Should you keep more than £85,000 in your ISA or pension? What happens if your broker/investment platform becomes insolvent?
This gets a bit technical, but we’ve done our best to explain the layers of protection you have as an investor in the UK.
Contents
How brokers hold client funds
When you hold cash with an investment broker, this money should be held in ring-fenced client accounts with UK-regulated banks. (Usually for a short period before being invested). It should not be available to the broker to pay their business costs, or to the broker’s creditors in the event of an insolvency.
Investments in funds, ETFs, shares and bonds that you buy through a broker are held ‘in trust’ on your behalf, and are themselves regulated instruments. In the event of a platform/broker failure, the company who manages the fund (e.g. Vanguard, iShares, etc.) still has an obligation to you, the client. Whilst it would potentially be an administrative pain to sort out, your investments still belong to you and you should get access to them eventually through a new broker.
Caveat: fraudulent activity
If a platform or broker told you the funds you sent them were correctly ringfenced / used to purchase investments, but they weren’t, the assets might not be present to transfer to another broker in the event your original broker collapses.
In this situation you would be up the creek and joining the queue for FSCS compensation.
FSCS Protection
The Financial Services Compensation Scheme (FSCS) is an industry-funded government-backed protection scheme for deposits and investments in the UK.
To be covered by the FSCS, the investments must be regulated by the FCA or PRA, and have failed in some sense. This usually mean unsuitable investments recommended by a regulated financial adviser, insolvency of the investment provider, or fraudulent activity. FSCS maintains a list on their website, which gives you an idea of the sorts of covered activities.
In the event of a bank failing, all cash deposits are protected by the FSCS up to the value of £85,000 per person per banking license. The FSCS also covers most “retail investments” and personal pensions.
For pensions, the cover is unlimited for a small subset of insured pensions (considered to be ‘contracts of long-term insurance’) – this is unlikely to be relevant unless you have an active annuity policy. For all others, the limit is also £85,000.
FSCS compensation case study: Beaufort Securities
There is a notable recent example here in the failure of an investment broker called Beaufort Securities. Beaufort had about 17,500 clients and held approximately £500 million in client funds. In March 2018, the FSCS declared Beaufort to be in default, and appointed an insolvency administrator, PwC, to manage the wind up of the company and return of client assets and money.
- Client accounts were transferred to a new nominated broker. The majority of transfers were completed within a year of the broker’s collapse.
- Although client assets and money were ring-fenced from creditors, PwC charged fees to clients for the administration process. Fees were distributed across client accounts based the content and size of the account.
- There was also found to be a problem where some invested assets were not properly recorded by Beaufort, and were therefore effectively “missing”. This amounted to 0.5% of assets overall.
Both the administrator fees and any shortfall in invested assets were covered by the FSCS up to the FSCS limit, which was £50,000 at the time.
Clients who owed more than the FSCS limit in fees had to pay the excess, whether out of their Beaufort accounts or by paying separately. This affected fewer than 10 retail clients (individual investors) in total.
FSCS compensation case study: Wealthtek
Wealthtek had about 1,100 clients and held a total of ~£228m in client money and assets (despite not being FSCS registered for this activity). They went into administration in April 2023, and a significant shortfall (35%) was discovered. The outcome is not yet final, summary of the situation as of October 2024 here:
FSCS protection for funds
This page discusses the FSCS treatment of broker/platform accounts, not individual funds.
Funds can benefit from FSCS protection, but the treatment is complex and depends on where the fund is domiciled (many index funds that can be used in the UK are actually domiciled in Ireland, for example). Monevator have a post about this if you’re interested in learning more.
Index fund providers are megacorporations that manage billions of pounds of customer assets across the world, and are structured in such a way that it makes it very hard for things to go wrong.
On the other hand, brokers are often far smaller, and run like traditional businesses rather than an investment fund.
Should I limit my investments to £85,000 per provider?
The short answer is that you will probably end up with more of an admin headache than a safety benefit.
The UK has one of the strongest legal and financial regulatory regimes in the world, and as a result the likelihood of an FSCS claim is very low when dealing with a large product provider.
With that said, there is still a (very small) chance of losing money, and you will need to decide how comfortable you are with that risk.
Reducing risk
Actions you can take to minimise risk:
- Only ever invest with FCA-regulated firms. Check the register number they provide against the FCA register for the purposes of managing investments. Note that companies can be on the register for other types of activity (such as financial advice), or may use different entity names for different business areas – it’s not always trivial to work out which activities are covered or not.
- Read Monevator’s post on FSCS protection for their take on the topic and more ways to protect yourself.
- There has been a recent trend of outright scam companies registering, for example, claims management permissions with the FCA, so they appear on the register, even if this has nothing to do with the claimed activity they undertake. See the Scams page for more information on spotting red flags.
- Deal only with large and reputable brokers/platforms. This isn’t an exact science, but dealing with a publicly traded company or subsidiary of a major bank is likely to be less risky than a brand new investment broker with no history or accountability.
- Try to do some due diligence on the platform/broker before you use them. How long have they been trading? Are they recognised/well-known? Who owns them? There are reputable third parties who can be used to help inform you too, such as Boring Money.
- Avoid exceeding £85,000 in cash deposits in your account – just as you would with a bank savings account.
- If dealing with small and/or questionable brokers, also limit your investments to £85,000.