Like all financial services, investing attracts its unfair share of bad actors and inept shysters. So it’s comforting to think that if the worst happens and your investments disappear in a puff of fraud, then the UK Financial Services Compensation Scheme (FSCS) will swing into action and bail you out.
But that ain’t necessarily so.
The FSCS investment protection scheme may come to your aid. But eligible claims have more strings attached than a puppet show.
How can you know if your investments are actually covered by the FSCS? And what further steps can you take to maximise your protection level?
Fancy hearing about a route to 100% FSCS compensation coverage with no cap?
Read on!
The FSCS investment compensation limit
The first knot to unpick is that FSCS compensation is limited to £85,000 for investments.
The formula is £85,000 per person, per firm.
Hence £85,000 is the maximum amount of compensation you can personally claim per firm you invest with. (Assuming all the other eligibility criteria are met. We’ll get to that funfest shortly).
- The per person element means that you’re covered for up to £170,000 in a joint account.
- Per firm means that if, in some future dystopia, two or more of your investing platforms collapsed, then you could make a separate claim for up to £85,000 to cover assets lost in each implosion.
For example, if you had £30,000 lodged with Ee-z-eeMoney Broker$ Ltd then you could put in a claim for the full amount owed.
Meanwhile, you’ve also got £200,000 stashed with the Hard4Profits Company. Their directors were last seen boarding a flight to Panama so you can claim back £85,000 for that mess, too.
You’re not covered for the remaining £115,000. The FSCS investment compensation limit maxes out at £85,000 per firm, no matter the value of your accounts with that firm.
Which firms are covered by FSCS compensation?
You’re only protected if the firm that pops its clogs is authorised by the UK’s Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA).
Note, the word you’re looking for is authorised by the FCA or PRA.
The next step is to ensure that the authorised firm is actually regulated (by the FCA or PRA) to undertake the particular service you’re using them for.
For example, is your broker regulated for ‘Arranging investments’ (translation: executing trades) in the particular security you wish to invest in? Such as ETFs or shares?
The FCA’s Financial Services Register theoretically enables you to check these details for every firm on their books.
But in reality it’s a minefield. A fact the FSCS acknowledges by shifting the responsibility for keeping tabs to you.
The FSCS says:
Ask your firm to confirm that the activity they are carrying out for you is a regulated activity and FSCS protected.
I thoroughly recommend you do that. Then double-check your broker’s claims are verified on the firm’s Financial Services Register page.
There was a time when I felt confident in checking a broker’s status purely through the Financial Services Register.
However, a firm’s status on the register is nowadays defined by specific, technical terms. I cannot be certain my interpretation of those terms is correct.
Plus the FSCS’s “Ask your firm to confirm…” edict is plastered everywhere on the site – which suggests we cannot solely rely on the register.
Multiple brand names, one firm
If you decide to diversify your money between brokers, then check they are not part of the same financial group.
For example, iWeb, Lloyds Bank Share Dealing, and Halifax / Bank Of Scotland Share Dealing are all in the same group.
This means they all count as being part of the same firm, from an FSCS perspective. So you’d only be eligible for a maximum £85,000 payout, even if you diligently split your assets across them all.
You can quite easily check whether your broker is part of a wider group on the Financial Services Register page.
Just search for its name, then check the Trading names section of its particular entry for other aliases.
FSCS investment protection for fund providers
FSCS protection does not cover you for investment risk. If your meme stocks go to zero then there’s no backstop.
Rather, the £85,000 compensation limit is there to cover you if the firm fails and can’t cover the value of your investments from its assets. Think fraud, negligence, mismanagement, and mis-selling type scenarios. (Use the Financial Ombudsman Service if you’re in dispute with a firm that’s solvent.)
And those vices can affect the companies that manage your funds, too. (What a wonderful world!)
However the FSCS scheme only covers a narrow sliver of fund manager firm situations.
The headlines are:
- FSCS investment protection applies to UK domiciled OEICs and Unit Trusts.
- It does not apply to funds domiciled overseas. For example, in Ireland.
- Nor will you be compensated if you hold ETFs or Investment Trusts with a fund provider that runs into trouble.
- The same goes for individual securities like shares or bonds. Never mind crypto.
Use this tool to check your investment type’s FSCS protection status. Here’s a list of useful UK domiciled index funds.
If you do invest in UK-domiciled funds then your maximum payout remains £85,000 per person, per firm.1
This is separate to the FSCS investment protection you’d be eligible for if a broker broke.
However, there is a way to invest with 100% protection…
100% FSCS protection for insured personal pensions and annuities
Some personal pensions qualify for 100% FSCS protection. (That is, the maximum compensation level is not capped at £85,000.)
The FSCS describe eligible pension schemes like this:
The FSCS protects 100% of a pension directly managed under a life insurance contract.
Essentially that refers to some personal pensions and stakeholder pensions that are offered by large insurance firms.
The firms must be regulated by the PRA. And the particular scheme must be classed as a contract of long-term insurance to qualify for FSCS protection.
100% FSCS protection seems to be woefully advertised, given that many people would value it highly.
Rather than plastering it all over their brochures, I’ve found pension providers typically relegate any references to a couple of paragraphs that are sometimes found in their Key Features documents.
Here’s the kind of thing to look out for, courtesy of a Standard Life Stakeholder Pension document (bolding is mine):
Your plan is classed as a long term contract of insurance. You will be eligible for compensation under the FSCS if Standard Life Assurance Limited becomes unable to meet its claims and the cover is 100% of the value of your claim.
Watch out for clauses that warn you lose FSCS compensation if you invest in certain funds available through the pension. These funds are usually managed by another investment firm but, bizarrely, they may also include own-brand funds provided by the firm that is actually running your pension.
Talk to your pension plan provider if you’d like to know more and maintaining 100% FSCS protection is important to you.
Bear in mind that – along with annuities – these types of pension qualify for compensation under the FSCS insurance claim category.
In other words, pension assets like this don’t interfere with your £85,000 investment category claim should you hold a brokerage account, or other funds, with the same firm.
FSCS protection for Master Trust pension schemes
If a Master Trust workplace pension scheme runs into problems then its trustees can invoke FSCS protection on behalf of its stakeholders. You wouldn’t claim yourself.
However, here again, beware of warnings in the documentation about choosing certain funds that aren’t eligible for FSCS compensation.
