UK FSCS compensation or US protection?

Barry_Bear

"Interactive Brokers (U.K.) Limited is authorised and regulated by the Financial Conduct Authority. Products are only covered by the UK FSCS in limited circumstances.

Your account is cleared and carried by Interactive Brokers LLC and for certain limited products by Interactive Brokers (U.K.) Limited.
Interactive Brokers LLC is regulated by the US SEC and CFTC and is a member of the SIPC (www.sipc.org) compensation scheme. "

The US SIPC compensation covers UK investors and the limits are higher than covered by UK FSCS. 

For a UK retail investor holding basic index tracker funds or ETFs (such as Vanguard, L&G, iShares, i.e. not complex products) and any cash balance in their account, which compensation system would these fall under?

dunstonh

For a UK retail investor holding basic index tracker funds or ETFs (such as Vanguard, L&G, iShares, i.e. not complex products) and any cash balance in their account, which compensation system would these fall under?

ETFs do not get FSCS protection.

masonic

Which type of loss are you interested in the compensation arrangements for?

Barry_Bear

masonic said:

Which type of loss are you interested in the compensation arrangements for?

As per the FSCS and SIPC consumer protection when firms holding their assets are declared to have failed.

Another way of asking the opening question:

If you hold £200k of a Vanguard Index Fund and cash on Interactive Brokers UK, and they go down, would it be covered by FSCS up to £85k, or by SIPC which has a limit covering it all?

dunstonh

If you hold £200k of a Vanguard Index Fund and cash on Interactive Brokers UK, and they go down, would it be covered by FSCS up to £85k, or by SIPC which has a limit covering it all?

Who goes down? Vanguard or Interactive brokers?    

masonic

Barry_Bear said:

masonic said:

Which type of loss are you interested in the compensation arrangements for?

As per the FSCS and SIPC consumer protection when firms holding their assets are declared to have failed.

Another way of asking the opening question:

If you hold £200k of a Vanguard Index Fund and cash on Interactive Brokers UK, and they go down, would it be covered by FSCS up to £85k, or by SIPC which has a limit covering it all?

If either firm goes 'down' (I'll assume this means becomes insolvent), then there is no loss. The assets are still there and you still own them. Under UK insolvency law, administrators are entitled to use client assets to pay their fees and that creates a loss that can be compensated by the FSCS. So if Vanguard Asset Management Limited or Interactive Brokers (U.K.) Limited went bust while holding assets belonging to you, then compensation for administrator fees would come from the FSCS. It is highly likely that with £200k of assets you would be fully covered by the FSCS for your losses.

What IB claims is that if the assets were instead held by Interactive Brokers LLC and it went bust, you would have no claim against the FSCS. Any loss and your ability to claim compensation for it would be determined by US insolvency law, with the SIPC being the provider of such compensation. Can't really comment on how that might work in practice.

There are other types of loss, such as loss due to fraud, for which the treatment may be different, and for which there may be no compensation available (e.g. fraud resulting in a Vanguard ETF not holding the assets it is supposed to hold).

Barry_Bear

dunstonh said:

If you hold £200k of a Vanguard Index Fund and cash on Interactive Brokers UK, and they go down, would it be covered by FSCS up to £85k, or by SIPC which has a limit covering it all?

Who goes down? Vanguard or Interactive brokers?    

Interactive Brokers. I am trying to get clarity about the level of protection compared to a solely UK FSCS regulated platform for a retail investor holding the assets I used as an example. 

Barry_Bear

masonic said:

Barry_Bear said:

masonic said:

Which type of loss are you interested in the compensation arrangements for?

As per the FSCS and SIPC consumer protection when firms holding their assets are declared to have failed.

Another way of asking the opening question:

If you hold £200k of a Vanguard Index Fund and cash on Interactive Brokers UK, and they go down, would it be covered by FSCS up to £85k, or by SIPC which has a limit covering it all?

If either firm goes 'down' (I'll assume this means becomes insolvent), then there is no loss. The assets are still there and you still own them. Under UK insolvency law, administrators are entitled to use client assets to pay their fees and that creates a loss that can be compensated by the FSCS. So if Vanguard Asset Management Limited or Interactive Brokers (U.K.) Limited went bust while holding assets belonging to you, then compensation for administrator fees would come from the FSCS. It is highly likely that with £200k of assets you would be fully covered by the FSCS for your losses.

