I guess we all invest our money with brokers that are well-regulated and protected by a financial scheme like FSCS.
However, can anyone tell me what the process of recovering your funds after your broker becomes insolvent looks like?
Does it take months, or years? Will you be getting a haircut? Will your shares be transferred to another broker? What if they donāt have your shares in their stock universe?
Obviously this is about to happen with Freetrade very soon if they donāt miraculously turn to profitability.
Mystic Meg are we? If we could predict the future we would all be rich
My understanding, roughly speaking on a basic level is that to operate as a UK / EU broker you must segregate client assets from your own. If you as the broker were no longer considered a āgoing concernā (insufficient funds to maintain the business for the next 12 months), the client assets are segregated from your liabilities and could be transferred to another broker.
That said - there are also examples of brokers that have used client funds in breach of legislation, and people have had to claim through the FSCS.
Itās probably also worth noting that 212 have been around for a while, have been profitable for years and announced what 12-18 months ago that their Invest&ISA arm had grown to a size that it was self sustaining (aka profitable).
Companies need to produce accounts on an annual basis, so back to FreeTrade, you would ideally expect at least 6-12 months earning if they were to wind down.
Broker going belly up doesnāt give me sleepless nights - below are the things that gives me a bit concern and hopefully @Team212@Michael.M can clarify - thanks
What happens when the shares custodian goes under - i believe itās IBKR ?
What happens when the cash custodian goes under - i believe itās Barclays ?
Is t212 using more than one cash custodian ? This merely to ensure my cash ISA and other savings products are not in the same cash custodian - Ā£85K limit protection
So this isnāt very well explained but IBKR doesnāt hold equity, so when 212 talk about IBKR holding your stocks they must mean IBKRs nominee, itās one of the things I wish theyād clarify.
Speaking for myself, itās not T212 Iām worried about. Having looked at their accounts I see them being a going concern for at least a number of years yet. Itās FreeTrade that I think originally began this thread and the quote in the first post on this thread was actually a quote where someone had answered a post I made on the FreeTrade forum where I voiced my doubts about their potential solvency. So FreeTrade worry me, hence why I wish to transfer to T212 once Iām able to open my new ISA on 6 April 2023.
I have the official response from the FSCSā¦ see belowā¦ it was highly unhelpful:
ā Thank you for contacting FSCS on 13th March in relation to FSCS protection.
Investment platforms typically arrange, safeguard and administer investments on behalf of customers and offer them access to investment products from a number of different providers. Investors can use platforms to access information and tools to help them with investment choices. They can also use them to make transactions, such as buying and selling shares and funds.
Use of a platform can affect whether the investor has a direct relationship with other, regulated firms in the chain, such as the actual provider of the investment. This, in turn, can affect FSCS protection if the regulated firm fails.
This is because FSCSās rules generally require the firm in default to have carried out a regulated activity āwith, or for the benefit ofā the investor, and require the firm in default to owe a civil liability to the investor (e.g. rather than to an intermediary such as a platform). A civil liability simply means that a UK court would hold the failed firm responsible for a customerās losses. There are some exceptions, such as when the intermediary is a bare trustee, agent or nominee of the underlying investor.
The precise effect of using a platform on the relationship between the investor and the other regulated firms (and hence on the investorās FSCS protection) will depend on the circumstances and legal terms in each case. Ask your platform for further information about how FSCS protection would apply to you in different scenarios.ā
As the email above was highly unhelpful and did nothing in terms of clarify I followed up and got the below response:
āFSCS may be able to provide compensation if an investor bought a product through an execution-only platform, depending on what caused the loss and if thereās any legal liability owned. So, if a broker platform was found to be liable for the losses, FSCS could potentially award compensation to affected investors. We do not protect losses which arise simply from investment performance, however, i.e., a product not performing in the way you had hoped. Our compensation limits page provides more detailsā
Are you sure the Ā£85k limit protection would apply (i.e. you have a Ā£80k Cash ISA with Barclays, and you have Ā£10k in cash in T212 which T212 holds with Barclays, that would mean you have Ā£5k unprotected)?
I assumed the limit is counted towards accounts held in your name (which the T212 one isnāt, although they hold part of the money in Barclays in behalf of you).
My understanding is that you would have Ā£5k unprotected - you would also need to factor in any financial institution youāve got cash that is parent owned by Barclays.
As per T212 money in Barclays, the protection is not on T212 but on you as an individual so that should count towards the total limit per my understanding.
Itās Ā£85k per Banking institution. So for example all accounts across Lloyds Banking Group would have Ā£85k protected, you would have Ā£85k protected at each Nationwide, YBS, Santander, etc.
However, I think cash is what this covers. Investments would be covered by something else although I donāt know enough about that.