Defined benefit pensions
Defined benefit pensions should be covered by The Pension Protection Fund (PPF) rules. Double check that yours is.
The top-line is:
- 100% compensation if you’ve reached the scheme’s pension age.
- 90% compensation if you’re below the scheme’s pension age.
Public sector pensions are funded by the taxpayer, so you’re fine as long as we have a functioning government (place your bets) and the Bank of England money printer doesn’t run out of ink.
What about cash in an investment account?
Your £85,000 FSCS investment compensation limit doesn’t reduce the £85,000 you can claim for lost cash deposits.
Most brokers lodge client money with one or more big-name banks.
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 firm, per claim category. (Cash is one category and investments another).
Some brokers park your money with multiple banks. They say that means your cash is equally divided between them all.
So, if your broker uses four banks for client cash, then you wouldn’t have to worry about exceeding the compensation limit until there was more than £340,000 sitting in your account.
(If you’re – cough – an absolute baller with more than £340,000 in cash at your brokers, then I hope you’ve already ponied up for Monevator membership…)
How likely are you to need FSCS investment protection?
Of course, the worse shouldn’t come to worst.
There are regulations in place that require fund managers and brokers to segregate your assets from their own.
If the mother company explodes, your money should be safely ring-fenced in a separate pot. 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. You will find a warning to that effect in the terms and conditions of any reputable UK broker.
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 FSCS compensation provides a last resort backstop – just 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.
If your investment platform went pop, shouldn’t the bulk of your assets actually be held elsewhere, though? Shouldn’t your money be invested in ETFs and funds with other companies that are still in perfectly good nick?
Yes, that’s true. Indeed, most claims that require FSCS intervention seem to involve mis-selling, where consumers took advice from a so-called investment professional.
However, the FSCS did step in to assist customers of Beaufort Securities and SVS Securities – two UK brokers that collapsed in 2018 and 2019 respectively.
In both cases, the FSCS made good customers who would otherwise have taken a haircut because client assets were earmarked to pay the fees of the insolvency administrator.
It turns out that administrators are not creditors. So they can dip into the pool of supposedly segregated customer assets, at the discretion of the FCA, if there’s no other way to meet the bill.
Passively paranoid
During the wind-up of Beaufort Securities, the FCA used the FSCS scheme to ensure that most but not all customers avoided a hit.
In this case, people didn’t lose everything. But clients with a very large account balance took a haircut that exceeded the FSCS compensation limit. Whereas most customers took a percentage loss on a relatively small total account balance, meaning their share of the shortfall was inside the FSCS cap.
So you may decide that you don’t need to fret when your account balance reaches £85,000. That you’ll only need the FSCS to cover you for a percentage of whatever amount you’re owed.
On the other hand, my biggest fear is the (admittedly small) chance of being caught up in a massive financial fraud.
It’s not hard to picture a scenario in which a firm tells you, “Don’t worry your cash is safely tucked away in Vanguard funds,” when it’s actually been spent on a fleet of supercars and crypto bets.
- For a full picture of why your brokerage account may not be as ironclad as you’d like, please read this piece on the weaknesses of industry-default nominee accounts.
What should you do?
We’ve had many discussions in the Monevator comment threads about how far to go for peace-of-mind.
Most people accept that their chance of needing FSCS compensation is acceptably low. Hence few of us open a new brokerage account for every £85,000 worth of investment assets we own.
But anyone with a large holding would be well-advised to diversify.
I personally operate across two different, reputable brokers. The Investor uses at least four that I know of.
Even if it all ends happily ever after, broker insolvencies can take many months to clean up. During that time your funds will be inaccessible.
If liquidity is important to you, then you’d be wise to spread your assets across multiple platforms, regardless of the FSCS.
Managing broker risk
No guarantees but here’s some tips if peace of mind is extremely important to you. Choose at least one broker that is:
- Big not small
- Listed rather than private (greater scrutiny)
- Profitable (check their annual report)
- High credit rating rather than low or no rating
- Doesn’t offer margin, loan out stocks, or run their own trading desk
Brokers can buy ‘Excess of FSCS cover’. This is an insurance scheme that apparently “protects investors for deposits above the level that the FSCS will reimburse.”
I haven’t seen any online broker advertise it as a USP, but it’d certainly offer some comfort if you find a platform that does.
Getting the answers you want about FSCS investment protection
As discussed, the FSCS expects you to contact your broker for reassurance that they are properly protected by the compensation scheme.
However, investment platform support staff are often inadequately trained in this area.
You may get a vague, confusing, or inaccurate reply. Ask two different people at the firm and their responses can be worryingly inconsistent.
Moreover, while some brokers clearly explain their level of FSCS investment protection on their website, others do not. Even when their coverage is perfectly fine!
So you might have to persevere.
A line like this may do the trick:
“Is my investment account covered by FSCS protection up to £85,000 if your firm becomes insolvent?”
Then make sure they specifically answer that question without fobbing you off with talk about cash protection, client money, or segregated assets.
The answer you need is that your investment holdings are covered by the FSCS.
Take it steady,
The Accumulator
- Think BlackRock, Vanguard, or L&G, for example. [↩]
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.
@Rob
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.
Wow.
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?
“6.
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.
7.
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’.
http://www.thisismoney.co.uk/money/diyinvesting/article-1718291/Pick-best-cheapest-investment-Isa-platform.html
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
thanks
The compensation rules for annuities are changing according to this document
http://www.bankofengland.co.uk/pra/Documents/publications/ps/2015/ps515.pdf
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
thanks
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.
Hi,
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).
Help!
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)
https://www.fca.org.uk/publication/consultation/cp17-36.pdf
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
Thanks.
@ 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:
https://www.fscs.org.uk/what-we-cover/investments/
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?
Thanks
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.
@TheAccumulator
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.
https://www.ie.vanguard/content/dam/intl/europe/documents/ucits/investor-protection-uk-domiciled.pdf
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:
https://www.finumus.com/blog/what-if-my-broker-goes-bust
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”
“Compensation scheme
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):
XXXX (InvestEngine)
10 Mar 2023, 19:14 GMT
“Hello,
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):
“Hi,
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.
