I got a bit of a shock when researching this post. Like many investors I assumed that if the very worst happened and my investments were stolen away then I’d be protected by the UK Financial Services Compensation Scheme (FSCS) for the first £85,000.
It turns out that ain’t necessarily so.
If you own investments domiciled beyond the UK – say in Ireland or Luxembourg – then the FSCS safety net doesn’t protect you at all. Instead, you may fall under the aegis of a much less generous scheme, and you may not even get that.
Most Exchange Traded Funds (ETFs) available to UK investors – and many index funds – are domiciled in Ireland, so there’s a good chance you don’t have the protection you thought you had.
But before we open that can of vipers, let’s talk through what compensation is available to UK investors and how it works.
Hmm, I was hoping for more
In the same way that UK savers are protected if their bank goes belly up, the FSCS will also bail out UK investors with up to £85,000 if their investments disappear in a puff of fraud, negligence, mismanagement, or mis-selling.
Note, you don’t get £85,000 if you bought shares in a Transylvanian blood bank firm that couldn’t fail and then promptly did. The scheme protects you from institutional risk, not stock market risk.
If your broker / online platform goes under and takes your monies with it, then you can claim for up to £85,000, if there’s no other way to get your money back.
Same again for your fund manager. For example, if Vanguard failed and your money mysteriously vanished, you could be due up to £85,000 compensation in that scenario, too. Vanguard is one of the world’s largest investment firms and it almost certainly won’t go down, but it’s nice to have a cushion.
The important thing to know about the limit is that it counts per institution per person, not per fund.
Of course, it shouldn’t come to this. There are regulations in place that require fund managers and brokers to segregate your assets from their own. If the mother company explodes, then your money should be safely ring-fenced in a separate pot and you’ll get it back once the smoke has cleared. The company’s creditors have no legal right to your piece of the pie.
That’s what is meant to happen, but any system can fail.
As Cofunds puts it:
As with any FCA regulated investment firm in the UK, while it is highly unlikely that Cofunds were to become insolvent, or cease trading and have insufficient assets to meet claims, we can’t provide a 100% guarantee that your money is fully protected.
So the FSCS compensation scheme provides a last resort backstop, in case the next Bernie Madoff happens to be running your brokerage while the cast of Dad’s Army is in charge of administration and oversight.
You’re only covered if the financial firm that pops its clogs is authorised by the UK’s Financial Conduct Authority (FCA).
Note, the word you’re looking for is authorised by the FCA. There’s all kinds of lullaby small print out there that may say the company is regulated by the FCA, but a company can be regulated for many different types of activity. A company must be authorised for compensation to apply.
You can check your broker or fund manager using the FCA’s search engine.
- Scroll down and search by name, if you don’t have the company reference number (I didn’t!)
- Then click on the basic details link (or the relevant subsidiary and then basic details) to check they are authorised.
When I checked the Irish spin-offs of BlackRock (AKA iShares) and Vanguard, the note said: Authorised (Schedule 5).
Ah, the ol’ fog of investing befuddlement descends once again!
The FCA’s advice on the relevance of Schedule 5 is:
Consumers considering or currently doing business with an Authorised (Schedule 5) firm, may wish to ask for further information from the firm or its UK branch about its complaints and compensation arrangements. This is because the position may differ compared to a UK authorised firm.
Here’s what Vanguard have to say about their position with the FSCS:
Funds that are domiciled in the UK are covered by this scheme, while Ireland domiciled funds are maybe covered by the equivalent Ireland scheme.
Maybe? What does maybe mean? A clarifying email later and it turns out that ‘maybe’ means that Vanguard Irish domiciled funds and ETFs are not covered by the Irish compensation scheme. The same is also true of State Street’s Irish domiciled SPDR ETFs, and iShares’ and I suspect of most other providers, too.
I recommend you check with your own fund / ETF manager to find out whether you’re covered by any particular compensation regime.
In the meantime, on the off-chance that anyone is covered by the Irish compensation scheme, just how reassuring is it anyway?
The answer is: not very.
The Irish Investor Compensation Scheme
Ireland’s scheme pays out 90% of your loss, up to a maximum of €20,000 per investor.
Only firms regulated or authorised by the Central Bank of Ireland are covered. You can check who’s who here.
State Street did show up on this list even though they have confirmed to us that their ETFs are not covered by the scheme. Therefore, it’s worth contacting your fund manager directly rather than relying on this list.
Some investors may have ETFs domiciled in Luxembourg. You can find details of the applicable scheme here. It looks similar to the Irish scheme – that is, a €20,000 pay out at best.
The UK FSCS doesn’t cover the Channel Islands or The Isle of Man, either. These are Crown dependencies but are not part of the UK and therefore have their own arrangements.
Chew on this
Some other nuggets to consider.
Your £85,000 UK compensation limit doesn’t interfere with the £85,000 you can claim for lost cash deposits.
If a bank fails while holding your cash on behalf of your broker, then you can claim £85,000 back while still claiming £85,000 elsewhere for missing investments.
However, if your broker money was stashed with a single institution, say Lloyds, and you also had a personal account with those self-same black horsie people then you could only claim up to £85,000 for the two losses combined.
That’s because the limits apply per person, per institution, per claim category (i.e. cash is one category and investments another).
Similarly, if your broker went bust and you had £150,000 invested with it – split 50:50 between iShares and Vanguard – and for some reason your money hadn’t been properly ring-fenced, then you’d still only be able to claim for £85,000. In this case it’s the broker that has failed, not the fund managers, and you only get £85,000 per institution that goes down the Swanee.
Remember there are other regulations in place to ensure that your investments are not bound up with the fate of these institutions. It’s unlikely that they’ll fail and leave you with absolutely nothing.
If you decide to diversify your money between brokers, then check they are not part of the same financial group. iWeb, Lloyds and Halifax / Bank Of Scotland Share Dealing are in the same group, for example. In other words, they count as the same institution and you’d only be eligible for £85,000 even if you diligently split your assets across them all. Again you can check this using the FCA’s search engine. Search by your broker’s name at the top of the web page. The search will then show a trading/brand names column that’ll show you who’s who.
