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Are your investments safe? A complete overview of the amount of investment insurance for all brokers

Jamie Cameron
10. 11. 2022
10 min read

Investors are often mainly concerned with ways to achieve the highest profit, a fat dividend or a stable portfolio. But they rarely consider whether their investments are safe with their broker. That's what we'll focus on in this article!

How are the different brokers doing?

The safety of your deposits is one of the most important questions you should ask yourself as an investor. You certainly can't rely on the fact that your broker can't get into trouble. While they are subject to strict scrutiny by central banks and other authorities, it has been shown in the past that even such a company can go bankrupt, be bailed out, or simply not act honestly.

So let's take a look at what's involved in keeping your deposits safe. In general, brokers are regulated and must comply with the conditions imposed by the authorities of the countries in which they are registered.

The first layer of protection is then the separation of investors' assets from those of the firm. It works exactly as it sounds. In the event of a crash or problem, users' investments simply will not be considered assets of the broker, which would be used to pay any compensation to the company's creditors.

But there is an inconvenience associated with this - because with most brokers, in such a case, as investors, you are not in the true sense the owners of the stock. I discuss this more in this article: Am I really a share owner? Brokers have provided an answer to a burning question for many investors

It can be assumed that if you are invested with one of the biggest players, then the chances of a problem are probably small. But no one can say how this is resolved. In fact, there have not been many such cases.

Now to the information from individual brokers.

Degiro

Degiro states the following:

The Asset Department

At DEGIRO, you can be assured that your investments will be safely held. We use a separate legal entity (SPV) to hold your assets. This means they are held separately from DEGIRO's assets. The sole purpose of this entity is to manage and protect your investments. By law, it cannot carry out any commercial activities. If something were to happen to DEGIRO, your investments will not be considered enforceable assets for creditors and will remain in the custody of a separate entity. This entity will hold your assets with third parties. Where possible or required by law, DEGIRO will require these third parties to segregate assets to protect our clients' investments from potential bankruptcy. The rules regarding asset segregation vary from country to country (both within and outside the EU). Failure to segregate assets relating to a third party in the chain of custody could result in the loss of financial instruments held by that third party in the event of its bankruptcy.

Cash account

When you register with DEGIRO, a bank account (cash account) will also be opened with flatexDEGIRO Bank. Your uninvested money will then be held in this separate personal account with a personal IBAN. This also means that your money is covered by a guarantee of up to EUR 100,000 under the applicable German deposit insurance scheme (Entschädigungseinrichtung deutscher Banken). Your new cash account will be directly linked to your existing DEGIRO investment account. This cash account cannot be used for other banking transactions. You can only use it to hold money for easy access when investing in your DEGIRO account.

Investor Compensation Scheme and Deposit Insurance Scheme

Your assets are distributed to separate entities to ensure their protection in the event of DEGIRO's insolvency. In the event that segregated assets cannot be returned to clients, which is highly unlikely, DEGIRO falls under the German Investor Compensation Scheme, which compensates for any losses on unreturned assets up to 90% (maximum EUR 20,000).

In addition, all money deposited in DEGIRO's cash account with flatexDEGIRO Bank AG is guaranteed up to EUR 100,000 by the German deposit insurance scheme.

Information about the German Investor Protection Scheme and the German Deposit Insurance Scheme can be found in English on the website of the regulatory authority BaFin here.

Who supervises DEGIRO?

The Dutch branch of flatexDEGIRO Bank, which operates under the name DEGIRO, is the Dutch branch of flatexDEGIRO Bank AG. flatexDEGIRO Bank AG is primarily supervised by the German Federal Financial Supervisory Authority (BaFin). In the Netherlands, the Dutch branch of flatexDEGIRO Bank is subject to integrity supervision by the DNB and supervision by the AFM. Source:

eToro

How are the funds in my eToro Money account protected?
Although the eToro Money account is not covered by the Financial Services Compensation Scheme, we protect customer funds in a regulated bank account that is segregated from the company's money and held as a trust fund. This means that if eToro Money were to enter liquidation or bankruptcy, no third party would have a claim on it and it would be returned to you. Please see our terms and conditions for further information. Source

LYNX

Investment account through LYNX: Maximum security for client deposits

In conjunction with our partner Interactive Brokers Ireland Limited (IBIE), we do everything possible to ensure that your trading account funds are always optimally protected.