Thanks
Finally I received this definitive proof from them as follows (and this was from a different staff member at IE:
XXXX (InvestEngine)
13 Mar 2023, 12:19 GMT
“Hi
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.
https://www.ie.vanguard/content/dam/intl/europe/documents/ucits/investor-protection-uk-domiciled.pdf
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.
@ TA – thanks for your comments about InvestEngine and FSCS protection.
I believe there is actually far less protection than most investors believe there is or that brokers would want you to believe – obviously they obtain more customers by not making it clear/transparent. I used to myself until I started looking into it more.
I have rung and emailed many brokers about this, as well as the FSCS. The problem is the FSCS website has a protection checker which lists different investment products but for most, when you click on them it just says you may be “possibly protected” – what does that mean? When I have rung them in the past they have not been that good (even suggesting I send an email and when I did they never replied) so I was not hopeful about getting any answers this time. It seems their telephone staff are not well trained and don’t have much knowledge and so are very vague with the answers.
This time after a long while trying to explain and me telling the staff member what I believed the FSCS covered – which is mainly “fund” investments such as unit trusts/OEICS and asking why does it say may be “possibly protected” for most things when from the investments category. The lady said this is likely because, although normally, individual shares/ETF’s/Investment Trusts would not be covered, if you bought them with advice from say, a financial advisor and that advice turned out to be bad, then you could be eligible for some compensation (but if DIY investing then most likely no protection at all.) She said to ask the investment firm directly “as they should know.” When I explained I had contacted many in the past and a lot of these couldn’t really tell me much or what I wanted to know, she just said they should know what protection they have on their products.
Apart from InvestEngine, in the past I have asked many brokers including AJ Bell/IWeb/Vanguard/HSBC GIC/Interactive Investor/Smart Investor – (and more) and most of their telephone staff don’t seem to know much either and simply refer you back to the FSCS. I found you have to persist with most of these, maybe even calling back and getting another staff member and sometimes even emailing the correct department, or otherwise you don’t get that much of an answer.(I even complained to AJ Bell about being “fobbed off.”)
One broker I found you can usually rely on is Hargreaves Lansdown and I have an account with them (from years ago when it was mainly a telephone service) and so used their messaging service. So I asked them if any FSCS protection would apply if I purchased ETF’s through them for either broker failure/insolvency or if the ETF fund manager failed or became insolvent. I wanted something in writing, rather than just words over the phone, and after a couple of days I got the following email reply on 20th March:
FSCS Protection
HL Helpdesk EMail Team
20/03/2023 17:55
Dear XXXX
Thank you for your message, I apologise for the delay in responding to you.
I can confirm that, from our understanding, if an ETF fund manager were to fail or was insolvent, whether or not it was a UK ETF or non-UK domiciled ETF’s, you would not be covered by the FSCS, as this falls under standard market risk rather than something that would be covered such as a bank failing where it holds a cash deposit.
If you were to buy the ETFs through us, UK or non UK, although you would not be covered by the FSCS, we hold all of your investments on trust under the name of HL Nominees Limited, which is a non-trading company that runs up no liabilities of its own. This means we will never use this money for our own purposes and every penny invested will be returned to you.
The same goes for individual company shares from DIY investing, you will not be covered by the FSCS on both UK and non UK stocks.
In the circumstances where if stock were to fail you ‘may’ be covered by the FSCS would include times where you have received advice which is deemed to be poor enough to cause detrimental effect or if there was some kind of poor or illegal management of that particular stock. However, this is done on a case by case basis and the final decision lays with the FSCS.
This is about as much information that we, as a broker, have for these kind of situations and they may vary slightly depending on the stock. The best place to check this is with the FSCS themselves, but I do apologise that they appear to have not taken responsibility for these questions as they do not fall on the broker and the brokers layer of protection.
I hope this has been of assistance. If you have any further questions, please reply by secure message from your HL account or send us an email.
Kind Regards,
XXXX
Hargreaves Lansdown
(names deleted for privacy)
I think HL answered my questions and answered what I’d asked them fully – many others seem to answer a different question, leaving you frustrated – you know a bit like politicians do!
So to me HL have confirmed definitively, that FSCS do not cover investments in ETF’s whether UK domiciled or non-UK domiciled and that applies whether Hargreaves Lansdown went bust or the ETF manager went bust (and they mentioned that it would not cover individual stocks either – which we know is the case anyway.)
I find HL’s service second to none. Everybody says the fees are expensive for DIY investing and they are, but from all the brokers I have dealt with/have accounts at, they are definitely the best in terms of the service you receive from them should you need it. (Every time I ring them I get through very quickly and get put through to a professional who answers your question properly – doesn’t fob you off with vague answers or tell you to call the FSCS. I just wish they were a bit cheaper as holding 85K in funds with them costs £382.50 per year and so is on the high side but you get what you pay for, I suppose. I don’t have any connection to them by the way – just have a fairly small amount in a SIPP account. TBH, it is worth it for me for the information, their online account and telephone access etc.)
I also found information from Interactive Investor which says this: “So if you buy shares in a company that subsequently goes belly-up, you’re on your own, as sadly that’s the nature of investment. As investment trusts and exchange traded funds are considered as shares in a company, these are not covered by the FSCS either unless there is a case for bad advice. Generally speaking, the FSCS covers savings deposits, insurance policies, and some investments. It’s important to note that it only covers firms that are regulated by the Financial Conduct Authority (FCA). Lastly, it’s the responsibility of the provider to inform you whether your investment is covered by the FSCS.
FSCS says “it doesn’t protect certain investment products because they are not a ‘specified investment’ under the UK regulatory regime – in other words, this type of investment isn’t recognised as the sort of investment that we can protect.”
At least when HL say this “If you were to buy the ETFs through us, UK or non UK, although you would not be covered by the FSCS, we hold all of your investments on trust under the name of HL Nominees Limited” – they did not say you would be 100% or “totally” protected like many brokers do – and is not true – as most brokers have something like the following in their terms & conditions. As I recently opened another account – this with Barclays Smart Investor I looked at their T’s & C’s on this:
From: Barclays Smart Investor – Terms & Conditions
2.Pooling of Assets 2.1 Your Assets may be pooled with those of other clients of ours or our sub-custodians in one account, in accordance with Regulatory Requirements. In this case: (a) we will maintain records of your interests in the Assets which have been pooled; (b) your right to specific Assets may not be identifiable; and (c) if there is a default by us or our sub-custodians resulting in a shortfall, you might not receive your full entitlement. You might have to share in the shortfall in proportion to the value of the Assets which we or the sub-custodian hold for you with other clients.
