Protection CPD Course  

Investment platforms: navigating the maze of investor protections

  • Describe the regulatory checks and balances that apply to investment platforms.
  • Explain how the government compensation scheme will cover losses.
  • Understand how the compensation applies to the different products on a platform.

Insolvency of the platform provider

The scenario some clients may be more concerned about is where a platform provider itself becomes insolvent. But before looking at compensation on insolvency, it is worth looking at the regulatory checks and balances in place that aim to prevent an insolvency situation occurring, not least because it is the part of the protection framework that clients are typically not familiar with.

In terms of client cash, the FCA CASS rules require platforms to hold cash in trust accounts with authorised UK banks. These accounts carry a client money designation and are monitored and reconciled on a daily basis. This prevents client cash becoming mixed with the platform provider’s own cash. It also means there is an accurate record of what cash belongs to which investor.

Investments must be held separately in the name of a nominee company or authorised third-party custodian. This means there should be a clear line between the assets belonging to the provider and those belonging to their customers. 

Both these measures should make it straightforward to return funds to investors or transfer them to another platform in the event the provider runs into difficulty.

The Capital Requirements Directive

There are also capital adequacy rules that providers must adhere to in the form of the Capital Requirements Directive. This requires platforms to hold enough capital in reserve so they can cover any ongoing costs in the event of an extreme but plausible wind-down scenario.

They also require providers to assess their business risks on an ongoing basis to make sure they are holding an appropriate amount of capital in reserve. Providers will typically go over and above in terms of holding the capital needed to satisfy the minimum requirement.

If, despite these rules, a platform provider were to become insolvent, and a client suffered losses as a result of the insolvency, they would be protected under the FSCS up to £85,000. 

It is worth noting there can be a degree of flexibility in how the £85,000 is applied in practice. In March 2018, the FCA applied to the High Court to place fund management company Beaufort Securities into administration. The FSCS stepped in, not to compensate losses, but to cover PwC’s costs.

Beaufort Securities

The FCA, along with the US Department of Justice, had been investigating Beaufort over alleged securities fraud and money laundering. At the time, Beaufort had around 17,000 retail customers in the UK.

Beaufort had been running some of its clients’ money on a discretionary basis and using their discretion to put some customer funds into unlisted, illiquid and otherwise esoteric investments, a large number of which subsequently had to be written down.

Individuals from PwC were appointed as administrators, and they forecast insolvency costs of £100m, later reduced to £55m. 

Initially, it looked like Beaufort customers would have to foot the bill for PwC’s costs. The money and assets were held in segregated accounts as per FCA CASS rules, so they were separate and identifiable. The issue was that regulations allow administrators’ costs to be passed onto customers if there was insufficient capital in the insolvent business to pay them.

However, PwC and the FSCS came to an agreement that the latter would cover PwC’s costs rather than compensate customers directly as would typically be the case.

PwC started paying back client cash and assets in September 2018, and by April 2019 the majority of Beaufort’s retail customers had received their money back.

Insolvency of a fund manager

It is also possible that the manager of an underlying investment fails in a way that means it is unable to return investors’ money. 

UK-based fund managers are authorised by the FCA. If a fund management company failed then the £85,000 FSCS limit would apply per investor per failed company. 

Therefore if the investor has all their money invested in units managed by the same fund manager, then only one £85,000 compensation limit would be available to cover all the holdings.