All client accounts are held as segregated accounts with IB. If the broker becomes insolvent, the client can continue to manage their money thanks to the segregated account. We also ensure that there is sufficient protection against misuse. Funds can only be transferred from an investment account to an authorised account in the client's name. It is not possible to send money to other persons or entities. Client accounts are protected in the following ways:

  • IBKR uses a number of banks to custody client cash to avoid concentrating risk with just one institution. IBKR also performs routine checks on these custody client accounts. Any cash positions or financial instruments that are held with third-party financial institutions are credited to the client and will also be segregated in the event of a broker default or bankruptcy.
  • Brokerage firms can avoid the delays associated with transferring ownership and execute trades quickly at minimal cost by custody of financial instruments in "street name". This means that the instrument is held with a custodian in the name of IBKR, but the ownership rights belong to the relevant client. In the unlikely event of bankruptcy, creditors will not be able to access client assets due to the prevailing ownership rights of the client.
  • Your assets are not part of IBIE's balance sheet. In the unlikely event of an IBIE bankruptcy, creditors will not be able to access clients' financial instruments and cash. They can transfer their assets to another institution because they are not subject to creditors' claims. The relevant investor protection regulation is only an option if the segregation of customers' cash and financial instruments from IBIE's own assets is not guaranteed (e.g. in case of fraud) and IBIE would not be able to meet its compensation obligations (e.g. in case of bankruptcy).
  • As your account is managed by IBIE, the Irish Investor Compensation Scheme (www.investorcompensation.ie) applies. The protection scheme compensates 90% of losses up to a maximum of €20,000.
  • In the unlikely event that LYNX becomes insolvent and as a result can no longer meet its obligations in relation to the Client Agreement, clients can rely on the Dutch Investor Compensation Scheme (in Dutch "Belongerscompensatiestelsel" (BCS). The maximum compensation under the Dutch Investor Compensation Scheme is €20,000 per Client.
  • Clients can claim the BCS if LYNX unexpectedly goes bankrupt or is no longer able to meet its financial obligations (due to mismanagement or fraud). As LYNX clients hold their funds with IBIE, there cannot be a situation where LYNX is unable to return client funds and financial instruments. More information on the Dutch compensation scheme can be found on the AFM and DNB websites. Source:

XTB

Protecting your moneyAll
client funds are held in a segregated (segregated) account in accordance with regulatory regulations to ensure that they are protected. Your funds are held in an account that is segregated from XTB's own resourcesYour
funds are protected by a guarantee fund of up to €22,000 in the event of our insolvency

What does segregation mean?
Segregated client funds are held completely separate from XTB's own resources, ensuring that client funds are returned to clients in the unlikely event of the company's insolvency, rather than being treated as recoverable assets with XTB's general creditors. The funds are set aside in separate bank accounts where XTB's clients are the beneficiaries and are not commingled with XTB's own funds.

Guarantee fund and what is the trader entitled to?
Client deposits are secured by a compensation system in accordance with the requirements of the Polish law defining Trading in Financial Instruments of 29 July 2005.
The funds are recoverable by the client from the State Depository for Securities in the Republic of Poland in the following cases:
1) declaration of bankruptcy of the brokerage company,
2) final delay of the declaration of bankruptcy due to insufficient coverage of procedural costs,
3) decision of the regulatory authority supervising the financial market, on the inability of strictly financial, to pay claims incurred by investors' demands, and their payment is not possible in the near term.




The compensation scheme provides for the payment of 100 % of the funds to the investor, less the brokerage firm's claims on the investor, up to a value of EUR 3 000. If this amount is higher, the investor will be paid 90 % of the remaining amount. The upper limit of the guarantee fund collateral is set at EUR 22 000 until the end of 2017. Source.

Trading 212

How is Trading 212 regulated?

Yes, Trading 212 is regulated by the UK Financial Conduct Authority (FCA), the Cyprus Securities Commission (CySEC) and the Bulgarian Financial Supervision Commission (FSC).

Is it safe to invest with Trading 212?

One of the factors of safety is undoubtedly insurance. Which Trading 212 broker has. In case of any damage to your property. You are insured for 90% of your funds (up to a maximum of 20,000 Euros). Source

Interactive Brolkers

Interactive Brokers is an American company based in Connecticut (Greenwich). IB had its European headquarters in the UK, but after Brexit the company was "forced" to move to another city (and country) - in the European Union.

This change was felt by all of Interactive Brokers' European clients at the time, as a new form had to be filled out. Today, IB's European headquarters is firmly established in Hungary, specifically in Budapest, where support is also based.

Of course, the Hungarian branch and the European headquarters of Interactive Brokers are subject to all strict rules and regulations. In a catastrophic scenario, we are of course interested in insurance. Deposits are insured at 100% up to EUR 2,800 and at 90% up to EUR 100,000. Source.

Conclusion

That would be a summary of deposit insurance and security for all the major players in this field. The amounts, methods and variants of insurance vary from company to company. However, none should let you down in the event of a problem. However, the specific form that any resolution and transfer of your investments would take is difficult to predict. We can only hope that none of us will find out.

What about you? Do you deal in any way with the insurance and security of investments with brokers? Is this a big factor for you in your selection?

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Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and a few other analyses. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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