So no such thing at all as 100% safe with nominee accounts as many brokers say. Also I found an example on the web which is a piece from the FCA website, about a substantial breach by Barclays after failing to protect custody assets of some 16.5 billion by not segregating it’s own assets from client assets as follows:
It said “One example of a breach of this rule occurred in 2014 when Barclays failed to clearly segregate its own assets from those of its clients. It failed to apply FCA rules when opening 95 custody accounts in 21 different countries, incorrectly recording which company within its Investment Banking Division was responsible for the assets in its accounts. It also failed to establish appropriate legal arrangements with custodians it used and had basic flaws in account naming and this incorrect data suggested assets belonged to Barclays instead of its clients.” (Source: FCA)
Info about this from the FCA website should be shown at the following link, (hopefully):
https://www.pensioncraft.com/wp-content/uploads/2019/01/Selection_999853.png
The FCA’s David Lawton pointed out in a speech shortly after the Barclays fine was levied:
“The doomsday scenario of a large firm failure still remains a real risk, and if CASS rules are not complied with, clients face delays in return of assets, extra costs and, worst of all, losing their assets. The FCA is not willing to accept this risk.”
So maybe our assets are not quite as safe as many think they are, which is more of a case for diversification and using the FSCS protection that comes with investing in UK funds.
@S M — You might find these two articles (or given how deep you are in your research, more the comments) of interest:
https://monevator.com/assume-every-investment-can-fail-you/
https://monevator.com/even-brokers-can-fail-you/
I have been banging the drum for spreading your money between at least a couple of platforms for decades (albeit this also increases the chances you’ll end up on one that has troubles…) as much for the delay in getting your money/assets back even if you are covered/rescued, as for the explicit protection.
If I were a passive investor I’d also split my money across two fund houses (e.g. Vanguard and Blackrock/iShares).
You’ll note in the comments some think this is overkill. I don’t. 🙂
@ SM – thank you for the follow up. You’re doing great work here and shedding even more light on a murky area.
I didn’t expect shares to be covered but Investment Trusts? I didn’t realise they wouldn’t be covered if you’re a DIY investor.
There are no UK domiciled ETFs and, thanks to the document you found, we know now that Vanguard explicitly rule out the possibility of compensation for Irish ETFs. This confirms what I thought to be the case when I originally wrote this article.
That said, I’m much more concerned about a broker going bust, so I wonder how many more have only got a very narrow form of FSCS protection for a more limited range of services than appears at first blush?
You’re quite right that nominee accounts are a point of weakness. I’ve previously talked about that here:
https://monevator.com/nominee-accounts/
I found small print at my mainstream UK brokers that implies non-UK securities may be lodged with overseas custodians that don’t conform to UK standards:
“There may be different settlement, legal and regulatory requirements and different practices for the separate identification of investments from those applying in the UK […] We will not be liable for the insolvency, acts or omissions of any third-party referred to in this sub-clause except where we have acted negligently, fraudulently or in wilful default in relation to the appointment of the third party.”
A later clause explains that my nominee investments may be recorded in the name of my broker or its custodian in certain overseas markets:
“the Nominee investments may not be segregated and separately identifiable from the designated investments of the person in whose name they are registered; and as a consequence, in the event of a failure, the Nominee investment may not be as well protected from claims made on behalf of our general creditors.”
As TI says, the best defence is diversification in all things. It may also be worth reviewing whether a zero fee broker that may or may not be domiciled in the UK is good value for money – all things considered.
@TI – Thanks for the links to those articles. I had not read that second article you wrote before – only the first one. Both are definitely worth reading especially for newer/beginner investors who might not be aware of the realities.
I was not even prepared for what I found in how many brokers IMO, seem to either deceive you/hide the real facts from you, regarding the actual real level of protection you have – just to try to attract your money to them.
I agree totally with you, I don’t think it’s overkill by splitting your money over just two platforms – infact I think it’s not enough for most. I mean if you have a fair amount say around 1m to 1.5m – for example, like some of your interviewees in your FIREside chat interviews do – although they are at higher end of that, would you want to lose even half of that (500K to 750K) if your broker or fund manager went bust? I know I wouldn’t – would probably kill me if I lost 75K!
I can understand what you say about people saying “overkill,” since just from the things I found and thought worth posting on here since it may be of interest to others, some people don’t seem to appreciate even the possibilty – saying that it’s unlikely for anything to happen – when the FSCS pays out hundreds of millions a year alone (to those that are eligible) in many failed companies right across the board – or saying segregated accounts are all that’s needed when they won’t fully protect you – there are many cases where this has failed and how you are not protected is even written into their terms & conditions (as I mentioned above from my Smart Investor T’s & C’s). This is never said on the website though, when they are telling you that you are 100% / fully protected by CASS regulations (nominee accounts).
As some have said, it does obviously increase fees the more brokers you have but I personally, would rather pay a bit more than possibly lose all or half my investments if my broker or fund manager failed. Okay so over a lifetime of investing you would (not tried to calculate anything though) lose quite a lot more in fees that could otherwise be invested but it just does not psychologically seem as bad to me to have small amounts taken now and again rather than losing a large percentage of your investments if you suffered broker/fund manager failure. I suppose it’s like insuring your house – do you want to pay a bit every year to protect your house in the event you could lose it to fire/flood etc. or leave it to chance and save a bit of money but if anything did happen lose your house?
Also I don’t really see the argument that it massively increases admin and so time consuming (not for passive investors anyway). I have 7 broker accounts at the minute and I don’t find it massively time consuming to log in to them separately, view them maybe every 4 to 6 months, download a quarterly account statement/report, rebalance across them once a year if needs be – although I accept it will be more time consuming if you invest actively.
As I am a funds only passive investor I know all my accounts are protected upto 85K by FSCS should anything happen, so in reality by spreading across many accounts I am not increasing my risk of losing money (due to more risk that at least one of these could possibly fail) as they would all be FSCS protected – although it may take some time to recover it, I would have my other accounts I could draw from. As you accumulate more, I know you can’t continue to do this as you’ll soon run out of available brokers/platforms and fund managers – so you have to risk more with each but until then you could choose to be fully protected if you so wish.