Building a stakeholder pension, SIPP, or workplace defined contribution scheme? Then £85,000 is your lot, per institution, as above.
Defined benefit pensions have their own rules that you can enjoy here.
A little known benefit of annuities is that your income is protected up to 100%, with no upper limit on the amount.
Claims can take a long time to recover your cash – six months or more. Don’t put all your eggs in one basket if you’re likely to need the money in a timely fashion, even if your funds are well under the limit.
Schemes are paid for by a levy on the financial firms covered. If you want to launch a campaign to argue that the compensation limits should be higher, then rest assured the industry will claw back the cost from all of us.
That said, the equivalent US scheme covers up to $500,000.
This piece is meant to inform not alarm. It’s worth reiterating that the chances of an unrecoverable failure are very low. However, the risk is not zero, so the answer – as in most things, except husbands and wives – is diversification.
I’m not suggesting that you choose another broker or fund manager every time you breach the £85,000 limit, but perhaps think twice about those nice offers to ‘consolidate’ all your investments in one, convenient place.
How many ways you slice your pie will depend on how much fragmentation you can handle and how comfortable you are with the thought of a black swan sailing merrily through all the fail-safes.
Remember there are no absolute guarantees out there, despite all the internet jousting that goes on about Crest and certificates of ownership locked in fireproof boxes.
And whatever you do, don’t let stress about compensation schemes derail your main aims. My Irish domiciled funds aren’t covered but I’m not going to sell a single one. What I will do is diversify among more fund managers over time.
Far better to diversify across asset classes to protect yourself against a probable risk than to live in fear of the improbable.
Take it steady,
What a public service: well done, that man!
Would anyone like to add more e.g. about Jersey, Guernsey, IoM, or even Canada?
Monevator, your blog is worth its weight in gold. I was trying to get my head round this issue last week and gave up (my brain hurt). Thank you. I will be looking at the domicile of my ETFs more closely in the future when deciding which to buy.
Thanks for the info TA, all good to know. Are SIPPs and ISAs covered by the same limit? E.g. if someone has an ISA with broker A and a SIPP with broker B, each with £50k in Vanguard funds, would they only be covered for £50k total?
Lots to think about here. 20% of my portfolio is Irish domiciled and I hadn’t considered the lack of UK FSCS compensation, to be honest. Like you TA, I’ll stay put for the time being but I’ll be reconsidering my diversification strategy in the future when buying.
Also, the US scheme (SIPC) seems to only cover broker failure and not fund managers, as far as I can see. Which means it’s probably not any practical use for those in the UK looking for further protection by buying US domiciled funds.
It certainly is a hornets nest.
I think however that PPPs and Stakeholder pensions issued by UK insurers are covered by the policyholder scheme – which is 90% of the liability with no upper limit.
A case for insurance based products rather than DIY perhaps.
Judging by this article TA says it’s “per institution, per person”
So I think it depends on what you’re worrying about. From your example:
– if Vanguard lose your money, you’d only be entitled to claim £50K (and so would in turn also lose £50K)
– if either broker failed, you’d be able to claim the £50K that broker held
– if due to extraordinary circumstances both broker A AND broker B lose your money, so long as they are completely different institutions, (my understanding is) you’d get back £50K from each.
Now if broker A, broker B and Vanguard simultaneously do things to lose your money…. (I’m have no idea!!!)
If there was so much financial turmoil that multiple financial institutions went bankrupt then I wouldn’t rely on the government to keep its compensation promises, even if it could afford to do so.
“so much financial turmoil that multiple financial institutions went bankrupt”: heavens, it might just be the result of one successful hacker bringing down a couple of stockbrokers. The rest of the financial system might well be able to continue funding FSCS.
TA, I opened a Charles Schwab US dollar account. SEC protection is $500k for investments, $250k for cash. There is currency risk of course, but that averages out over time. Feels good to have an account external to UK in a more shareholder friendly country. No stamp duty to pay on shares either.
@Jon does that $500k hold for aliens as well as US citizens? If you fill out a W8-BEN then you’re kinda declaring a lack of interest, though if you don’t then I guess Uncle Sam owes you the shelter of his fiscal wing…
@ Paul C – Great spot on pensions via insurance companies. Here’s the link: http://www.fscs.org.uk/what-we-cover/eligibility-rules/compensation-limits/insurance-limits/
@ Rob – Jonny’s right, it makes no difference whether you’re in ISAs, SIPPs or regular accounts. The compensation limits apply to your claim category e.g. cash, investments, insurance and then your institution e.g. broker, fund manager, bank. So you can claim per institution that fails, per claim category per person. So feasibly if you had a Cash ISA with HSBC then you could claim back £85,000 while claiming back £50,000 for the stocks and shares ISA you also held through HSBC.
@ermine, yes, UK citizens are fully covered. Complete the W8 BEN form, you will pay 15% tax on dividends. I only buy blue chips, Coke, JNJ, PG, McDonalds etc No ETFs that would get complicated (non reporting status and all that). Charles Schwab is a mega listed broker, great website and customer service, no charges for re-investmenting dividends – as a rule I only use brokers that are listed.
iShares have got back to me and confirmed their Irish domiciled ETFs aren’t covered by the Irish Investor Compensation Scheme.
Hello. If my reading of the above is correct, clearly I must have a fundamental misunderstanding of how a brokerage firm works. If I own say £20k of a UK domiciled fund through broker A, why is it relevant if the broker goes bust – don’t I own £20k of this fund and in this scenario they haven’t gone bust? I can understand if I had £1k of cash sitting in my brokerage account that this would be subject to the FSCS compensation scheme. Likewise if the UK domiciled fund went bust, I understand that this is covered by the FSCS scheme.
I appreciate this is probably not an answer that some can give in a few sentences, so if there is a webpage out there that explains the business model that results in the need for the FSCS to cover funds invested through a broker, that would be appreciated. thanks
Yes, you do, unless the broker didn’t keep accurate records of your investments or simply stole the money. MF Global is the poster child for this kind of nightmare: http://en.wikipedia.org/wiki/MF_Global
Reread the Cofunds quote. Check your own broker’s T&Cs.
