Question
After the financial crisis, people were advised to split their money between banks so that their money didn't go over the compensation limit of £85,000. Would you advise doing something similar with investments on fund supermarkets/investment platforms? What is the compensation limit in this case?Answer
Fund supermarkets/platforms, along with most stockbrokers these days, hold your money and investments in what's called a nominee account.
Nominee accounts are separate companies owned by platforms/stockbrokers that hold shares or funds on behalf of all their customers. While the nominee company owns the investment(s), it promises to pay customers what they're owed - i.e. dividends and proceeds when shares/funds sold, or the shares/units themselves if you move the nominee account to another broker. And the nominee company assets are ring-fenced from the main business , i.e. the platform/broker is not allowed to withdraw your money or investments for themselves.
So technically your money is safe. if the platform/broker goes bust the nominee account should be unaffected, save for a delay in finding another platform/broker to take on the nominee account or the investments being re-registered into your name.
However, in the event someone illegally dips their fingers into the nominee account you could lose money. While the chances are very slim when using an established, reputable company, I guess we should never say never.
In this event, assuming the platform/broker can't afford to make good the loss and goes bust then your claim would fall on the Financial Services Compensation Scheme (FSCS), giving you 100% protection on the first £50,000 invested per institution (i.e. platform/broker).
The funds you hold within the platform should also be covered by the FSCS giving £50,000 of protection per fund management company. So if fraud occurs at the fund level (rather than the platform) you'll be separately covered, Cash accounts (for example, within a SIPP) are likewise covered up to £85,000.
Should you use more than one platform for this reason when larger sums of money are involved?
I'm torn. In general I'd say no, as it rather defeats the point of using platforms in the first place (which is to make administration simple). However, when there's a risk, albeit very small, that someone could theoretically walk off with your life's savings it does seem sensible to ensure full FSCS protection.
I think this ends up being a personal choice, based on how much you value total peace of mind over convenience.
You can read more about nominee accounts in my article here.
After the financial crisis, people were advised to split their money between banks so that their money didn't go over the compensation limit of £85,000. Would you advise doing something similar with investments on fund supermarkets/investment platforms? What is the compensation limit in this case?Answer
Fund supermarkets/platforms, along with most stockbrokers these days, hold your money and investments in what's called a nominee account.
Nominee accounts are separate companies owned by platforms/stockbrokers that hold shares or funds on behalf of all their customers. While the nominee company owns the investment(s), it promises to pay customers what they're owed - i.e. dividends and proceeds when shares/funds sold, or the shares/units themselves if you move the nominee account to another broker. And the nominee company assets are ring-fenced from the main business , i.e. the platform/broker is not allowed to withdraw your money or investments for themselves.
So technically your money is safe. if the platform/broker goes bust the nominee account should be unaffected, save for a delay in finding another platform/broker to take on the nominee account or the investments being re-registered into your name.
However, in the event someone illegally dips their fingers into the nominee account you could lose money. While the chances are very slim when using an established, reputable company, I guess we should never say never.
In this event, assuming the platform/broker can't afford to make good the loss and goes bust then your claim would fall on the Financial Services Compensation Scheme (FSCS), giving you 100% protection on the first £50,000 invested per institution (i.e. platform/broker).
The funds you hold within the platform should also be covered by the FSCS giving £50,000 of protection per fund management company. So if fraud occurs at the fund level (rather than the platform) you'll be separately covered, Cash accounts (for example, within a SIPP) are likewise covered up to £85,000.
Should you use more than one platform for this reason when larger sums of money are involved?
I'm torn. In general I'd say no, as it rather defeats the point of using platforms in the first place (which is to make administration simple). However, when there's a risk, albeit very small, that someone could theoretically walk off with your life's savings it does seem sensible to ensure full FSCS protection.
I think this ends up being a personal choice, based on how much you value total peace of mind over convenience.
You can read more about nominee accounts in my article here.
Read this Q and A at http://www.candidmoney.com/askjustin/880/should-i-use-more-than-one-fund-platform-for-safety
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