@ SM – on this point:
“when the FSCS pays out hundreds of millions a year alone (to those that are eligible) in many failed companies right across the board”
Have you come across any break downs of that figure? As in how much of it is being paid out against failures of execution-only brokers?
I’ve found a couple of FSCS documents that suggests a great deal of the compensation is paid out for investment related activities. But, and I need to dig into this more, it seems like much of this is related to advised investment products. For example:
“FSCS has pursued a number of high-profile, high value and complex recoveries actions that can take many years to resolve, often involving collaboration with agencies across international jurisdictions. The Harlequin Group is a recent example that has involved working with agencies spanning multiple jurisdictions across the UK and the Caribbean.
Harlequin, a collection of companies connected through the common ownership of David Ames and members of his family, marketed, sold and developed overseas properties that turned out to be largely fraudulent exposing more than 8,000 investors to huge losses.
Many invested through UK-based independent financial advisers (IFA) and Self Invested Personal Pension (SIPP) operators that subsequently failed. Victims parted with huge sums, some from pensions and life savings, believing they were investing in Caribbean holiday properties that in reality could not be delivered, leaving investors out of pocket.
Since 2014 FSCS has received valid claims against 110 firms involving Harlequin investment products, the majority of firms were IFAs or SIPP operators. It has supported more than 3,000 customers with completed claims who had collectively invested in excess of £150m.”
In more than a decade of putting together Monevator’s broker table, I know of two UK brokers who’ve gone bust. Neither made it into the broker table and both were relatively minor players.
If hundreds of millions per year was being paid out to customers of execution-only platforms then the casualty rate would be enormous, we’d all be trading war stories in the comments, and I doubt many of us would invest at all.
This is a tricky area to get right. I don’t want to underplay the danger but I don’t want to overplay it either.
If Enron can go bust then we can’t discount a nightmare scenario affecting any of the major firms we’re all familiar with.
We do need to protect ourselves. Hence I fully support and applaud your pursuit of the truth in this regard.
Still, I’d count myself unlucky if one of my boring brokers went up in smoke. Red flags for me are promises that are too good to be true and risky business models.
@TA – I can’t find a breakdown for execution-only brokers, don’t think they differentiate and many brokers nowadays do both don’t they – offer advice if you want to pay for it or DIY .
So when I said “when the FSCS pays out hundreds of millions a year alone (to those that are eligible) in many failed companies right across the board” I was referring to all FSCS compensation overall for the last year. The figure was one I’d read about online and is £584 million for the last financial year but as I said that was across the board for all categories that they cover like banks, investments, insurance, pensions etc. (Seems the FSCS also class SIPP’s with investments not with other managed pensions due to the differences i.e. SIPP’s are a DIY investment (85K limit as for other investments) whereas other pensions aren’t (100% protected).
I’ve since found out from FSCS documents (Annual Reports) that for the last year 2021/22 the compensation paid out for the investments category overall was 122 million (over 130 million in 2020/21) which I still think is a staggering amount paid out for financial company failures in one year alone.
I read these two paragraphs from the Investors Chronicle (was from 2019) which woke me up:
“Broker failures are rare, but happen at a rate of one or two each year. In October, discretionary fund management group Reyker Securities was placed in ‘special administration’ after it fell into financial difficulties. And there have been a number of other notable casualties in recent years: SVS, Beaufort Securities, Fyshe Horton Finney and Pritchard – enough, potentially, to trouble those holding investments with brokerage groups.
Those with assets tied up in a failed broker face a tense few months without access to their assets while administrators disentangle their portfolios. Broker failures often come out of the blue and investors will often only become aware of the problem after their assets have been frozen. For clients, the biggest question is whether they will get their money back.”
As you said, a large proportion of these failures may be of advisory only brokers which FSCS had to pay out compensation, rather than just solely execution-only ones (or brokers that do both) I’m not sure, but I think there will be more of the advisory type as FSCS provides quite a high level of protection where you may have been badly advised (and lost out financially as a result) which then would cover most investment categories including ETF’s, Investment Trusts, individual shares etc. not just funds providing there was bad advice, otherwise if DIY execution only they are not covered.
That’s why if you use the FSCS investment checker – it does confuse as it gives you “possibly protected” for those investment types as it has to allow for those who have been badly advised – whereas if you do DIY execution-only then there is no FSCS cover for those. I queried this myself with FSCS and eventually that is what they said (like pulling teeth though to try to find out). They also said it depends on the exact circumstances of the bad advice as any compensation is at the FSCS’s discretion and depends on your case.
This link to info from FundExpert explains quite well what investment types/categories are covered:
https://www.fundexpert.co.uk/ugc-1/1/1/0/fscs_protection_-_explainer_-_fe.pdf
and I saw this info (on a Chartered Financial Planning company website) which said:
FINANCIAL SERVICES COMPENSATION SCHEME (FSCS)
ETFs and ITs are classed in the same category as stocks and shares and are, therefore, not protected by the FSCS.
We do not consider this as a significant issue, however, we do opt for a cautious approach when it comes to the make up of the ETF and its provider.
Please be aware that if you choose to invest in an ETF or IT and for some inexplicable reason the provider runs off with your money, you have no safety net other than to complain about the adviser (ie us) for recommending same.
and also from Interactive Investor:
‘Investments’ covers stocks and shares, unit trusts, futures and options, and other long-term investments. The FSCS will only be triggered when an investment product provider goes bust, or for a loss arising from bad advice; rather than for the demise of an underlying investment. So if you buy shares in a company that subsequently goes belly-up, you’re on your own, as sadly that’s the nature of investment.
As investment trusts and exchange traded funds are considered as shares in a company, these are not covered by the FSCS either unless there is case for bad advice.”
What I am saying is some DIY investors may have lost out financially in some years and will not have been compensated by FSCS as they were “not in scope” of FSCS as they were invested in things other than OEIC/unit trust funds – such as ETF’s & IT’s and so those won’t be ever reflected in the FSCS figures but they would still have lost their investments. Also some will have had more than the FSCS limit of 85K and so will not have been compensated either – so that will not be in the figures, so the actual losses will be much more.