Here’s another quote from the FSCS:
FSCS provides protection if an authorised investment firm is unable to pay claims against it. For example:
• when an authorised investment firm goes out of business and cannot return investments or money.
OK. I think my gap in understanding is the definition of client money. So assuming the broker did not steal the money and correctly executed the purchase of the relevant fund, then isn’t that money paid to the fund and therefore no longer “client money”? And if inadequate records are kept, surely the fund itself has a record of my ownership?
OK, I browsed the T&Cs and it is an eye opener. I did not realise my client assets were not held in my name. Is this typical, even if I held a share directly?
Where we register your Investments in the name of one our Nominees or hold them with a Sub-custodian, the Nominee or Sub-custodian will hold your Investments together with those of our other clients in a pooled account. The Investments held in a pooled account in this way cannot be distinguished by individual client. This means that if the Nominee or Sub-custodian defaults or becomes insolvent and there is a shortfall in the pooled account which cannot be reconciled, you (and our other clients) may share proportionately in that shortfall.
We will hold your Investments in one or more pooled accounts, therefore, you may receive dividends or other distributions net of tax which has been paid or withheld at rates that are less beneficial than those that might apply if the Investments were held in your own name or not pooled. In addition special benefits to shareholders or shareholder incentives attached to your investments may be lost”
The pooled nominee system is highly typical of online broker operations.
That’s why the fund manager won’t know who you are. The broker holds your units on your behalf and it’s up to them to keep a record of the beneficiaries. I’m actually preparing a post on the pooled nominee system but am awaiting a tardy broker to reply on some of the hairier aspects of their T&Cs.
Shares fall into the same system unless you request physical certificates or find a broker who uses the CREST system.
I’m with The Accumulator.
Thisismoney.co.uk recently outlined ‘Five things to consider when picking a platform’.
No mention of any risk to your funds.
One platform has a web page about their service titled ‘How safe is your investment?’. In the text the word ‘safe’ is not used so I assume that the custody of money and investments with their (and any other) platform is ‘not safe’. Similarly there must be risks at fund providers, nominees, etc. The web page does, however, explain all the safeguards.
The FSCS compensation scheme for cash deposits is relatively easy to understand but I’ve not yet found a good explanation of the ‘£50k per person per firm’ for investment firms and whether it covers ETFs (the same platform provider’s website suggests Unit Trust and OEIC providers only). TA’s post has clarified this for me. Thankyou.
One concern is that ordinary savers, who understand the FSCS compensation for cash deposits, and who are being encouraged by low interest rates to move their money into investments, may not appreciate the differences in the FSCS scheme when it relates to purchasing investments via a platform.
I would like to think that each platform, nominee company, broker, Unit Trust/OEIC/ETF provider, etc, has all the right things in place to protect against human error, systemic failure, mismanagement or fraud, so its unlikely that investors will ever need to understand the conditions of the FSCS £50k compensation scheme.
But at the back of my mind I know there are risks. I just don’t fully understand them nor best practice in protecting myself against the risks.
My approach from now on is to spread my investments between products and providers. I’m already in the situation where my SIPP, my Stocks & Shares ISA, and my sharedealing account are with different platforms/brokers. I will continue with that, despite the marketing offers tempting me to have everything in one place. I’ll invest with different ETF providers. I’ll invest in Investment Trusts as well as ETFs. My next year’s ISA will start a new account with a different platform.
My costs of investing will be higher, but at least I’ll be happier.
What a great article. This sort of stuff is incredibly difficult to pin down.
I recently read that compensation for s&s isa may be matching those of savings I am a bit concerned as I have mistakenly gone above the limit I wonder if anyone has any news on this as I don’t want to rash Thanks
I’d be grateful for confirmation, from one of your wise folks, that I’ve understood things…
Broker A – £100,000 in Vanguard fund held in an ISA, UK domiciled.
Broker A – £100,000 in Vanguard fund held in a SIPP, Ireland domiciled.
Broker B – £100,000 in Vanguard fund held in ISA, UK domiciled.
In event that Broker A falls over, £50,000 compensation from the FSCS for the UK investment and, possibly, £20,000 from ICCL for the Irish investment. £130,000 loss.
In event that Vanguard fails, FSCS compensation for £50,000 for the one institution, and similarly £20,000 from ICCL. £230,000 loss.
@ Slow – spot on. Though I’d be more confident in Vanguard than any broker.
@TA – thanks. I also asked my broker and the FSCS, both who are paid to help. I’m still waiting…
Hi any news on compensation rates being increased my broker is iweb and I have gone over the limits with vanguard in s & s isa more concered with iweb really any advice
The compensation rules for annuities are changing according to this document
From 3rd July 2015 annuities (which are covered under the insurance part of the FSCS) will be 100% protected, whereas at the moment they are 90% protected
Thank you Snowman! As ever, I tip my hat to your nose for news
Does that include my s&s isa recently transferred from cash isa
What makes me doubt these schemes is the real life example of Equitable Life. As far as I understand it tens of thousands of EL clients lost out when EL could no longer afford to pay out on their policies. These people did not receive the 90% compensation that the FSCS claimed it would cover for insurance companies (100% of the first £2000 and 90% of the remainder). Instead the government set up independent compensation packages for far less than that amount. Things like this make me doubt these schemes. When it comes down to it how often will the providers try and wiggle out of paying on some technicality or interpretation of certain clauses?
If anyone has any information on why I’m not correct about Equitable Life I would love to hear it.
With regard to a Junior ISA, does anyone know whether the parent or the child is the investor (from a FSCS perspective)?
The FSCS confirmed to me today that a parent invested through an ISA and their child invested through a CTF or JISA, at the same broker, which then failed, would both, independently be entitled to £50,000 investment protection.
