Globalization and the expansion of the internet created a border less virtual society. One of the consequences of this change in society is that investment misconduct and financial scandals are on the rise, leaving small investors and the novice with a loss of money and emotional damage resulting in a decline of market confidence. In the European Economic Area, investor compensation schemes provide for an extra layer of protection for investors whilst maintaining confidence in the financial system and protecting the proper functioning of the internal market when investment firms and credit institutions become insolvent, fail or are likely to fail and are subject to winding up procedures.
The objective for victims is to get their investment secured, or when such scenario turns out to be impossible, to maximize their recovery. It is noteworthy to point out that not all investment losses are the result of bad behavior on the side of the investment firm. Investment risk contains traditional market and credit risk and is influenced by external factors. The price for return on investment is the uncertainty of the outcome. Therefore, the higher the return, the higher the risk. Professional and institutions investors can use a wide variety of risk mitigating calculation models and products to limit risk of their investment. Private and novice investors generally focus on the return on their investment instead of the downside risk of the investment. The result is that when things go wrong, these investors can be exposed to heavy losses. It is then the question whether the intention of the investment firm or adviser was to mislead or defraud the consumer, or that there is a legitimate transaction.
When consumers are misled or defrauded, there are a number of ways to act. First and foremost, a sophisticated asset tracing strategy must concretize the location of the assets to avoid that these disappear via a backdoor or loophole. Once sufficient evidence is found, collective claims can be fought by criminal trial, civil litigation, mediation, arbitration and other out of court settlements. The last is often the fastest for both parties whilst limiting the emotional and professional scars during the process.