In fact in the Annual Report and Accounts (there is a link to this below) on page 13 FSCS says this “It is worth noting that the compensation we paid to customers this year does not represent the full amount of financial harm being experienced. There were £214m in losses this year that we could not compensate customers for, due to our limit, which is currently £85,000 for most claims.” Also on page 20 it says this: “What do we mean by “customers helped”? We often talk about how many customers we’ve helped, which is different to the number of decisions we make on claims. We don’t include customers who we find we can’t pay compensation to.”
You may already have already seen these as you said you have already seen some FSCS documents:
I found this FSCS list (40 pages) of firms that have failed, or under investigation, from present date back to one firm in 2000:
https://www.fscs.org.uk/making-a-claim/failed-firms/firms-list/?page=1
I subsequently also found the FSCS Annual Reports and Class Statements 2021/22 which are here:
https://www.fscs.org.uk/globalassets/annual-reports-and-class-statements/arac-2122/fscs-class-statements-2021-22-acc-final.pdf
It has a bar chart showing the compensation for investments (but no split for execution only) on page 8 and on page 14 has a more detailed summary which says “Total compensation paid to customers for this class was approximately £122m in 2021/22 (compared with £130m in 2020/21). Most of the compensation paid out in this financial year related to SIPP providers (£114m) and also £8m in compensation for non-SIPP product claims in 2021/22. So most was related to SIPP providers it seems in this year.
Pages 31 – 33 lists the firms that failed in the 2021/22 financial year.
This is the link I mentioned above to the FSCS Annual Report and Accounts which has some useful info:
https://www.fscs.org.uk/globalassets/annual-reports-and-class-statements/arac-2122/2022-fscs-annual-report-and-accounts-publication-0822.pdf
On pages 14 & 15 it says there have been 4234 firm failures since January 2001 and shows the total amount of compensation paid for each year from that year up to 2021/22. (The GFC was obviously the most compensation paid in 2008/09.)
They also say this on page 19 – “During this financial year, we paid compensation to customers who had experienced losses from 1,614 different firms, including some of the 66 which failed in 2021/22. It is worth noting that we expect to receive some additional claims from customers in 2022/23 against firms that defaulted (failed) in 2021/22 and earlier.” So there’s more losses to add for the year.
I think you’re right, I don’t believe it’s very likely that a large, long established mainstream broker would fail and probably less likely a large fund manager would and I don’t think they are going happen very often either. But just from my past memories who would’ve thought before 2008, that many banks would fail and that our whole banking system would have collapsed if the government had not bailed it out – as well as other countries including the US where Lehman Bros. Collapsed?
Similarly who would ever have conceded that Britain’s oldest merchant bank, the 233 year old Barings Bank, and bank to the Queen, could collapse – when it was brought down by just a single rogue trader who lost over 1.7 billion in today’s money.
Then there’s the Equitable Life scandal when people lost their pensions, or a large chunk, collectively losing 4 billion whilst the Government has only awarded them 1.4 billion.
And then a fund manager, the Neil Woodford scandal – when his widely recommended fund collapsed (Woodford Equity Income Fund) left investors with losses. I know this was a new venture but he was regarded as highly experienced and I was invested in one of his funds at Invesco where he was considered the star fund manager. Lucky escape I had as I could have invested in his fund. Hargreaves Lansdown didn’t come out of this well either and are being sued by investors.
So if these are just a few things I remember happening in the recent past – and some of them large, long established firms, then it could feasibly happen to any firm, broker, fund manager given the right circumstances and a dash of mismanagement or fraud. Probably more likely with smaller less well established ones. I would never say never though.
I prefer to be cautious as I had banks go bust on me in the GFC and if I had been over the FSCS would have lost out but I kept under the limit. As these companies hold our life savings & pensions and lightening only has to strike once and, if you have only one broker, it’s gone (well except for FSCS minimum compensation which is peanuts) – even with two – half is gone and unless you have a very XL sized pot (which most investors don’t) then probably the other half plus the FSCS 85K you’ll get back, won’t be large enough to accommodate your retirement plans. If it happened to me at this stage I’d probably need to work for most of rest of my life to live to a reasonable standard and any retirement plans would probably be finished.
I can understand your point of view, in having to give balance – not putting readers off investing or making them unconcerned as to the risks, which although infrequent/unlikely, if it happens to you could be disastrous. I think it can depend on age – similar to your risk tolerance with asset allocation. If you’re younger, have less to lose and more time to make up any losses then you may decide to go with a minimal amount of brokers/fund managers and save on fees but when you are nearer to retiring like me, then split it more amongst larger reputable brokers/fund managers to protect your pot as you’ve no time for last minute disasters. I always think if you have all the information and the lack of protection is not sort of hidden from you by some of these brokers (like fees used to be hidden in the bad old days on pensions/investments) and not easily found either, then we can all make our own decisions.
I also came across these articles (the second one even mentions Monevator!) that have some useful information on broker insolvency if anyone is interested:
https://www.bankeronwheels.com/how-to-choose-a-safe-stock-broker/
https://occaminvesting.co.uk/what-if-my-broker-goes-bust/
I’ll stop waffling on now as it’s an essay already!
All the best.
@ S M – that’s another great haul of evidence there. Thank you for your time on this! I do want to clarify something though.
There are two levels of FSCS protection in play:
1. If your broker fails
2. If a fund company fails
You’re right that the fund company level protection only applies to UK domiciled OEICs and Unit Trusts.
However, you’re still protected by the FSCS if you’re broker fails, even if you’re invested in shares, ETFs, ITs, etc, so long as that broker is covered by the FSCS’s investment scheme and they agree to your claim (up to £85k per individual).
The Fund Expert pdf you link to makes this clear, as does AJ Bell: https://www.ajbell.co.uk/faq/fscs
HL also but their version is probably too succinct to be reassuring:
https://www.hl.co.uk/help/managing-your-online-account/passwords-and-security/security-of-assets/what-is-the-financial-services-compensation-scheme-fscs
Your fantastic link to the FSCS’ failed firms list is staggering but also reassuring: https://www.fscs.org.uk/making-a-claim/failed-firms/firms-list/?page=1
I’ve hardly heard of any of them. Apart from SVS and Beaufort they didn’t appear on my radar despite my sideline in running Monevator’s broker table.
So while the FSCS is paying out millions per year, it’s not paying out for fails in the investment platform pool that you or I fish in.