I don’t know if anyone will see this question but I’ll try here first…
Suppose I hold £50k of an Irish-domiciled (for the sake of argument) ETF inside an FCA-authorised ISA. If the *ISA provider* goes under and has failed to properly ring-fence their client assets, am I right in thinking I am covered for the full £50k? It’s only if the ETF itself goes under I am thrown onto the non-FSCS compensation scheme?
@Steve – It’s actually only £20k cover for an Irish ETF (via ICCL). Your UK broker is covered by FSCS.. See my comment on March 29, 2015 at 3:03 pm.
@SlowToLearn Sorry, I’m still confused! My UK broker fails but the broker was holding an Irish-domiciled ETF (which hasn’t failed) on my behalf. Does the FSCS cover me for £50k because the UK broker failed, or am I getting £/€20k from the Irish scheme instead because the holding I’ve lost was Irish-domiciled? (It’s like your example, except broker A doesn’t have the £100k in the UK-domiciled fund – that makes your example “easy”, because the maximum FSCS guarantee is used up on the UK-domiciled fund.)
@Steve – I’m not surprised, it is confusing! My belief is that in that situation, once the dust settles, the records will show, from your failed broker, that you had an investment with an Irish ETF, and the administrators would be seeking to reconcile you with your investment. If the broker was holding uninvested cash on your behalf, then you could make a claim via FSCS, up to £50,000. But, if it was a UK bank(s) that failed, that was holding that money for your broker, then you could make a claim for £75,000, per institution. (Editor – perhaps the article could be updated to reflect the reduced level, when you get a mo).
Skim re-reading this fine Monevator article this morning, I had forgotten the worrying response from Vanguard.
I did spend quite a few weeks wringing my hands about all this, and so now I do track my potential compensation against my invested funds / use of brokers. But I keep to the limits fairly casually.
My interpretation would be that if the broker has failed and not kept records then that’s where fault would lie and you’d be eligible for £50,000. Assuming your holding couldn’t eventually be tracked back to the ETF that’s still in fine fettle. So much the same as SlowToLearn.
Perhaps contact the FSCS though if it’s really bothering you.
@ SlowToLearn – good point! Updated.
I’m not sure I’ve fully understood everything that has been said so far, and reading through my broker’s details, it isn’t too clear either. Here goes:
I’ve already got £40k invested in Vanguard UK lifestrategy funds, through the iShares (UK) platform. I’ve got another £120k to invest now, and I was wondering whether to put that into the same place. I’m in agreement that Vanguard is low risk because of its management structure (no Bernie Madoff).
But I’m not clear about what risk I’m potentially facing if I lumped it all in the same place here. I read in one place, that the platform can go tits up and your money is still ringfenced, courtesy of the custodian, though I’m not quite clear who the custodian of iShares is meant to be. They are currently owned by Blackrock but…? Their own prospectus says in one paragraph that the UK arm is regulated and authorised by the FCA, and then two paragraphs later that customers are not protected. My head is spinning. Who actually has my money in this case? Do I need to worry about iShares failing in terms of whether my money is protected? Or are they simply the ATM between me and Vanguard? (i.e. ATM breaks down, but your money is still in the bank itself).
Hi, are you sure you mean the iShares platform? iShares / Blackrock are fund providers, same as Vanguard. They do the same job – offer funds to investors – and are rivals. Platforms tend to be separate institutions that offer a range of funds from different fund providers.
Either way, you can have exposure to both types of institution. You give your £120K to the platform, they give most of it to the fund provider who buys shares with it.
If the platform went bust before they handed over your money or they hadn’t really given it to the fund provider at all but used it to plug a hole in their accounts or blew it on coke and hookers then your exposure is to the platform. If your money has made it to the fund provider then your exposure lies there.
Yes, everything is meant to be ring-fenced, and parked with a custodian, and FCA protected, and hopefully if one institution went down then others would step in to prevent an industry wide panic but… no guarantees.
Same way no-one can guarantee you won’t be wiped out by a bus or a super-volcano tomorrow. Probably won’t happen, it’s a waste of life to fret about it (beyond sensible precautions e.g. make sure you carry your super-volcano umbrella at all times 😉 but nothing is 100% ‘safe’.
Personally, I don’t stick to the £50K limit. But I do diversify between two or three different institutions at the fund provider and the platform level. That’s my version of a sensible precaution. Do what best helps you sleep at night.
Hi TA, and thanks for this – yes, you’re quite right – result of a mild brainfog after a long day’s work. It’s not iShares, it’s iWeb shares, owned by Halifax – should have double checked. [Explains why the iShares prospectus was perhaps less than helpful 😉 ] but I was still left with this uncertainty about platform-fund crashing and what it would mean. And I picked the iWebshares because it’s a one-off payment of £200 to set up, and only paying after that for actual dealing. I wanted to build the fund up to about £300k and then retire on that, so if it’s possible to keep it to just one platform, that’s preferable (and cheaper) than having to mess around with several.
It’s reassuring then, what you say, about the platform not being involved beyond the passing on of the money, and – as you say, hookers and coke aside – that it’s Vanguard’s health I have to be concerned with (if that’s what you’re saying), which seems like a non-concern as far as Vanguard goes. But as you also say, good to diversify not just in Vanguard, but invest in some other fund providers as well. Difficult to want to do so when I see an APR of 17% in the funds I already have in there. The rational side of me is on tenterhooks waiting for that crash to happen… The irrational side of me is telling me to jack in work and live off the profits already. Must. Be Sensible.
Thanks for giving us all this great blog – it’s been an immense help over the last year for me, a complete newbie to investing, but getting a little better at it as I go along.
There is a proposal from the FCA for the investment limit (where it applies) to be raised to £85,000 from £50,000. A few news articles about but this is the source (FCA CP17/36)
It doesn’t look like any proposed change if carried through following consultation would apply until 2019/2020 (see 6.1)
Thanks for picking up on this, Snowman.
I’m no expert on these things but it sounds to me like a good thing that the limit should be increased to £85000 – as £50000 is strangely and awkwardly low. Why have it lower than for bank savings?
Perhaps we could all respond to the consultation. They probably get lots of responses from financial institutions, but perhaps fewer from individual savers/investors.
