The Investor Protection Fund is an autonomous legal entity that provides limited property coverage funded from the contributions paid by its members and from other revenues as required under law and in the provisions of its own by-laws if any of its members cannot effect delivery against certain customer claims due to lack of funds, i.e. is not capable of performing its commitment to disburse deposits.
IPF foundation and members
Act CXI of 1996, which contains a comprehensive set of provisions about the securities market and its institutions (the Securities Act), envisaged a new organisation of investor protection to be introduced in the Hungarian capital market in response partly to the level of development of the market itself, and in part due to the intended accession to the European Union (EU). The new organisation is designed to provide indemnity to investors against property damages arising from the potential insolvency of investment service providers.
When the Securities Act entered into force (on January 1, 1997) it obliged all operating investment service providers by the force of statute to establish such an institution of investor protection. As a result, the Investor Protection Fund was set up on April 14, 1997 in line with the provisions the Act.
All business organisations which are licensed to engage in covered lines of business by the Hungarian Financial Supervisory Authority are members of the Investor Protection Fund. A commodity exchange service provider that holds a license to manage customer accounts may join the IPF on a voluntary basis, or may pursue this line of business without IPF cover.
At present all financial enterprises, credit institutions that provide investment services and managers of investment funds that manage private portfolios are members of the IPF. None of the commodity exchange providers has joined the IPF yet.
Membership contributions are the main source of IPF assets. Members pay an initial contribution upon affiliation also make annual contribution payments to the IPF.
The IPF invests the amounts thus received in compliance with its Asset Management By-laws by employing a fund manager selected via competitive bidding.
The assets of the IPF cover the performance of the duty of the IPF to pay compensation. If the available amount proved to be insufficient for the purposes of compensation, the IPF Board of Directors may order its members to pay extraordinary contributions or may decide to take out a loan. As the funds of the IPF fell short of its liability to pay the compensations that became due and payable in 2000, the Fund borrowed HUF 2.48 billion for a term of 10 years under a one-off government surety.
Effective as of 1 January, 2002, the amended version of the CMA provides general government guarantee by force of law, should the IPF need to borrow funds to be able to abide by its duty to settle compensation claims as they fall due.