That said, I completely agree with you that any firm can potentially go under.
Your point about past blue-chip scandals is well made.
For that reason I do not keep everything with Vanguard or Blackrock. Although if firms of that scale did explode, I think the best we could hope for is a central bank ‘too-big-to-fail’ bail-out.
I completely respect your efforts to protect yourself. My retirement would similarly be kaput should the worst happen.
But I’ll end on an optimistic note. The theme that ties together your list of storied scandals is overreach. Woodford in China, Enron, Baring’s rogue trader, even Equitable Life IIRC. Their reputations were impeccable but they were also making promises they couldn’t keep.
I’d prefer it if Vanguard had just stuck to index funds but so long as they’re mostly just tracking a benchmark I feel pretty safe.
Anyway, I can’t thank you enough for providing so much material. It’s going to be a massive help when it comes to rewriting this post.
@TA – Thanks. I’m happy if any of it is any help to anybody on here. The more information we have can only make it a safer environment for us all to invest in, hopefully.
I often thought in the past that what you said re:
“There are two levels of FSCS protection in play:
1. If your broker fails
2. If a fund company fails” etc.
could may be the case but not actually read it anywhere that explained it as well and fully as you did here. So thanks for pointing that out.
Also the FSCS saying they don’t usually cover other non-fund investments apart from where bad advice given, I thought this would apply to brokers just the same as fund managers. They should say that plainly as you did, as otherwise it’s misleading.
I think that if you include what you said – about the two levels of FSCS protection in play – when you do re-write this article, it would be a massive help to many as I couldn’t get this info from the FSCS themselves and I’ve spoken to them a number of times – seem as daft as a box of frogs to me!
I don’t think it’s ever made clear enough and I’m sure many others aren’t totally clear on exactly what FSCS protection they have. In latter years, due to me getting nearer to retirement, I have just invested in funds as I didn’t want the risk, but may ponder now on whether I should have some other products, such as ETF’s where they may have cheaper fees, as the risk would not be broker failure (if you stick within the FSCS limit) but only in the fund manager failing and this should in reality, be much less likely than a broker failing.
The only reservations I had was due to what I found out from the recent emails I received from Hargreaves Lansdown and InvestEngine – which I posted earlier on here. These said broker failure was NOT covered. So I emailed HL again asking them to look into it, writing:
“I just wanted to clarify something about what you said in the email I sent 20/3/23. (It is only with regard to FSCS protection though that I am asking about.)
In regard to investing with HL in ETF’s/investment trusts/shares, you said that FSCS would provide no protection if HL failed as you said this “ If you were to buy the ETFs through us, UK or non UK, although you would not be covered by the FSCS” etc.
But on your website at this link:
https://www.hl.co.uk/help/managing-your-online-account/passwords-and-security/security-of-assets/what-is-the-financial-services-compensation-scheme-fscs
it says this:
“What is the Financial Services Compensation Scheme (FSCS)?
Investors are likely to be covered by the provisions of the Financial Services Compensation Scheme (FSCS), if Hargreaves Lansdown ceases trading. It can award up to £85,000 in compensation to any one investor where they decide that an investment business is in default and is unable to satisfy any claims against it.”
This seems to say you ARE covered up to £85,000 for everything and doesn’t say that ETF’s/Investment Trusts/Shares would be excluded (or alternatively that only fund investments (OEICS/unit trusts) would be covered).
So I really need it clarifying.”
So they then sent me this reply just yesterday:
“Dear XXXX,
Thanks for getting back in touch.
I hope the following clarifies the matter you have raised.
In regards to investing with HL in ETFs/Investment Trusts/Shares, the FSCS compensation up to £85,000 wouldn’t cover this type of investment where these types of investments were to default or fail. This is separate to if HL were to fail.
If HL failed as a platform/provider, you would be covered under the FSCS up to £85,000 of cash that is held in your HL accounts.
In the same scenario, the investments you hold, are held in a separate Nominee Company name, HL Nominees Limited. If the scenario was to arise that HL failed and not the investments themselves they can be transferred to another provider and would not be applicable under the FSCS.
I hope this has been of assistance.
Kind Regards,
XXXX
Hargreaves Lansdown”
This email was from a different staff member at HL than the first and so has confirmed what you said is totally correct. Normally I find HL are good, certainly better than any others I have come across, but the first person must have been having an off day, as the information was incorrect in the first instance.
However InvestEngine is a different story as I have two emails from different staff members stating that investments with them do not have any FSCS protection – whether for broker or fund manager failure (and the FSCS logo shown on their website applies to cash transfers only). So I believe this is the case with them and is very confusing for investors – many will think they are covered for broker failure up to £85000 when they’re not. It’s also very difficult to glean this information from them – they are particularly evasive I find. I wonder why they don’t have any protection if many others do?
And how do you know which broker has what – as you don’t always get anywhere near a concise/correct answer when you do actually ask many of them? I mean IE even told me to “go and do your own due diligence.” How can you if they themselves fail to tell you – that’s what I was asking them for! Strange people. I don’t think I feel reassured about investing with them!
As you said before, some of the newer brokers may have a lesser level of protection which we are not aware of – in some cases maybe not until it’s too late. It’s knowing which ones that’s the trouble.
All the best.
@ S M – Good to get that in writing from HL – thank you for sharing. I think your investigation is conclusive re: IE and explains why the FSCS scheme now puts the onus on asking your platform what protection they have. Clearly there’s a level of protection and customer service that’s worth paying for, especially for those with larger pots.
@TA thanks for the clarification, that makes sense and is very helpful.
@D
IE said ‘All your investments up to £85,000 are covered by the FSCS’, specifically they say investments not just the cash on its way. That ties in with what @TA said above, even though say a Vanguard ETF is an ETF and domiciled in Ireland I would be covered should IE go bust.
@SM thanks for confirming with that HL info. But now we have conflicting IE info. Am I misinterpreting IE’s words quoted above?
@all — I have with some regret had to remove a comment from a poster regarding the protection issue, because the comments veered into making quite extreme allegations about the business practices of certain platforms.
I understand people may feel frustrated or misled. Unfortunately, however, such feelings are not a legal defense in court. Monevator is a small website with an even smaller business behind it. We need to be alert to legal liabilities.
