor's securities account (shares, investment funds, certificates and other financial instruments)? What happens to an investor's account if the institution becomes insolvent?

In general terms, EdW provides coverage not for individual financial instruments or accounts but for the obligations existing towards the investors under securities transactions conducted by the institutions assigned to the EdW. The financial instruments are kept in safe custody in an account with an institution but remain the investor's property.

If an institution becomes insolvent, the investors may demand release of the financial instruments from the (insolvent) institution or have their account transferred to another institution provided the institution has no collateral rights. Any existing segregation rights under insolvency law are thus not compensated. Compensation under the AnlEntG is provided only if a loss of assets has occurred. Hence the investor does not incur such loss of assets if and to the extent that they have a segregation right under section 47 (1) of the Insolvency Statute. The object covered by the segregation right is not part of the insolvency assets but belongs to the creditor of the institution. A loss of assets therefore has not occurred, so the segregation right does not constitute a claim for compensation under section 4 (1) of the AnlEntG.

Compensation under securities transactions in accordance with the AnlEntG can be considered if the institution has breached its obligation to return securities belonging to the investor and kept in custody by the institution.

What is the statutory period of limitation for an investor's compensation claims?

The investor must submit a claim for compensation in writing to the EdW within one year after notification by the EdW of the compensation case. After this period has elapsed a claim for compensation normally can no longer be filed (section 5 (5) of the AnlEntG).

Under the AnlEntG, the statutory period of limitation on investors' claims against the EdW is five years after notification by the EdW of the compensation case (section 3 (3) in conjunction with section 5 (4) sentence 1 of the AnlEntG).

Any questions?

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