Hi all. Now we are into 2018 I was wondering if there is any news on bringing the compensation limits for investments in line with savings as mentioned in a previous post
Just to update,
now FSCS covers up to £85k for UK authorised (see https://www.fscs.org.uk/what-we-cover/investments/), so inline with the standard cover for savings accounts.
I’m looking for assistance to understand potential risks and where liabilities may lie for my portfolio.
I have a Stocks and Share ISA with ii.co.uk.
The Initial Investment amount was £20,000 in Vanguard Life Strategy Funds. The current valuation is £45,000.
I recently sold some OEIC units and the £7,500 generated from the sale is sitting in my cash account within the ISA.
My questions relate to the unlikely event that ii.co.uk was to go bust.
1. How would get my £7,500 cash back?
2. I understand that Vanguard Investments UK use State Street Trustees to hold client cash. If ii.co.uk went bust and my portfolio is valued at £45,000 at that time, how much would I get back, and who from?
As my initial investment was £20,000 and that cash was be held by State Street, presumably I would get my £20,000 back at some point. But what is the process, and who pays out?
Furthermore, what happens to the ‘other’ £25,000
@ Donald Mac – In theory from the administrators. Though potentially a bust stockbroker would be taken over by a stronger market player. This has happened before – Beaufort Securities being a case in point.
The FSCS compensation scheme are outlined here:
An important point is that you could be left in limbo for a while, so worth diversifying brokers if you’re likely to need the cash in a hurry.
Vanguard now claims they are covered by FSCS (https://www.vanguardinvestor.co.uk/need-help/answer/are-investments-covered-by-the-fscs)
But wording is ambiguous (‘most investments are covered’, ‘you may be entitled to compensation’ etc).
Do you think they are fully covered now?
Also, searching for Vanguard on FCA website shows at least 3 results, with two of them covered (vanguard asset management, and vanguard investments UK), but Vanguard group (ireland) is “schedule 5”. How can I find out which of these entities is administering my funds?
In my experience it’s very difficult to find out any information from the FSCS as I’ve rung and the staff are useless/clueless – they operate the scheme and even told me to ring the companies themselves to find out how it would operate (i.e. the bank or investment platform!) Most of their staff are vague or don’t really know either and they tell you to ring the FSCS! Impossible! ….and laughable if it wasn’t so serious that you could end up losing most of your life savings.
The FSCS website only gives very basic information – under “What we cover” and “Check your money’s safe” etc. This only gives information about say “banks” or “investments” or “pensions” just taken in isolation (not together) such as 85k is protected in a bank or banking group operating under the same licence but what if you have current/savings accounts and investments/SIPPS with the same group. I’ve found out more via Monevator than from the people who actually run the scheme (and in your article “Investor compensation schemes – are you covered?” TA seems to have been given a similar runaround in trying to find out various information for that article) but the FSCS being a Govt. run organisation what can you expect but complete incompetence and lack of clarity – just as they have handled most other things. They even gave me an email address to contact them on with my query – mid-way through last year and they still haven’t replied – seemingly can’t be bothered. It’s so damned annoyingly frustrating and I wouldn’t trust them to run a bath frankly. Don’t seem to want to tell you how the scheme would operate in case they have to give you a lot of money back (better for you to be in the dark and lose cos you are stupid and don’t know the rules) and there always seems a lot of “ifs” and “buts” as well such as you may get your money back in “certain circumstances” only if “eligible.” Whats all this rubbish mean – all I wanted to know is that as a UK investor if I’ve got over 85K with the same bank/investment company (or group) and it goes kapput that I’ll get it ALL back – no ifs, buts or maybes.
As I have investments with Iweb and am aware they are part of Lloyds Banking Group (Lloyds/Bank of Scotland/Halifax Banks etc.) I asked Iweb (back when I opened my Iweb account) if money with any of their banks was a separate 85k to Iweb as I believed it was from everything I’d read.
However I rang them again a few days ago as I had heard from someone this may not be the case and a guy there said “as far as I know it’s separate between Iweb and the banks” where I said “as far as I know doesn’t seem very certain and I’m looking for absolute certainty.” He finally said I’ll have a word with somebody if you want me to and check this. I said I definitely did.
After about 10 minutes holding, he came back and said “you only get 85k FSCS protection over all our accounts.” When I queried this and that it seemed he had now changed his tune on what he said earlier to me, he said he had and that with Iweb (and obviously also applies to Halifax/Lloyds/Bank of Scotland Sharedealing) they share the same protection with all those same banks as well. I commented that I thought the banks had a separate licence and he said he “believed” they do but they are the same group and the protection they offer would be shared across ALL of them and he had asked a superior to confirm this. I said are you sure this is correct. He said yes and said as an example if you have £45000 with Iweb/£40000 Lloyds Bank – and Lloyds Group goes out of business you would get all this money back but if you had ANY more in any of them you would lose all the rest above this. (So this COULD also apply to Barclays & their Smart Investor/HSBC & Global Investment Centre/Santander & their Investment Hub and many others for all I know. How can any of us be certain if we contact them that any information their staff give is correct as in my experience they don’t seem to care what they tell you – in fact anything to get you off the phone bothering them. How can you trust what they say – they won’t give you it in writing will they, and even then, would it count for anything when it all goes t*ts up?)
I was quite astonished at the information given by Iweb as I always believed banks and investment companies were totally separate (like ringfenced) from each other and have been told this every time in the past (and even looks like this on information given on FSCS website.) I have also been given incorrect or inadequate information by AJ Bell/Vanguard/Hargreaves Lansdown/ii in the past when I have queried it. Vanguard staff didn’t even know stuff regarding their ETF’s and FSCS protection without a lot of to-ing and fro-ing and going off phone for an age to find out and then were still vague/didn’t sound confident. (They also completely messed up my inward ISA transfer to them for months and months and did little to sort it out but that’s another story. How they continually are Which? recommended is beyond me – even if their funds are decent, their service isn’t except with very basic things.) It seems these staff in the call centres they put up to answer investor questions don’t know the answers and mostly won’t take the time to find out!
