What happens to my money if my broker steals it or goes broke? In Papua New Guinea the answer is the compensation fund in Division 1 of Part IX of the Capital Market Act 2015. It replaced the Fidelity Fund kept under the repealed Securities Act 1997; section 123 of the Securities Commission Act 2015 converts the old Fidelity Fund money into the Capital Market Compensation Fund.
Who must establish the fund
A stock exchange shall establish and maintain a compensation fund which shall be administered under this division. The assets of the compensation fund shall be the property of the stock exchange, which shall be kept separate from all its other properties and such assets shall be held in trust for the purposes set out in the regulations made under this Act.
The duty falls on the stock exchange, in practice PNGX Markets Ltd, not on the Securities Commission. The exchange holds the fund on trust in a separate trust account at a licensed bank (section 343), keeps audited accounts with a balance sheet as at 30 June each year (section 345), and administers claims under regulations that may fix who may claim and how (section 341(3)). No other money of the exchange may be used to pay claims (section 355), and if the exchange is wound up, whatever remains after claims are met passes to its liquidator (section 358).
Where the money comes from
Section 342 lists the sources: the exchange’s opening payment, members’ contributions, investment income, any portion of the exchange’s net income the Commission requires it to pay in (section 346), recoveries from wrongdoers and insurance payouts. Unclaimed restitution recovered for takeover breaches also goes to the fund (section 281(8)).
| Contribution | Section | Rule |
|---|---|---|
| Entry contribution | 347(1) | K20,000 paid to the exchange by each participating organisation on being licensed |
| Annual contribution | 347(1) | Amount approved by the Commission, due by 31 January each year; not refundable |
| Variation | 347(3) | Exchange may vary amounts and manner with the Commission’s approval |
| Discharge | 348 | Long-standing contributors owing nothing are released once the fund exceeds K50 million; contributions resume if it falls below K10 million |
| Levy | 349 | Exchange may levy members, with the Commission’s approval, if the fund cannot meet its liabilities |
| Advances | 350 | Exchange may lend to the fund from general funds and be repaid |
Section 348(1) releases a member that has made “50 annual contributions or more” once the fund passes K50 million; fifty years is an unusually long qualifying period and may be a drafting error. Idle money may be invested only on fixed deposit with a licensed institution or in trustee-authorised securities (section 351).
Who can claim, and for what
Section 352(1) is the heart of the Division. The fund must be applied to compensate a person who suffers monetary loss because of either:
- a defalcation or fraudulent misuse of money or property by a director, officer, employee or representative of a licensed dealer in securities that is a participating organisation; or
- the insolvency of a participating organisation,
where the loss relates to money or property entrusted to or received by the broker, in connection with its dealing in securities, for the claimant or as trustee. A broker is insolvent when it is being wound up or when the exchange determines under its rules that it cannot meet its obligations on exchange trades (section 352(5)). The Commission may prescribe further circumstances by Gazette order (section 352(2)). Payments per claimant and per broker are capped by regulation, though the exchange may pay more if the fund can bear it (section 352(3), (6)).
The exchange may require documents or statements supporting a claim and may disallow a claim if they are not produced (section 353). Once it pays, the exchange steps into the claimant’s shoes against the broker and its officers, and the claimant may not recover from the broker’s estate until the fund has been repaid in full (section 354). The exchange may insure the fund (section 356), but claimants have no direct rights against the insurer (section 357).
What it does not cover
The fund protects clients of stockbrokers against theft and broker insolvency. It does not compensate anyone for a fall in the value of shares or units, and it does not cover losses caused by a unit trust trustee or fund manager, because trustees and managers are not participating organisations. Unit holders in the Pacific Balance Fund, whose trustee the Commission found insolvent and whose licence was revoked in 2023, had no claim on this fund.
A unit holder’s protections lie elsewhere: the trustee’s duty to hold scheme property separately and on trust, the Commission’s power to appoint an interim trustee, the right to sue for breach of trust, and the Act’s civil remedies for market misconduct. See how a trustee must hold scheme money, suing the trustee and recovering losses from misconduct. Where units are listed and bought through a broker, the fund covers the broker, not the trust.
The fidelity fund for derivatives
Division 2 (sections 359–373) requires a derivatives exchange, if one is approved, to keep a parallel fidelity fund for clients of licensed derivatives traders, with K20,000 entry and annual contributions (section 364), a separate trust account, claims for defalcation (section 367), subrogation and insurance. Caps are set by the exchange’s rules. Papua New Guinea has no approved derivatives exchange, so the Division is dormant.
Confirm that your broker is a participating organisation of PNGX with a current capital market licence. Keep contract notes and statements; section 353 lets the exchange refuse an undocumented claim. If a broker fails, lodge the claim with the exchange promptly and tell the Securities Commission. See how licensed firms must handle client money.
Sources
- Capital Market Act 2015 — ss 2(1) (“participating organisation”), 281(8), 340–373
- Securities Commission Act 2015 — ss 117, 123
- Securities Act 1997 (repealed) — Part III (Fidelity Fund)
Before relying on anything here, read the current text of the Capital Market Act 2015 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.