Although not all investment losses are the result of deliberate fraudulent act by financial advisers, the focus of our collective action is towards investor protection after misleading and fraudulent activities, or failure of the investment firm. To define fraud, several elements need to be connected. Fraud includes acts and omissions to persuade someone to part with something with the deceit or intention to do so for personal gain or to cause losses to other parties. It must be clarified though that the sophisticated safety net of deposit protection and investor protection does not cover plain investment risk. It mainly protects investments held by investment firms in the event of insolvency or winding-up of the firm.
Fraud and financial crime can take place against an investment firm or credit institution. When such outside factors influence the existence and survival of a financial institution, investments are at risk. Investors who fear losing their capital, might try to withdraw their investment. Massive cash withdrawals potentially push the firm into mandatory closure.
Investor compensation schemes in the EU do not cover investment losses per se. The objective of the Community is to ensure a proper functioning of the internal market and maintain consumer confidence on a high level. Where foreign direct investment, or transferable securities and money-market instruments are involved, the community wants to guarantee a deposits and investments up to a certain amount in case of default of the institution. This means that when the investment firm or credit institution is closed, investors can qualify for a refund of their investment.