Investor compensation scheme limits

Whenever you put your money with any financial firm, you want to be sure that it’s safe. So the most important question every investor should ask themselves before signing up with a stock broker is: “What protects me if this company goes bust?”

This even more important if you are planning to use a broker outside your own country. After all, most investors have some idea about the investor protection rules at home.

But these rules don’t apply when you put money into an overseas financial institution. Instead, you will be covered by the regulations in force there – which may be stronger or weaker than you are used to.

This note looks at the investor compensation scheme limits in a number of countries. It’s only a summary – you should check the detailed rules yourself before opening an overseas account. But let’s see how safe your money in the US, Singapore, the Isle of Man and many more.

How investor compensation schemes work

First, make sure that you understand the purposes and limits of these statutory investor compensation schemes. They do not protect you against losses incurred in the stock market.

That’s true even if the reason you’ve lost money is that the share you’ve invested in turns out to be a fraud. They are solely there to protect you against your money being lost when a regulated firm fails and the reason for your loss is some kind of fraud or incompetence.

In other words, if a stock broker collapses and your money or stocks are missing, then the compensation scheme may pay you something. That’s because your assets are supposed to be held on trust separately from the firm’s assets. Even if the firm collapses, they are still your property. If they can’t be clearly identified as yours, something has gone wrong.

You must also be aware that investor compensation schemes only cover you if you were doing business with a regulated company that is a member of the scheme. You will not be entitled to anything if you have money with an unregulated company operating illegally.

So just knowing the local rules is not enough. You should also make sure the firm is operating legally and licensed and regulated to the extent required by law, to be sure that you will be protected.

Also be aware that that in many countries there are investments or financial activities that legitimate, but not covered by the regulations and the compensation scheme. One example of the latter is foreign exchange transfers in the UK.

Investor compensation schemes around the world

The limits for some major financial centres are listed below. Note that these are the rules covering investment firms – those for bank deposits are often different.

The UK Financial Services Compensation Scheme (FSCS) would pay compensation of up to £50,000.

The Singapore Exchange (SGX) Fidelity Fund would pay up to S$50,000 (covering trades done on the Singapore Exchange only).

The Hong Kong Investor Compensation Company would pay up to HK$150,000.

The US Securities Investor Protection Corporation would pay up to US$500,000.

The Association pour la Garantie des Dépôts Luxembourg would pay up to €20,000 (English summary).

The €20,000 limit is also the minimum for any country in the European Union. However, some countries offer more and there are plans to increase the minimum.

This minimum also covers Norway, Iceland and Lichenstein as they are European Economic Area countries and are obliged to implement EU single market rules except for fisheries and agriculture. Although obviously Iceland’s recent record with investor compensation shows that there are limits to the value of a state guarantee anyway.

Be careful with small offshore centres

However, there is a complication to this which could catch out investors who don’t know all the wrinkles of international relations. Not all territories governed by an EEA-member country are part of that country’s financial regulatory system or the EEA.

In particular, note that British territories such as Jersey, Guernsey, the Isle of Man and Gibraltar – which are popular tax havens and the base for some offshore financial services firms – are not part of the United Kingdom. They are not overseen by the UK Financial Services Authority and they do not fall under the FSCS.

Gibraltar is a special case, since it joined the European Union under the UK Treaty of Accession in 1973. Hence, while it is not covered by UK regulations, it has implemented the EU directive and would pay compensation of up to €20,000 under the Gibraltar Investor Compensation Scheme.

The Isle of Man increased its existing bank deposit protection scheme after a large number of depositors in Kaupthing Singer & Friedlander Isle of Man lost their savings when Icelandic bank Kaupthing collapsed. And Jersey and Guernsey also introduced similar schemes at the same time.

But these do not offer any protection for non-fund investments – so assets held at a stock broker based in these territories would not be covered. This is an important point since some low-cost stockbrokers now marketing their services in the UK are actually based and regulated in the Isle of Man and so are not covered by the FSA and the FSCS.