How can I be sure that my funds are safe?

This is a very common concern, simply because clients come from all over the world. It is very understandable to be worried about sending your money to someone you have never seen before. Currently levels of protection vary in Europe, although a handful of firms have joined the FSCS ‘top up’ scheme for investors with accounts of UK branches of European Economic Area (EEA) firms.

I very simply say to stick with regulated companies in financial centers like London. In the UK, the Financial Services Compensation Scheme (FSCS) traditionally protects customer money up to £50,000 that is held by broker firms. All CFD and spread betting brokers in the United Kingdom for instance are regulated by the Financial Conduct Authority. The financial authority’s rules require that all funds from retail accounts are held in segregated bank accounts. If a provider fails to follow these rules and it goes bust, clients losing up to £50,000 are shielded under the Financial Services Compensation Scheme. Of course there is no compensation is a market simply moves against your trading positions!

Don’t open an account with brokers operating from some remote island like the Seychelles. If these companies go under you won’t have much (if any) protection. It also helps to trade with the largest and most established brokers.

Spread betting and CFD providers in the UK are regulated by the Financial Conduct Authority. Should a provider become insolvent you are covered up to £50,000 from the Financial Services Compensation Scheme. If you have a grievance against a spread betting company you can also take your complaint in front of the Financial Ombudsman Service.

CHECKLIST: BEFORE YOU INVEST

1. Log on to the Financial Conduct Authority (FCA) register.
2. Check your firm is either ‘FCA authorised’ or ‘EEA recognised’ by the Financial Conduct Authority. EEA recognised refers to the European Economic Area. If a financial services firm is based in a foreign country outside the EEA it can still operate in the UK but will need to be authorised by the FSA and should appear on the FCA register as ‘authorised’.
3. If your broker does not appear on this register, check the broker’s credentials. You may want to look somewhere else if you are concerned about the level of investor protection offered by the firm.

IF THINGS GO WRONG

Despite our vigilance, sometimes things do go wrong. In the UK consumers are covered for when companies mis-sell to you as well as when the companies collapse. The Financial Services Compensation Scheme (FSCS) is the only compensation scheme in Europe to do this.

Of course, this only matters in instances when you have been ‘advised’ on your investment decisions.  If you think you have been mis-sold you should contact the company directly first and if you are not satisfied you are able to turn to the Financial Ombudsman Scheme (FOS).

Thankfully, the number of complaints for share dealing and portfolio management mis-selling is negligible. However, clients that have been ill advised by FCA regulated business are able to turn to the FOS.

In your view what responsibility does the Financial Services Compensation Scheme (FSCS) have to educate customers of trading firms?

The job of the FSCS is to instil confidence in the system and ensure that clients are aware of the amount of protection that is available to them. You still find many clients who are unaware that they are protected to up to £50,000. In the US, the culture there is different and they know that the system there protects them up to US $500,000, whereas we don’t have that and I think it is partly the failure of the FSCS, the compensations schemes and the Financial Conduct Authority (FCA). I’m not sure it is a job of the media to put this forward.

So, there is some agreement here that there is a lack of consumer understanding between the £85k limit for deposits and the £50k protection limit for investments. In my opinion, the current FSCS campaign ignores anything outside of deposits. They say that they haven’t – what do you think as an industry?

I think this industry, or this component of the industry, probably has more clients than an investment bank would have in aggregate, so if you are concerned about the number of people rather than quantitative risk, then this is it.

The way the FSCS sees it, they are looking at bank failures. You and I deposit money in our bank accounts. That is more of a danger to the banking system as a whole. Look at Northern Rock five years ago with people standing outside a bank. They don’t want to see that again. We have seen with the deposit guarantees that there is more focus on that because they see that as more important to the system.

It is interesting that you think that they see the failure of the banking system as a greater risk. Do you think that will change with the forthcoming change of regulators?

No, because a lot of stuff is driven through Europe and we see it on a European level with the compensation schemes, the deposit insurers. There were serious proposals made in 2010 of July and the deposit insurers have made progress. The focus is on the deposits side and that is clear.

If a bank goes under, then the total aggregate value is even greater in terms of deposit holders. And that is a loss you can’t afford. In my opinion, the attitude is that if you are investing in markets, then, in theory, you know what you are doing and when you deposit your money in the bank, you can’t afford to lose it.

How does the marketing of the level of protection offered by the FSCS affect how clients interact with the industry’s firms?

Sometimes they come in and they expect [cover of] £85,000. When they don’t get it, they want to know why. They take a slight not necessarily on your individual firm, but as the industry as a whole. It gives negative impression right from the start.