From now on I’ll err on side of caution and not put more than the limit with any bank or investment platform and including in TOTAL/AGREGATED with any that are linked/connected to each other . I know it’s more faffing and admin/opening more accounts etc. and maybe having to pay a bit more in fees with some, but I would rather that than seeing half my retirement savings go down the plughole due to their misleading information/incompetence (although I know this is not always possible with larger pots in the millions as would run out of accounts to deposit but still best to spread it around IMO.)
I thought I would point out the information I have been given, as investors, maybe won’t be aware and believe everything they are first told is “kosher.” As I have found FSCS, the banks and investment platforms all often give out incorrect and often majorly misleading/conflicting information such that you can’t trust what they are saying but at the end of the day its you who loses when they go bust and then decide on the rules interpretation “afterwards” and the carve up of your money. They’ll probably tell you then that you have it wrong and didn’t check it out properly – your fault or in other words “customer is always wrong,” “computer says no” and all that kind of thing.
I’d defy anybody to be able to get the actual correct information from either the FSCS/Banks/Investment Platforms that they can 100% rely on but at least if you are aware you decide your own level of risk. I agree with TI in some of his articles where he says that he is quite risk averse in terms of spreading investments around/not putting all eggs in one basket and personally I wouldn’t trust any of these organisations with a bargepole (or financial advisors either but that’s another story also.)
Some may think it’s over cautious but during the global financial cock-up I had 2 savings account providers go bust and would have lost out if I had over 85K in either.
Our FSCS limit is so very small as it is at 85K (compared to US scheme who I believe are protected to 500K dollars which is much more reassuring) but can’t see that changing anytime soon as I think it is taxpayer backed when really there should be a tax/levy on all the financial institutions as it is them that leave us in the lurch but then they would just charge us more in fees to cover it anyway!
Sorry just to add regarding my last paragraph, there is a levy on financial firms that funds FSCS (which I only just found on FSCS website) so not taxpayer funded but as I said earlier they probably just factor that in their fees (or less interest) as customers ultimately are ones that pay for FSCS compensation and staff.
@Doodle — Yes, as you say I would never have all my eggs in one basket. Even just two baskets is a massive reduction in systemic failure risk. Thanks for taking the time to type out what you’ve learned.
I occasionaly re-read this article to try and get my head around the extent my investments are FSCS protected or not – probably not. As you concluded: “My Irish domiciled funds aren’t covered but I’m not going to sell a single one. What I will do is diversify among more fund managers over time.”
The thing that remain obscure to me despite revisiting this topic occasionally is where money the FSCS ostensibly protects actually resides. Reading the comments a lot of people think that there will be funds available under the scheme if a platform fails, but isn’t it that case that the funds are actually with the investment managers, who in their turn have purchased actual shares in actual companies? The trading platforms just keep a record of your investments made through them and have some kind of aggregate cash account for all their clients held with a third party banker for handling their current transactions. If you have cash in your trading account when a platform goes under then I suppose that would be covered, but the investments themselves would be elsewhere and until the administrators or whoever untangle the meltdown you’d not have access to those investments, but could expect to recover them in the fulness of time.
If I’m vaguely right about the position of trading platforms, then maybe the same applies to fund managers themselves. So if you have cash in your Vanguard UK account that would be protected by the £85k FSCS cover. However if you hold two chunks of a Vanguard ETF, one with Vanguard UK and one with a second training platform, the combined amount is exposed to risk under the Irish scheme, i.e. apparently not covered at all. However, if you have the investments with the UK domiciled fund version of the ETF you would have perhaps more protection under the FSCS.
I think I’m probably still mostly clueless about all this despite trying to understand how it all works, which is a bit worrying: black swans and all that.
I think now for a simple portfolio with a couple of global equity and fixed income index funds I’d still want at to use least two distinct platforms for my investments, but on each I’d look to hold similar funds from different investment managers. So say £80k with Vanguard invested in their UK domiciled index funds, say Vanguard FTSE Global All Cap Index Fund (VAFTGAG ) and separately have £80k invested in a similar iShares global index fund via AJ Bell.
I also find having at least two trading platforms with different group identities is a little comforting for reasons separate from FSCS protection as one crisis I’m worried about is a cyber attack taking down these platforms. I don’t know how significant this risk is, but it is apparent that the war in Ukraine is raising the risk that state actors hostile to the UK will target our financial services sector.
I don’t know where this rumination has left me, but if @TA has time on his hands maybe revisiting this topic and attempting to further clear the fog of confusion around it would be worthwhile.
Hi Ian, thank you for your thoughts. This has really got me thinking. I started typing a reply but it’s turning into an article length response (although thankfully one of my shorter ones).
I think I’ll make my reply a proper post if that’s OK? Many readers worry about this, the scheme is far from clear, and I really need to update based on developments since 2013.
It’ll take a few weeks for my response to work its way through the Monevator pipeline but, in the meantime, thank you for the inspiration and for kicking me into gear on this one.
I’m looking forward for Monevator article. From my understanding, before brexit there was a discussion to protect EU funds by FSCS but now FSCS covers definitly only UK domicile funds. As there are no UK domiciled ETFs , all ETFs and non-UK funds are not protected by FCSC.
Vanguard has very detailed guide about FCSC protection.
I posted on another article titled “The cheapest stocks & shares ISA on the market” about my doubts about the safety of your assets with InvestEngine, (or other similar small low/no fee brokers that have sprung up) and another reader seemed to say they were fully protected – saying that they were fully covered by the FSCS for brokerage failure upto 85K.
So I set out to find exactly what protection this broker has as I wondered how can they be operating and doing things properly with no fees charged directly. (I had seen Monevator’s articles on a review of InvestEngine and one mentioned above about being the cheapest broker for an S&S ISA. However what I found out is shocking, I think.
