Regulation and investor protection: how safe is your money?
Custody, deposit guarantees and investor compensation are three different things. What the FSCS, EdW, esisuisse and SIPC actually pay, with worked examples.
On this page9
- The short answer
- Three layers doing three different jobs
- What the schemes actually pay
- Worked example: EUR 120,000 and a shortfall
- Cash and securities hang off different schemes
- Which entity are you actually a client of?
- Leverage caps, close-out and negative balance protection
- What none of this protects you against
- What to actually do
The short answer
Your shares, ETFs and bonds are not the broker's property. A regulated broker holds them in custody on your behalf, recorded separately from its own assets, and in an insolvency they are identified as yours and either returned or transferred to another firm. Compensation schemes such as the FSCS, Germany's EdW and America's SIPC are the backstop for whatever is missing after that exercise. They are not the first line of defence, and they never cover your portfolio falling in value.
That distinction is the whole point. "Protected up to EUR 20,000" looks thin beside a EUR 200,000 portfolio and reads as though EUR 180,000 is hanging in the wind. In the ordinary case it is not. The EUR 20,000 covers the shortfall - the gap between what the books say you own and what the administrator can actually find and hand over.
Three layers doing three different jobs
| Layer | Mechanism | Protects against |
|---|---|---|
| Custody and segregation | Client securities held off the broker's balance sheet; client cash in designated client-money accounts at credit institutions | The broker's creditors reaching your assets |
| Compensation scheme | A statutory fund financed by levies on member firms | A shortfall in client assets after a failure - usually caused by fraud, poor record-keeping or misuse of client money |
| Prudential and conduct rules | Minimum capital, regular reporting, client-asset audits, product intervention | The failure happening at all, and the worst product designs |
Layer one carries the weight. Swiss law states it plainly: securities in a custody account are held in safekeeping by the bank but remain the property of the client, so in a bankruptcy they are segregated out of the estate and issued to the client (esisuisse). The same logic runs through MiFID II client-asset rules across the EEA and the FCA's CASS regime in the UK.
Layer one is also where the damage happens: records that will not reconcile, client money mixed with firm money, positions pledged as collateral without authority. That is exactly why layer two exists.
What the schemes actually pay
| Jurisdiction | Scheme | Investments | Cash and deposits |
|---|---|---|---|
| Germany | EdW (securities firms), EdB (private banks) | 90% of the claim, maximum EUR 20,000 per investor regardless of how many accounts | EUR 100,000 per customer per bank, up to EUR 500,000 for six months after certain life events |
| EEA (minimum) | National investor compensation scheme under the EU directive | at least EUR 20,000; several states pay 90% of the loss up to that ceiling | EUR 100,000 per depositor per bank |
| UK | FSCS | GBP 85,000 per eligible person per firm | GBP 120,000 per person per banking licence (since 1 December 2025) |
| Switzerland | esisuisse | Custody assets segregated from the estate, no cap - but no securities compensation fund either | CHF 100,000 per client, system-wide cap CHF 7.9bn |
| US | SIPC | USD 500,000 per customer | USD 250,000 cash sublimit inside the USD 500,000 |
Sources: EdW, EdB, FSCS investments, FSCS deposits, esisuisse, SIPC. These ceilings are political decisions and they move - the Swiss rules were revised with effect from 1 January 2023, and the UK deposit limit rose from GBP 85,000 to GBP 120,000 on 1 December 2025, while the investment limit stayed at GBP 85,000. Check the current position with the scheme itself before relying on a number.
Worked example: EUR 120,000 and a shortfall
Suppose you hold EUR 120,000 with a broker: EUR 95,000 in ETFs and single stocks, EUR 25,000 in uninvested cash. The firm fails and the reconciliation leaves a EUR 30,000 securities shortfall attributable to you.
- German securities firm, EdW member: 90% of EUR 30,000 is EUR 27,000, but the ceiling is EUR 20,000. You receive EUR 20,000 and bear EUR 10,000 yourself.
- UK firm, FSCS: EUR 30,000 sits well below GBP 85,000, so the shortfall is covered in full.
- Swiss bank: custody assets are segregated out of the estate. But if they are genuinely missing there is no securities compensation fund behind them - the CHF 100,000 esisuisse cover applies to cash deposits.
The co-insurance bites at small numbers too. On an EUR 8,000 shortfall the EdW pays 90%, or EUR 7,200; the remaining EUR 800 is yours. The 90% rule is not a detail that only affects large accounts - it applies to every claim.
Cash and securities hang off different schemes
This is the most-overlooked point in the whole subject. If your broker is itself a bank, your balance is a deposit and falls under the EUR 100,000 (or GBP 120,000, or CHF 100,000) deposit guarantee. If it is an investment firm without a banking licence, your cash sits in a client-money account at a partner bank - and the question that matters becomes: which bank, and does the deposit scheme look through to you as the underlying client or stop at the broker as account holder?
Second worked example: you hold EUR 250,000 in cash with a broker that spreads it evenly across three partner banks. If one bank fails, roughly EUR 83,300 is exposed - below the EUR 100,000 ceiling, and therefore covered, provided the scheme recognises you as the beneficial depositor. If the account is held purely in the broker's own name and the scheme does not look through, the guarantee applies once to the broker rather than once per client. The answer is in the client agreement or the depositor information sheet, and anyone parking a large cash balance should know it.
The practical consequence runs against intuition: cash is the exposed position in an insolvency, not securities. Do not leave meaningful sums sitting in a settlement account for months.
