Investor compensation scheme
Family VIII · Regulation
Not to be confused with financial ombudsman, chargeback, negative balance protection.
Investor compensation scheme is a protective mechanism that pays compensation to retail clients when an investment firm fails and cannot return client money or assets. It is not insurance against market losses; it applies only to the misappropriation, administration or insolvency of a regulated firm. Coverage limits, eligible products and claim procedures are set by the scheme's governing jurisdiction and therefore vary.[1]
How a scheme operates
A scheme is usually funded by levies on member firms, by a statutory fund, or by a combination of both. When a firm is declared in default, the scheme's administrator assesses client claims and pays compensation up to a per-client cap. The cap is a fixed amount in the scheme's home currency, but the amount and the definition of an eligible claim differ between countries and are periodically revised.
Typical exclusions include losses caused by market movements, claims from professional or institutional clients, and products that are not covered by the scheme's mandate. The scheme does not supervise firms or prevent failure; it only responds after a failure has been established.
Worked example
Assume a scheme has a per-client cap of 50,000 in the local currency and covers cash and custody assets held with a failed broker. A client held 30,000 in cash and 35,000 in eligible securities, for a total claim of 65,000.
The client receives 50,000, and the remaining 15,000 is an unsecured claim against the failed firm's estate. If the cap were 100,000, the full 65,000 would be payable.
Variation and limits
Coverage limits and eligibility rules are not universal. Some schemes cover only cash, others cover cash and securities, and some impose separate sub-limits for different asset types. The per-client cap may be expressed in a local currency and may change over time. Claims procedures, deadlines and the treatment of joint accounts also vary by jurisdiction. A scheme's rules should be checked in the jurisdiction where the firm is authorised.
Often confused with
- financial ombudsman
- An independent dispute-resolution body that investigates complaints from consumers against financial firms, and can order a firm to compensate a complainant, typically up to a statutory or scheme-defined monetary limit.
- chargeback
- A chargeback is the reversal of a card payment by the cardholder's bank after a dispute, returning funds to the buyer and debiting the merchant or payment processor.
- negative balance protection
- Negative balance protection is a regulatory or broker policy that prevents a retail trading account from owing money to the broker after losses exceed the deposited funds, by resetting the balance to zero.
See also
- anti money laundering check
- asic regulated broker
- broker insolvency
- broker license
- cftc regulated broker
- chargeback
References
- ↑ Financial Conduct Authority, permanent rules restricting the sale of contracts for difference and CFD-like options to retail clients, in force since 2019. UK retail clients. The FCA extended the restrictions to closely similar products.