When you are investing you are generally only worried about losses relating to decreases in the value of your stocks, ETFs, etc. But should you be also worried about losing your money if the investment brokerage you use goes bust?
In this blog post, we will see what protections are there for investors in Ireland the rest of Europe in the event of such a broker liquidation.
Investor Compensation Schemes
You will be glad to know that in most cases you do have some protection if your broker ever went out of business, acted fraudulently, or because of malpractice lost your assets.
You need to be clear on one thing though an investor protection scheme will not protect you from any bad investments you made that resulted in your losing all your money.
The EU has for a long time, 1997 to be exact, had a directive in place to protect investors by providing compensation if an investment firm fails to return the investor’s assets.
(11) Whereas a harmonized minimum level of compensation of ECU 20 000 for each investor should be sufficient to protect the interests of the small investor where an investment firm is unable to meet its obligations to its investor clients; whereas it would therefore appear reasonable to set the harmonized minimum level of compensation at ECU 20 000; whereas, as in Directive 94/19/EC, limited transitional provisions might be required to enable compensation schemes to comply with that figure since this applies equally to Member States which, when this Directive is adopted, do not have any such scheme;
Directive 97/9/EC of the European Parliament and of the Council of 3 March 1997 on investor-compensation schemes
The general scheme Europe-wide will have these terms – compensating any losses from non-returned assets up to 90% (with a maximum of EUR 20,000).
The downside is if such an event happens it may take a considerable about of time for you to get your money back, investors who have gone through this process in previous times have seen considerable delays as there is no set time limit for the return of the client’s assets.
There were efforts made back in 2010 to increase this level to €50,000 but this did not make its way into EU-wide legislation.
Summary of Investor Compensation Schemes for European Brokers
| Broker | INVESTOR COMPENSATION SCHEME LIMIT |
|---|---|
| Degiro | €20,000 |
| Trading 212 | €20,000 (or £85,000 if you are from the UK) |
| Interactive Brokers | €20,000 |
| Etoro | €20,000 |
| Revolut Trading | €0 |
| Bux Zero | €20,000 |
You will notice one outlier on the list above – Revolut Trading.
Revolut provides ‘execution-only order transmission services’ – what this means is when you place an order with Revolut they will send these to a third party who will execute these trades and keep custody of your investments (DriveWealth LLC based in the United States).
As Drivewealth is not a registered broker in the EU your investments are not protected under the usual Investor protection schemes, which you would be if you are trading with Degiro, Trading 212, and Etoro which cover your investments up to €20k in the event they go bankrupt.
What About Uninvested Cash?
There is an important distinction to be made between stocks you own versus cash that you have sitting in your trading account that has not been invested. This uninvested cash is not covered by the normal investor protection scheme.
Some investment brokerages do however partner with banks so that each investor has their own bank account tied to their investing account. Degiro is an example of a broker who operates like this, they are part of flatexDEGIRO Bank AG. Because of this, any uninvested cash is then protected under Deposit Guarantee Schemes which will protect you up to a cash value of €100,000.
Whatever broker you choose, you should check how your brokerage holds such cash. If you are someone who holds cash on the side often waiting for the right time to invest then you may feel more assured if your cash is also protected.
Do Investor Protection Schemes Also Cover Crypto?
Cryptocurrencies are still not regulated in the EU and therefore your crypto-assets will not be covered in the event your broker goes out of business or fraudulently misappropriates your assets. So investing in crypto using a broker that is traditionally used for trading stocks and ETFs will be at your own risk.
This may change in the years to come if the prosed MiCA (Markets in Crypto-Assets) legislation in the EU is brought into form. This draft legislation is still in its early days and has not yet been finalised. It is earmarked to be in place by 2024.
A Strategy for Big Time Investors
If you are a big investor and what we mean by a big investor here is someone investing with amounts well over €20,000 it may be worth splitting your investments across multiple brokerages.
As €20,000 is the maximum amount that you will get in the event that you have to make a claim against the investor protection scheme, then you would left very short if you had an investment of €40,000 at the time your brokerage was unable to return your assets.
For peace of mind that you will be covered in every situation that investor could invest €20k with one broker and €20k with another broker.
Final Thoughts
What we are really talking about here is the worst case scenario and there hasn’t been any huge collapses of investment brokerages that has affected 100’s of thousands of investors, so there is no need to panic about the safety of your stocks.
But it is of course very important to know what your rights are if such a day every comes.
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.