| Savings Protection

29th Jul '19 by ambrosia

8 comments 793 reads

just trying to be clear on the goverment savings protection scheme and what happens if your Broker goes bust.
as you have shares and not cash in your ISA, SIPP or trading account, are you still covered up the £85,000 under the goverment scheme.

Also if you have over the £85k do you need to have more than one broker to qualify, if you have one SIPP and one ISA with the same institution do you still only get combined £85k protection. and i'm guessing not all brokers will qualify

I tried googling the answers but most websites only mention savings accounts

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Ambrosia

Premium Member

8 comments

Vsihv

29th Jul '19

You are protected, but not sure what the threshholds are - might be £50k as opposed to £85k for savings unless there has been a recent change (please note the precise number depends on £:€ rate (at least until 31 October 2019).
Further, this protects you in the event of the broker going bust, not from capital losses.
Limit applies per person per account - so if you have 40k in ISA, 20 in SIPP and 20 in Trading, only 50k is protected.

Your only holding is £40k of HL stock in HL ISA. HL goes bust. Your investment is worth nothing, protection is there but worthless.
Your only holding is £40k of HL stock in Interactive Investor ISA - II go bust - your holding in HL via II is protected.
Some other conditions too - like the firm was actually authorised and can't pay directly.

All of that said, I would not select a broker (or a savings account) on the basis that it is protected - unless you are a big fan of protracted administration!
Further, just because an amount is guaranteed does not mean that is the max you will get. A well run brokerage will have segregated client accounts, and those assets cannot be used to pay creditors in event of administration - it is only if they screw up.

Banks (and deposit taking institutions) do not segregate client money which is why in theory the risk is far greater than for an insurance broker / stock broker.

Hope this helps - https://www.fscs.org.uk/what-we-cover/investments/

Robbie Burns

29th Jul '19

Re sipps I believe the broker doesn't hold the money - the trustee does so it should be safe
if the broker goes bust. I got paid out by fscs when MF Global went bust - took four months. All
positions were sold and all the money was returned. I believe now if your spreadbet co
goes bust you now get £85k back it used to be 50k. I would be careful with the smaller SB
companies and not go much over 85k. One further point: I keep banked money with
National Savings, you earn a touch less interest but money is guaranteed up to £2 million
saves the hassle of lots of different accounts if you're lucky enough to be cash rich.

jonesj

29th Jul '19

1 Brokers are SUPPOSED to segregate your assets. I don't know what stops them disregarding the rules whilst the broker is in the process of collapsing and the directors need money to pay themselves.

2 Also google the story on Beaufort Securities. I believe the administrators were intending to use client assets to pay their fees. Will be interesting to see how it works out.

In the 21st century, it's about time the UK facilitated direct holdings of stocks at reasonable cost. Just like Singapore & (so I am told) Australia.
Then we have all the protection we need AND it would be easier to move broker. This may of course be part of the problem, as I suspect the sector suffers from "regulatory capture".
https://en.wikipedia.org/wiki/Regulatory_capture

timarr

29th Jul '19

The £85K only applies to cash and not to shares.

The brokers don't usually have a banking license so it depends on where they hold the cash as to the risks. Some intermediaries - ii for instance - claim they spread excess cash around so that you would be protected even if you have in excess of £85K. Hard to check, but hard to believe they'd say it if it wasn't true. It all depends on the banks where the cash is lodged, not the brokers.

Shares are supposed to be segregated so that if the broker goes bust you're protected. But that assumes the broker isn't a crook to start with.

As stated below, in the Beaufort Securities case the administrator proposed using client money to fund the administration. They could do this as an unintended consequence of legislation enacted during the GFC. AFAIK this is still in place, although there are various campaigns to get the law changed.

Broadly, don't go for the cheapest brokers, go for the most liquid and transparent. Saving a few thousand in fees is nothing compared to the potential losses in the event of a broker going bust.

timarr

29th Jul '19

Can't edit that post for some reason ... for brokerage accounts the limit is £50K, not £85K.

timarr

ragnar danneskjold

29th Jul '19

Two points to add to the other comments posted.

1. If the bank the hammered broker uses is the same as you use for your savings account etc, you will only be covered for 85K in total and most brokers don't tell you what banks they use. So although you may think your 85K in your bank and your 85K with your broker are covered, only one of the deposits may be insured. Best use NS&I as RB advises above.

2, Client accounts do not entirely solve the problem. Some years ago in the USA a broker allowed a client to over- trade in the silver market. The client lost so much money in the trade that it wiped out the entire client's account.

Luthrin

29th Jul '19

FSCS protection for investment provision was raised from £50,000 to £85,000 per person per firm from 1 April 2019.

FSCS press release

jonesj

29th Jul '19

An £85,000 limit is OK when you are starting out, but for anyone who is successfully saving at significant scale for retirement via an ISA or SIPP, it's going to be inconvenient.
Even if you let each account fill to £85k before starting another one, growth could quickly take it past £85k. So it's either necessary to moves stocks out or perhaps stop at £40k to allow for a few years growth.
Then if your second broker gets taken over by the first, I presume you are back to one set of compensation when the whole lot goes down.

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Ambrosia

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