What IB claims is that if the assets were instead held by Interactive Brokers LLC and it went bust, you would have no claim against the FSCS. Any loss and your ability to claim compensation for it would be determined by US insolvency law, with the SIPC being the provider of such compensation. Can't really comment on how that might work in practice.

There are other types of loss, such as loss due to fraud, for which the treatment may be different, and for which there may be no compensation available (e.g. fraud resulting in a Vanguard ETF not holding the assets it is supposed to hold).

Very helpful thank you.
Does the FSCS not cover retail investors for losses due to fraud, or was your emphasis only on the fact ETFs are not covered but the FSCS does cover cash and funds against fraud?

masonic

Barry_Bear said:

masonic said:

Barry_Bear said:

masonic said:

Which type of loss are you interested in the compensation arrangements for?

As per the FSCS and SIPC consumer protection when firms holding their assets are declared to have failed.

Another way of asking the opening question:

If you hold £200k of a Vanguard Index Fund and cash on Interactive Brokers UK, and they go down, would it be covered by FSCS up to £85k, or by SIPC which has a limit covering it all?

If either firm goes 'down' (I'll assume this means becomes insolvent), then there is no loss. The assets are still there and you still own them. Under UK insolvency law, administrators are entitled to use client assets to pay their fees and that creates a loss that can be compensated by the FSCS. So if Vanguard Asset Management Limited or Interactive Brokers (U.K.) Limited went bust while holding assets belonging to you, then compensation for administrator fees would come from the FSCS. It is highly likely that with £200k of assets you would be fully covered by the FSCS for your losses.

What IB claims is that if the assets were instead held by Interactive Brokers LLC and it went bust, you would have no claim against the FSCS. Any loss and your ability to claim compensation for it would be determined by US insolvency law, with the SIPC being the provider of such compensation. Can't really comment on how that might work in practice.

There are other types of loss, such as loss due to fraud, for which the treatment may be different, and for which there may be no compensation available (e.g. fraud resulting in a Vanguard ETF not holding the assets it is supposed to hold).

Very helpful thank you.
Does the FSCS not cover retail investors for losses due to fraud? Even when the company that was overseeing / victim of the fraud is authorised and regulated by the FCA?

Not always, no. It depends if the financial services that resulted in the fraud are qualifying. If you buy some shares in FCA authorised company No Frills Trading PLC, and it turns out they were involved in fraudulent activity, went bust and you lost all your money as a result, you'd have no recourse to the FSCS as a shareholder. Similarly if you invested in an ETF or investment trust and the provider went bust you'd have no FSCS protection against any losses you suffer. FSCS does protect investors against losses from OEIC and unit trust investments where the fund house suffers fraud and cannot repay investors. For brokers and investment platforms, there generally is FSCS cover available if there is fraud within the nominee company and the provider cannot repay investors for their losses, but there are some exceptions (unregulated investments such as mini-bonds, P2P loans and certain other non-mainstream products are excluded from cover). For companies that operate through different subsidiaries like IB, FSCS cover would only apply if the assets were being held by the nominee company associated with the UK subsidiary.

Barry_Bear

Interesting thank you.
So although the chances of fraud losses are small, it's not impossible that you can lose some or all your investments. So if possible:
1. Use funds rather than ETFs
2. Split investments between more than one platform
3. If possible split between 2 or more equivalent funds from different fund managers e.g Vanguard, Blackrock, L&G etc. 
Obviously there has to be a balance between caution and practicality.

dunstonh

1. Use funds rather than ETFs

Insured funds get 100% FSCS protection with no upper limit.  OEICs/UTs get £85k per fund house.   ETFs, as mentioned, like ITs get no FSCS protection.       £85k per fund house is a way to spread it about if you are really concerned about it.

2. Split investments between more than one platform

Only if you are going off mainstream or using platforms that are not profitable and need external funding or have a high ratio of exotic illiquid investments.

Obviously there has to be a balance between caution and practicality.

If you are mainstream with your investments and you are using a mainstream platform that is making a profit then it isn't really a concern.  Clients invested in mainstream unit linked funds are a business asset.   So, if a profitable platform went  into administration, the administrator would have little difficulty finding a buyer.      If the platform was heavy in illiquid exotic investments then it has little value and would be more likely to be wound down over a long period.     So, stick to mainstream and it really becomes a non-issue.