Moreover, I don’t feel such inflammatory language is particularly helpful in getting to the bottom of these issues.
It is of course fine to say something the lines of “I do not like how this platform is handling this, and I will be taking my business elsewhere” or similar.
Please stick to the facts as you find them, not speculation or name calling, for the above reasons.
Our site is not the venue to make inflammatory allegations about the business practices and motivations of any platform.
If you have concerns in that area, I’d urge you to take them to the Financial Ombudsman or similar:
https://www.financial-ombudsman.org.uk/
Thank you for understanding.
@ S M, Thank you for sharing the HL reply. Would you be able to ask HL two questions regarding the scenarios where FSCS protection may not be applicable:
1. Is HL Nominees Limited regulated by the FCA? If not, how can be covered by the FSCS investments held in FCA unregulated companies?
2. In the event that both HL Nominees Limited and HL fail (but not the investments themselves), would ETF investments be protected by the FSCS?
Thank you for your help in clarifying these points with HL.
@ all – The Investor got in touch with InvestEngine yesterday and the reply from their compliance department confirms that investments held in IE accounts are covered by the FSCS scheme. Here’s the IE reply in full:
Er hem !!
“Meanwhile, you’ve also got £200,000 stashed with the Hard4Profits Company. Their directors were last seen boarding a flight to Panama so you can claim back £85,000 for that mess, too.
You’re not covered for the remaining £125,000. The FSCS compensation limit maxes out at £85,000 per firm, no matter the value of your accounts with that firm.”
Arithmetic sir ! Arithmetic !
Very interesting about ‘administrators are not creditors’ and so can help themselves to clients assets. Was not aware of that as a risk…
Thanks,
@Maj — Darn, I missed it too in my sub-edit. Thank you, fixed now!
Thanks for the update. I must admit I still struggle with this as I intend moving separate DC pots into SIPPs pre retirement for cost efficiency. It simply isn’t practical to spread around too much and while I can conceivable operate 3 SIPPs that still will still leave exposed balances of up to £300k. Somewhere I guess I have to reconcile that in extremis I might lose a slug of the total but not everything (I really don’t like the idea of anyone being able to lay their mitts on custodial accounts) or live a life full of admin and cost inefficiency.
Great article but…………..
As an individual investor also getting older also getting affairs in order and also simplifying- how practical is this advice?
I run 2 ISAs,2 SIPPs,2 Instant Cash ISAs and a high interest bank account plus all the other accoutrements -visa,current account
Now I have to institute another layer of diversification for “safety”!
I have chosen to go down the path of only using “too big to fail” institutions (my perception!) and foregone the more exciting interest rates and investing opportunities out there-Icelandic Banks etc
Probably the most practical and only way the small amateur investor can “play safe”!
xxd09
Personally I agree with @TA and @TI that splitting assets across at least two big/reputable brokers seems like a very sensible thing to be doing with relatively little hassle associated with it – even aside from the FSCS coverage point (which is important), it helps to mitigate a scenario where one of them has a major IT snafu or similar and has to shut down online access to accounts to a period of time (which doesn’t feel that far-fetched to me).
I also suspect that some of the finer detail of exactly what the FSCS does or doesn’t cover might only get definitively pinned down if/when a big broker fails and it all gets litigated, which feels very unsatisfactory but there we go!
With thanks to @TA and the many commenters for an excellent and informative piece and for the vibrant comments discussion.
This type of issue is the sort that gives me nightmares and sleepless nights.
You can diversity across a couple of platforms and a few different ETF providers and Funds house/groups; but it quickly becomes a case of diminishing risk reduction for exponentially increasing practical difficulty and administrative effort.
This is not a straightforward area, and it can give rise to problems and concerns which could give an aspirin a headache.
There have been too many scandals and tragic business failures in the investment and pensions industry, whether Bob Maxwell or Equitable Life.
Anything that operates can fail, (to paraphrase a philosopher) ‘all that is solid can melt into air’, liquidity risk can become solvency risk in the blink of an eye, nothing and no organisation can be relied upon with complete certainty at all times, for all time and in all circumstances.
They had, and have, a difficult and demanding job; but I have to say that I don’t feel that the retail investor or private pension contributor had been amazingly well served by the FSA and now by the PRA, FCA, FSO and FSCS over recent years and decades.
It was worse before the likes of BCCI, Mirror Group Pensions and Poly Peck blew up of course, but we’ve not made the progress that perhaps we should have on fund segregation, robust external audit and oversight, resilience and stress testing, and on more comprehensive and straightforward bailout funding for those investors and pension contributors who have genuine grounds for seeking legitimate recourse when the worst happens.
@ Time like infinity – ‘all that is solid can melt into air’ love that quote and the acceptance it implies of a world beyond our control
@TA Agree that it’s a great line – “all that is solid melts into air” is originally a line from Marx (specifically the Communist Manifesto). Totally off-topic, but here it is in context:
“Constant revolutionising of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones. All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses his real conditions of life, and his relations with his kind.”
Back on topic, I suspect that a Communist revolution is not a scenario in which FSCS compensation would be payable…
Wow, that guy knew how to wield a pen. Thank you for supplying, PhilosoFIRE, I enjoyed that.
Yes, pretty sure there’s a specific line in the FSCS T&Cs that covers Communist revolutions. Ah yes, here it is: “All bets are off!”
This is good advice. But it begins to break down for investors with substantial sums. If you have say £1m, how do you go about balancing the risk? At £300k you might be OK with 2 providers, but what about with £1m or £2m? What’s the consensus, then, how do you go about spreading risk.
There doesn’t seem to be any mention of adviser risk, too. I don’t use an IFA, but if I did I’d be far more worried about ensuring they actually invested my money than I am about platform malpractice.
After reading this and all the comments it’s been pretty eye opening. Whilst I trust Vanguard I’d rather still be certain I have the coverage as most of my investments are in Trading212 and InvestEngine, essentially all Ireland domiciled, they don’t even offer funds that are UK based so I guess it’s a case of moving providers now?
@ AB – you can get FSCS protection on some Vanguard funds but not on any ETFs.
This piece here will give you some ideas for suitable funds:
https://monevator.com/maximising-fscs-protection-for-your-investment-portfolio/
Thanks for that, I guess the trade off for the peace of mind is slightly higher fees but it’s always better to have that than be caught with your pants down.