Which entity are you actually a client of?
Large broker groups run several licensed entities. A claim like "regulated by the FCA, CySEC, ASIC and the FSA Seychelles" can be entirely true and still leave only one of those entities as your counterparty. What governs you is the legal person named in the contract you signed. Its regulator and its compensation scheme apply to you. The others do not.
Two minutes to find out:
- 1Open the client agreement or terms - the opening paragraph names the entity.
- 2Read the website footer for the company name, registered office and licence number.
- 3Look that entity up in the regulator's register, not the brand.
- 4Compare the licence number in the register with the one on the site.
Cross-border, the EU passport means an EEA-authorised firm can serve clients across the union from a single licence. Your compensation scheme is then the one in the firm's home state, not yours. A German client of an Irish-authorised broker claims against the Irish scheme - 90% up to EUR 20,000 - not the EdW. This is entirely legal and very common, but it changes who you write to when things go wrong.
Leverage caps, close-out and negative balance protection
ESMA's 2018 product intervention - since implemented nationally and made permanent in the UK by the FCA - caps retail CFD leverage at 30:1 on major currency pairs, 20:1 on non-major pairs, gold and major indices, 10:1 on other commodities and non-major indices, 5:1 on individual equities and 2:1 on cryptocurrencies. Two accompanying rules matter more than the caps themselves: the 50% margin close-out and negative balance protection per account (ESMA).
Third worked example: EUR 5,000 of equity, EUR/USD at the maximum permitted 30:1. That is EUR 150,000 of notional against a EUR 5,000 margin requirement. Close-out triggers when equity reaches 50% of that requirement, or EUR 2,500 - so after a EUR 2,500 loss. On EUR 150,000 of notional, EUR 2,500 is a 1.67% move: around 180 pips at a rate near 1.08. EUR/USD covers that in two ordinary sessions, or in minutes around a central bank decision. Maximum leverage does not make the position safe; it makes the loss finite.
The same package requires providers to publish the share of retail accounts that lose money. When ESMA introduced the measures it put that share at 74-89% of retail accounts, with average losses between EUR 1,600 and EUR 29,000 depending on the country. A CFD provider showing no such line anywhere is telling you something.
What none of this protects you against
- Market losses. The FSCS explicitly will not accept claims for poor investment performance, and neither will SIPC. That is not a gap in the system, it is the system's purpose.
- Your own decisions, and strategies that did not work. The EdW expressly excludes damage from advisory error and lost profits.
- Products outside the scope. SIPC covers neither foreign exchange nor commodity futures nor crypto assets that are not registered securities.
- Advisory failures at a solvent firm. That is an ombudsman or court matter, not a compensation claim.
- Supervision without substance. A registration in an offshore jurisdiction with no compensation scheme is formally a licence and practically no backstop at all.
What to actually do
- 1Identify the entity, not the brand. Look up the legal person named in your contract in the regulator's register and match the licence number.
- 2Settle the cash question. Ask which bank holds your settlement balance and whether the deposit scheme looks through to the end client.
- 3Compare the ceiling to your balance - not because your portfolio is at risk, but because the shortfall is capped at exactly that number if the worst happens.
- 4Split above the ceiling. Six-figure cash balances belong across several banking licences, not several brands within one group.
- 5Do the close-out arithmetic before you open a leveraged position, in percentage terms rather than in currency.
- 6Re-check the numbers. Every figure here is current as at August 2026 and legislators change them. The schemes themselves - EdW, EdB, FSCS, esisuisse, SIPC - publish the position that applies today.
This article is information, not investment advice.
Frequently asked questions
Usually not. Securities in custody are your property and are segregated out of the insolvency estate, then returned or transferred to another broker. The risk is not the value of the portfolio but a shortfall where holdings are missing or wrongly recorded. That is what compensation schemes cover - in Germany at 90% of the claim up to EUR 20,000. Expect delays too: transferring a portfolio out of an administration can take months.
Because the two schemes cover different risks. A cash deposit is a claim on the bank and is fully exposed in a bankruptcy, hence the EUR 100,000 per customer per bank. Securities are your property and never enter the estate in the first place; investor compensation only covers the residual case where holdings are missing. The smaller number reflects a smaller residual risk, not weaker protection.
It can be worth something, but it is a private insurance policy rather than a statutory entitlement. Check three things: who the insurer is, whether the cover is per client or an aggregate across the whole client base, and which loss events are excluded. An aggregate of one million spread over an entire client book disappears quickly in a large shortfall. Statutory compensation, by contrast, applies whether or not an insurer pays.
It is legal and routine under the EU passport, but it changes who is responsible. Supervision and compensation follow the firm's home state - CySEC and the Cypriot Investor Compensation Fund at EUR 20,000, not BaFin and the EdW. In a dispute, local law and the local ombudsman generally apply. Many investors find that acceptable; if you would rather argue a case in your own language and legal system, choose a broker licensed domestically.
No, and no scheme anywhere does. The FSCS and SIPC both explicitly reject claims for poor performance, and the EdW excludes advisory error and lost profits. What regulation does instead is structural: capital requirements, segregated custody, leverage caps, negative balance protection and the duty to disclose what share of accounts lose money. It shapes the risk; it does not remove the outcome.
For cash it is relatively quick: Germany's EdB pays within seven working days of BaFin declaring a compensation event, and Swiss esisuisse works to a seven-working-day deadline as well. Securities are slower, because holdings must first be reconciled and segregated - months is realistic. Do not plan on reaching that money at short notice during an administration.
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