Apart from any of this, they are also advertising via their website they are crowdfunding to raise capital from investors. However this is a very minor thing compared to the rest of it and I’m not sure of all the ins and outs of this but does a company being “crowdfunded” for their expansion make you feel they are a totally safe and professional outfit? Makes me feel a bit uneasy that they are borrowing off Joe Public that maybe doesn’t know/have full disclosure of their position I wouldn’t think. I mean any banks or other institutions/professional investors should have full disclosure about this company before making their decision whether to invest but Joe Public won’t have the same access and I wouldn’t just rely on what IE would tell you – from my experience in how difficult it was to get the “actual” correct information about the FSCS protection they actually have as below.
They certainly want to tell you about all their “protection” on their website – you know about how your money is 100% safe and held in segregated nominee accounts (which from what I have read is not 100% safe by any means in that these are self administered schemes). Sure the FCA’s Client Assets Sourcebook (CASS) provides “rules for firms to follow whenever the firm holds or controls client money or safe custody assets” and it says “CASS has many record keeping requirements” but these are all self-administered rules and all the assets are in “pooled” accounts not individual ones. There are “audits” and some oversight by regulators but this is limited and does not mean mistakes/negligence/fraud/corruption cannot happen (and have not happened in the past) or that things can’t be hidden from the regulators as they have been before. This is an example of “the lunatics being in charge of the asylum.”
Some of this has already been pointed out in this article and also in this one from Finumus:
Now this is disturbing enough and especially as InvestEngine have told me more than once, in a number of emails I have had with them in the last few days, that these nominee accounts provide “100% protection” – which I know is not true. How can they be allowed to say this – where are Trading Standards – it’s not right and shouldn’t be allowed but what is more disturbing is that they say this on their website under the heading “Safe and secure”
Investments up to £85,000 may be eligible for claims under the Financial Services Compensation Scheme (FSCS). Follow this link for more information.”
Yet when I emailed them a number of times, as they wouldn’t divulge the full information without a lot of repeated poking/prodding from me (infact I was getting quite angry in the end) in why they were trying to withhold this information from investors, it became apparent there is only very limited FSCS protection with them at all – only for MONEY TRANSFERS.
In one email my questions were thus:
“I’ve seen you have FSCS protection to 85K GBP but as you only have ETF investments and the FSCS isn’t supposed to protect hardly any ETF’s (as majority are not domiciled in UK but in Ireland/Luxembourg or other countries which don’t offer much protection) then how would anyones money be protected?
Also would I be protected upto 85k by the FSCS scheme if:
(1) Invest Engine went out of business?
(2) Any of your ETF fund managers went out of business in which I was invested?”
I said above in the email that ETF’s don’t have much protection as that is what I found from ringing some providers – that there wasn’t much at all – at best 20K Euros or less and even Vanguard where vague saying their Irish ones could have that amount but when questioned said they probably wouldn’t. In this article TA says the same thing that many don’t have protection, some limited amount maybe.
This is the exact email they sent back to mine above (although I’ve deleted the name of the person who sent it):
10 Mar 2023, 19:14 GMT
Thank you for contacting InvestEngine.
£85k FSCS protection protects your money transfer of up to 85k (should it go missing).
But, all client funds are protected when they invest with InvestEngine. The £85k FSCS protection is just for money transfers between two parties
So, if somebody had £160k to transfer , if they did it in two transfers of £80k, they would be protected for the full amount.
If they transferred all the £160k, and then some of the money went missing in the transfer, only up to £85k of the money would be guaranteed
However- we hold all client monies and securities separate from InvestEngine, so if anything happens to InvestEngine, then the client monies will be 100% guaranteed
CREST hold the securities and Natwest the monies (cash). So your money and investments are always safe, no matter what happens to InvestEngine.”
This I really could not believe. They seemed to be saying you are only protected by the FSCS scheme for the “money transfers” in and out between you and IE if you keep them to 85K or below – and NOTHING ELSE and that your money is 100% safe since they keep it in “pooled” nominee accounts that are administered on the whole by them – when as said before these schemes aren’t 100% safe so how can they claim that. That means nobody can ever have lost money in a nominee/segregated account which I don’t believe for a second but they must think investors are stupid to believe this.
So I had a few exchanges of emails with them – this one was mainly because I couldn’t believe what another person at IE had said in the last one and so just asked for further clarification (notice I am getting more frustrated with their rhetoric in this one):
Could you clarify – am I correct in thinking that the FSCS protection is only for the transfer of cash to InvestEngine and nothing else so no FSCS Protection at all if:
(1) Invest Engine went out of business?
(2) Any of your ETF fund managers went out of business in which I was invested?
This is not explained adequately on your website as it suggests to people that they do have full FSCS Protection to cover all eventualities and just for cash transfer purposes is not that. It is very limited protection. It should say that this protection only applies to cash transactions which would have a very limited use.
Nominee/segregated accounts do not 100% protect investors as you wrote below – that is only the spiel you have to tell customers. This is not true. They are self administered by the investment firm themselves so they can’t be. I mean who does the administration and transfers to these “nominee” accounts and holds the paperwork – you do – so it is not 100% protected so mistakes/frauds/corruption can happen. The only protection that’s relevant is the last resort protection of the FSCS.
Finally I received this definitive proof from them as follows (and this was from a different staff member at IE:
13 Mar 2023, 12:19 GMT
Thanks for your reply.
FSCS only covers money transfers, FSCS is not involved if an ETF or InvestEngine were to default.
Your holdings with InvestEngine are 100% protected under the FCA CASS regulations.
I hope this answers your question and please get in touch if you have any other queries.”
Astounding – it makes you feel from their website that you are fully protected by the FSCS and clearly you are not protected for anything HELD with them
(only the money transfers). You are not protected by the FSCS if InvestEngine go bust OR if one of their ETF managers go bust – so all your investments could be at risk.
That is unless you 100% believe that IE – who it took me many emails and latterly angry words from me (and with different staff) to finally get this conclusive information (and who are the ones administering your assets) are completely honest, truthful and never make mistakes. I DON’T.
They may be cheap in no fees but I would rather pay some low cost fees and keep hold of my assets long term. As the Dragons would say “I’M OUT.”
So just thought I’d share with other readers what I found then you can decide for yourself.
@S M You wrote “They may be cheap in no fees but I would rather pay some low cost fees and keep hold of my assets long term.”
