Brokers & Accounts · Intermediate · 5 min

Investor protection: segregated assets and compensation schemes

You can explain what happens to your assets if a broker fails, what compensation schemes cover, and what they never cover.

If the broker fails

Brokers are companies, and companies can fail. Every few years a well-known financial firm collapses, and customers ask the same question: what happens to my shares now?

For clients of a properly regulated broker, the answer is usually better than they fear. But the protection has clear limits, and it depends on rules many people never read. This lesson explains the two layers of protection and the gaps between them.

Two layers of protection

Layer one: segregation. In the EU, MiFID II requires investment firms that hold clients' securities to protect clients' ownership rights, especially if the firm becomes insolvent. Client money must be protected too, and firms may not use client assets for their own account without consent. This is called segregation: your assets are kept apart from the firm's own. The US and UK have similar rules.

So if a broker fails, your shares are not part of the firm's estate. They belong to you and are transferred to another broker or returned. In practice, securities are often held further down a chain, at a custodian bank or a central securities depository, where records show which shares belong to the broker's clients. Getting them back can still take weeks or months while an administrator sorts out the records.

Layer two: compensation. Sometimes assets are missing when a firm fails, through fraud, errors or poor records. Then an investor compensation scheme steps in, up to a limit. These schemes protect against missing assets. They never cover a fall in market prices, bad advice or a trade that went wrong.

Cash can be treated differently from securities. Money held at a bank is covered by deposit guarantee schemes, which in the EU cover 100,000 euros per depositor and bank, under a separate directive.

Protection also depends on the legal entity you sign with. Some brands run a regulated company in the EU or UK and another one offshore, where these schemes do not apply. Your contract shows which one you are with.

Limits in three places

EU: the directive sets a minimum of 20,000 euros per investor. Countries can offer more. Below that amount, they may limit cover to 90% of a claim.
UK: the FSCS covers investments up to 85,000 pounds per person and firm, for firms that failed after 1 April 2019.
US: SIPC covers up to 500,000 dollars per customer, including up to 250,000 dollars in cash, when a member broker fails and assets are missing.

A fictional client holds shares worth 60,000 at a failed broker. Thanks to segregation, shares worth 55,000 are found and transferred. The missing 5,000 is the claim. In the EU, the scheme pays it if the national cover reaches that amount. Had the shares merely fallen in price, there would be no claim at all.

Common mistakes

"My losses are insured." No scheme pays for falling prices.
Confusing deposit and investor protection. They are different schemes with different limits.
Ignoring the legal entity. The same logo can stand for very different levels of protection.
Keeping everything at one firm without knowing the limits. Above the cover limit, a shortfall is your loss.
Assuming every product is covered. Some products, such as many crypto offers, fall outside these schemes. Check before you invest.

The takeaway

Your securities are kept separate from the broker's own money. Compensation schemes step in only when assets go missing, never for market losses.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the step that comes first when a broker fails.

Tap the chart.

Segregated client assets belong to the clients, not to the failed firm. They are returned first. Compensation covers only what is missing.
2Your shares fall 40% and your broker is fine. Does a compensation scheme pay?

SIPC, for example, states that it does not cover a decline in market value. Schemes protect against missing assets, not bad trades.
3What is the minimum compensation for investors under the EU directive?

Directive 97/9/EC sets at least 20,000 euros. Countries can pay more. The 100,000 euros apply to bank deposits under a different directive.
4What does segregation of client assets mean?

MiFID II requires firms to safeguard clients' ownership rights, especially if the firm becomes insolvent.

of 4 correct.