Investing in funds and shares has never been easier or more popular, thanks to the increased accessibility of investment platforms such as AJ Bell. But with many new names in the platform market and different protections on offer, many investors want reassurance their money is safe.
Let’s look at the protection on offer to you in different scenarios.
How is my cash protected?
The primary purpose of investment platforms is to hold investments. However, many customers will hold some cash in their investment account. This is typically cash that’s waiting to be invested or in place to cover fees and charges.
Because platform providers like AJ Bell are not typically authorised as deposit takers, they place this cash with other banks and financial institutions. There are rules from the regulator, the Financial Conduct Authority (FCA), that means your cash must be kept separate from the provider’s own cash. The FCA rules require platforms to hold cash in trust accounts with authorised UK banks and keep an accurate record of what cash belongs to which investor.
In a worst-case scenario, if a bank holding platform cash were to become insolvent, customers’ money would be protected by the government-backed Financial Services Compensation Scheme (FSCS). It’s important to note that the FSCS disregards any wrappers or accounts on the platform. In other words, for the purposes of the FSCS, it’s as if you were holding that money in your own personal bank account.
The amount of cover is £85,000 per person per banking licence. Halifax and Bank of Scotland are separate brands, for example, but they both operate under the same HBOS licence.
AJ Bell holds your cash across multiple banks, which means you benefit from multiple £85,000 protected amounts.
How are my investments protected?
There are lots of regulatory checks and balances in place that aim to prevent a platform becoming insolvent. We’ve already covered off the protections to cash, so let’s look at investments.
In terms of investments, these 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. AJ Bell’s nominee company is Lawshare Nominees Limited.
Additional FCA rules mean platforms must hold enough money in reserve that they can cover any ongoing costs in the event of an extreme but plausible wind-down scenario. These capital adequacy rules 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.
As with holding cash, holding investments for customers is a regulated activity, so there would also be FSCS protection available up to £85,000. Therefore, if your platform provider became insolvent, it should be possible to identify all your investments and return them to you or transfer them to another platform. And if, despite this, you happened to incur any losses of any kind, they would be covered up to the FSCS limit of £85,000.
It’s worth noting that the FSCS can be flexible in terms of what it covers. In the case of a broker placed into administration in 2018, most of their 17,500 customers received their investments back in full. However, the professional administrators’ fees of £50m would’ve fallen on them given the failed broker didn’t have the funds to pay them. In that case, the FSCS stepped in to cover those fees.
ISA managers and SIPP providers are also regulated
Many investment platforms offer different tax wrappers, principally SIPPs and ISAs, and managing these products requires authorisation from the FCA.
It’s also worth noting that assets in trust-based SIPPs (like the AJ Bell pension accounts) are held by the SIPP trustee, which is a non-trading company functioning as a bare trustee. This means that the SIPP cash and assets are held by a separate legal entity to the SIPP administrator.
The FCA also has specific capital adequacy requirements for pension providers. As with the capital adequacy rules for investment platform providers, these require administrators to hold capital in reserve that they could draw upon in the event of the pension firm being wound down. Firms that permit more esoteric and unusual pension investments are required to hold larger amounts of capital.
If you’re looking at a platform where the SIPP administrator and the investment platform are part of the same overall business, the platform provider will be subject to both sets of capital adequacy rules.
What about if the fund manager running my fund fails?
It’s possible that the manager of an underlying investment fails in a way that means it’s unable to return investors’ money.
UK-based fund managers are authorised by the FCA. If a fund management firm failed, then the £85,000 FSCS limit would apply per investor per failed firm. Therefore, if you have all your 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.
Whereas, for example, if Manager A and Manager B both failed at the same time, and you held investments in the funds of both, then two £85,000 limits would be available to cover investments in funds with both managers.
When it comes to exchange traded funds (ETFs), the same principle applies. However, a large proportion of ETFs are domiciled outside the UK, typically in the Republic of Ireland and Luxembourg. If the manager of an overseas-based ETF became insolvent, there may be a compensation scheme in that jurisdiction, but losses are unlikely to be covered by the FSCS.
And if a fund simply fails to perform, and ends up with liabilities greater than its assets, there’s no formal recourse for compensation. This is investment risk, and it sits with the investor. The same applies for the failure of listed companies that you might hold shares in.
Non-platform protections
Finally, it’s also important to consider how the platform businesses themselves are performing.
Investment platforms that have a consistent track record of profitability or that are part of a larger group should be able to ride out any storms. You can look at things like the range of investments on offer, the level of regulatory capital a platform holds, and IT capability when assessing a provider’s robustness. While this isn’t a type of formal protection or compensation, it’s another way investors can reassure themselves that their investments are secure.
Read more on our security centre
Important information: These articles are for information purposes only and are not a personal recommendation or advice. Remember that the value of investments can change, and you could lose money as well as make it.
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