Which provider protects better your money than IE if you pay more for fees?
From my understanding even the most expensive ETFs brokers offers no protection if you decide to invest in ETFs. Please correct me if I’m wrong.
@ Dan – no Dan I believe you are absolutely right, there is no/very limited amount of protection with ETF funds (and not always easy to ascertain with fund managers which ones have any at all) – no matter what broker you go to.
When I wrote that (i.e. “They may be cheap in no fees but I would rather pay some low cost fees and keep hold of my assets long term”) I agree it was badly worded as I didn’t explain, I was not talking about just ETF’s. I don’t invest in ETF’s at all (only funds) with low cost brokers such as Iweb/Vanguard etc. So I was talking about FSCS protection on funds with low cost brokers. Sorry!
Don’t get me wrong I think ETF’s are good and if there was a good selection of ETF’s with the full FSCS protection – I’d be there like a shot as they are investing on the cheap – but there isn’t so the the lack of protection puts me off. Added to that brokers like IE not disclosing (not very easily anyway) that they have no FSCS protection (apart from money transfers). If any newer investors were to look at their website, they would be led to believe they had a lot of protection including FSCS when they don’t – as I said isn’t this “mis-selling” or at least not telling the truth in adverts which I thought was illegal. Apparently not!
I know it’s rare for one to go bust, just like banks but I had savings providers during the financial crisis a few years back do just that on me – but luckily had the FSCS protection so got my money back. Also used to invest with Hargreaves Lansdown (until came to my senses with the high fees). IMO they offer the highest service of any broker, certainly that I’ve ever had and I’d trust them but you pay for it – but even they were heavily pushing Neil Woodford’s funds a few years back, so I heard, and look what happened to them – went bust and investors were struggling to get money back – so that’s why I want full the FSCS anyway. Others may not and would rather invest very cheaply and take the small risk. My luck’s not that good.
Anyway just posted what I had found out as it may inform others, who aren’t aware, of the realities and then they can make up their own mind. Always best to have the information.
All the best.
@S M: that Finimus article (“What if my broker goes bust?”) states at the end: “The Financial Services Compensation Scheme covers you for this sort of loss, up to £85,000 per person per institution. So while theoretically the balance of your assets at a broker above this limit may be at risk, the ‘shortfall’ is usually not a complete loss. In the above example Bob gets his 50 shares back from the administrator, and the balance, of about £100 from the FSCS. Indeed Bob has nothing to worry about. … How worried should you be? Not very. But the advice would be to keep balances at riskier brokers not much above the FSCS limits if at all possible.”
Monevator also say the FSCS covers brokerage failure, “UK investors should be protected against broker fraud and insolvency by the FSCS Scheme mentioned above.” – https://monevator.com/nominee-accounts/
Imho the reply you got from InvestEngine (“FSCS only covers money transfers, FSCS is not involved if an ETF or InvestEngine were to default. Your holdings with InvestEngine are 100% protected under the FCA CASS regulations.”) should be interpreted as, if “InvestEngine (UK) Limited” defaulted, then your cash held there would be covered by the FSCS, because “InvestEngine (UK) Limited” only holds cash – not your shares. Your shares are legally held in title for your benefit by the separate nominee (“InvestEngine Nominees Limited”). What happens if the nominee fails? Then the shares are still yours and a court would assign a new nominee. What happens if there is outright fraud, and the assets are gone? When that happened before, and Beaufort Securities Ltd broker collapsed, the FSCS covered it: “Thankfully the UK’s Financial Services Compensation Scheme (FSCS) stepped in to prevent most of Beaufort’s clients losing out.” – https://monevator.com/nominee-accounts/ https://www.fosterdenovo.com/my-resources/news/beaufort-securities-happened/
@ S M, Thanks for sharing the info, I have the same dilema. I also prefered UK domicile funds as they are FCSC protected up to £85k. I plan to mirror small investments account with ETFs and check the difference directly.
Regarding the information on the webpage, I found that only Vanguard has guide about FCSC protection (it was bit hidden) where is explaning that ETFs are not insured.
You can try to request broker to be honest with their clients and to publish on their webpage that what is and what is not protected by FCSC. If they refuse you can still contact FO to complaint that they are missleading customers. https://www.financial-ombudsman.org.uk/
@ Dan – Thanks for that guide. I have a Vanguard account but didn’t see that one. I rung Vanguard before about it and found out (in the end) that there was no protection for ETF’s but good to have it in writing – at least you know where you stand if you invest in them. I’ll stick to funds, like you are for the most part, as I don’t want the risk of losing anything (well apart from the obvious risk that the funds might go down) – even though I think in this case it woud be a very small risk with Vanguard as they are so big but then big companies do fail – and probably would if I invested in their ETF’s!
I have already told IE in email they are misleading investors by making out they are FSCS protected (when it is only for the money transfer and nothing else). That is very limited and not what most people would think they are getting by reading their website.
I have contacted the FOS a couple of times before about other companies – but found they usually side with the financial institution vast majority of the time – they have many bad reviews on Trustpilot about their service etc. They told me they only deal with cases of financial loss not anything else – so don’t deal with “bad practice” or sort of mismanagement. They said if the company puts it in their terms and conditions they can more or less do what they like – you have to read the T’s & C’s. This was about a bank and they said they couldn’t do anything and told me to contact the FCA. I did and they said they couldn’t do anything either. So waste of time. Just best to be aware/check everything yourself – don’t believe what their flashy websites say and like I did – leave them. I closed the bank account due to their bad practices and incompetence.
@ S M – superb sleuthing! I think you’ve put your finger on something important. The onus of the FSCS scheme has shifted to make the consumer responsible for finding out which of their broker’s services are covered by the compensation scheme. As new platforms come on stream it looks like they aren’t always fully covered by the scheme.
I think I need to rewrite this piece to emphasise this development.
@ Dan – Thank you for sharing that Vanguard guide. It’s as forthright a description of the situation as I’ve seen from the industry.
Offshore funds of any type won’t be protected by the FSCS.