Investing in funds and shares has never been easier or more popular, and this is thanks in no small part to the increased accessibility of investment platforms.
Platforms are now big business. According to June 2021 figures from platform research consultancy Platforum, the market sits at £785bn of assets under administration, a quarter of which is managed by financial advisers.
Investors will want reassurance their money is safe. However, many platforms are not yet household names in the way banks, building societies or insurance companies are, so advisers might find themselves fielding questions about the security of platform cash and assets.
Given there can be different entities involved in a platform, not to mention different products, it can make it hard to figure out what is protected and how. Add to that the fact that the investment market is a heavily regulated sector with various protections and fall-backs in place.
So, if you are asked about investor protection, the first thing to check is the exact scenario being contemplated – or, more precisely, which entity has become insolvent. This is one of the best ways to contextualise how these protections work.
This article looks at how the government compensation scheme works in each scenario and what wider preventative and protective measures are in place.
Insolvency of a bank
Before we look at investment protection, let us first look at cash protection. The primary purpose of investment platforms is to hold investments. However, a client will almost always hold some cash in their investment account. This is typically cash that is waiting to be invested or that is there to cover fees and charges.
Given platform providers are not typically authorised as deposit takers, they place client cash with other financial institutions. As we will look at more in the next section, this cash is governed by the Financial Conduct Authority's Client Assets Sourcebook rules, which means it must be kept separate from the provider’s own cash.
If a bank holding platform cash were to become insolvent, the cash would be protected by the government-backed Financial Services Compensation Scheme.
It is important to note that the FSCS ‘looks through’ any wrappers or accounts on the platform. In other words, for the purposes of the FSCS, it is as if the client was holding that money in their own personal bank account.
The amount of cover is £85,000 per person per banking licence. Halifax and Bank of Scotland are separate brands, for example, but they both operate under the same HBOS licence.
As a result, clients may ask to check which bank a platform uses. But many platforms will probably use a selection of banks, and the exact percentage of cash held with each bank may change on a regular basis. This means it might not be possible to pin down to the exact pound the amounts clients are deemed to hold with an individual bank.