How to keep your shares safe from the threat of a broker going bust

Rules exist to protect your assets if a broker goes bust, but it’s best to minimise the risk if you can.

In the middle of a major market panic when all your investments are plummeting in value, the last thing that you want to worry about is whether what remains of them is safe. But anybody who’s been investing for a few years will know that, from time to time, stockbrokers, wealth managers and other investment firms fail. And crises are often accompanied by at least one such blow-up (although small brokers go under frequently enough anyway – the most recent example was SVS Securities in August last year). So if you’re wondering what rules exist to protect your investments, here’s a quick outline.

The key point is that investments you hold through properly regulated UK investment firms should be held on trust for the customers and segregated from the firm’s own assets. Your shares will not be registered in your own name, but they will be in the name of a nominee company, which is a subsidiary set up solely for this purpose of holding clients’ assets. If the investment firm fails, its creditors don’t have a claim on these assets.

This is important, but not always sufficient. When firms fail, it sometimes turns out that this segregation hasn’t been enforced properly. Assets may be missing or mixed up with the firm’s own. That can be due to negligence and bad record-keeping: don’t underestimate the degree of chaos that may prevail in a firm before it goes bust.

Or it could be fraud: even if somebody hasn’t set out to steal from clients’ accounts, the temptation to dip into them to keep things going when the firm is in trouble may occasionally prove too hard to resist. In general, fraud seems more likely with cash balances than shares, bonds or funds, so keeping less cash in your account may reduce – but not eliminate – your exposure to this risk. 

If the firm fails and cash or investments are missing, the Financial Services Compensation Scheme (FSCS) should be there to plug the gap (see below). But the process of identifying shortfalls, returning assets to clients and paying compensation can be quite protracted. SVS Securities’ clients are still waiting, for example. You don’t want your account frozen for months at the best of times and certainly not in a market like this. 

That’s why we’d suggest that if you only have a single account, it’s best to stick with one of the largest and most reputable firms, who are very unlikely to fail. If you want to use a smaller firm – and there may be good reasons to do so – we’d suggest splitting your portfolio across more than one company to minimise the disruption if the worst happens. Finally, be aware that all this applies only to fully regulated UK firms. Those offering unregulated investments or those outside the UK may offer less or no protection, depending on the rules that apply to them. 

I wish I knew what the FSCS was, but I’m too embarrassed to ask

The Financial Services Compensation Scheme (FSCS) covers both banks and building societies as well as investment accounts. If a bank goes bust the FSCS will pay compensation of up to £85,000 per person, per bank to cover any losses (or up to £1m if the money is there temporarily – such as the proceeds from a house sale – for up to six months from when the amount was deposited). 

So if you have substantial cash savings, you may want to have accounts with more than one financial institution. But if you split your savings like this to maximise your FSCS cover, be aware that many bank brands share the same bank licence, so check you are genuinely saving with two separate institutions. 

Bank and building society failures are urgent – people rely on their money to be able to pay their bills. So the FSCS aims to pay within seven days of the institution going under.

If your broker goes bust and there is a shortfall in clients’ assets, the FSCS will pay out up to £85,000 per client (not per account) to top up whatever can be recovered from the broker. So if a broker owes you £90,000, but you only get back £40,000, you should be entitled to another £50,000 from the FSCS. However, if you have two accounts with the same broker holding £90,000 in each and you get back £40,000 in each, the FSCS will pay you a maximum of £85,000 – leaving you £15,000 short. 

The £85,000 limit should cover any likely shortfall for most investors (remember that you also get what remains of your investments back and it would be unusual – though not completely unknown – for a very large percentage of overall assets to be missing). But if you have a large account and you are worried, consider splitting your assets across more than one provider. 

Payouts for failed investment firms are much slower than for banks. Eight out of ten investment claims will be paid within seven months, according to the FSCS website (FSCS.org.uk).

Recommended

The MoneyWeek Podcast: picking stocks is fun, but you need to do your homework
Investment strategy

The MoneyWeek Podcast: picking stocks is fun, but you need to do your homework

John Stepek talks to Steve Clapham, investor, analyst and author of The Smart Money Method, about the dangers in picking individual stocks and why you…
8 Apr 2021
How to find companies that can thrive in the post-Covid world
Advertisement Feature

How to find companies that can thrive in the post-Covid world

Many sectors of the global economy will return to something resembling pre-pandemic status, but others will take far longer to recover.
8 Apr 2021
What the Deliveroo IPO can teach us about investing
Investment strategy

What the Deliveroo IPO can teach us about investing

Losing money on an investment is painful, says John Stepek, but it can force us to look at our process in a way that making money doesn’t.
8 Apr 2021
Deliveroo’s IPO flop shows which way the market is going
Stockmarkets

Deliveroo’s IPO flop shows which way the market is going

Deliveroo’s disastrous IPO is a good example of how investors are looking away from loss-making growth stocks and more towards companies that will pro…
6 Apr 2021

Most Popular

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?
Bitcoin

Central banks are rushing to build digital currencies. What are they, and what do they mean for you?

As bitcoin continues to soar in value, many of the world’s central banks are looking to emulate it by issuing their own digital currencies. But centra…
8 Apr 2021
House prices: from boom to even bigger boom
House prices

House prices: from boom to even bigger boom

UK house prices have risen to new to record highs, says Nicole Garcia Merida. Demand continues to outpace supply, but continued low interest rates, th…
9 Apr 2021
Nuclear power might never be popular – but now looks a good time to invest
Commodities

Nuclear power might never be popular – but now looks a good time to invest

Nuclear power gets a very bad press, but it is the ultimate renewable energy source. Interest in it is perking up again, says John Stepek. Which means…
9 Apr 2021